Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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þ
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended June 30, 2009
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period
for ,
2009
Commission
File No. 000-31751
LONGWEI
PETROLEUM
INVESTMENT
HOLDING LIMITED
(Name
of small business issuer in its charter)
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Colorado
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84-1536518
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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No.
30 Guanghau Street, Xiaojingyu Xiang, Wan Bailin District, Taiyuan
City,
Shanxi
Province, China
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030024
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(Address
of principal executive offices)
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(Zip
Code)
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(617) 699-6325
(Registrant’s
telephone number, including area code)
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Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class registered:
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Name
of each exchange on which registered:
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None
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None
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Securities
registered under Section 12(g) of the Exchange Act:
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No þ
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes þ 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.
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Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
(Do
not check if a smaller reporting company)
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o
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Smaller
reporting company
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þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
Revenues
for year ended June 30, 2009: $196,811,000
The
aggregate market value of the registrant’s voting common stock held by
non-affiliates as of June 30, 2009 based upon the closing price reported for
such date on the OTC Bulletin Board was US $13,125,603.
As of
October 13, 2009, the registrant had 83,011,527 shares of its common stock
issued and outstanding.
Documents Incorporated by
Reference: None.
1
TABLE
OF CONTENTS
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PAGE
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PART
I
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ITEM
1.
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Business
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3
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ITEM
1A.
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Risk
Factors
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8
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ITEM
2.
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Properties
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15
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ITEM
3.
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Legal
Proceedings
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15
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ITEM
4.
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Submission
of Matters to a Vote of Security Holders
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16
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PART
II
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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ITEM
6.
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Selected
Financial Data
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18
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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19
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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22
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ITEM
8.
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Consolidated
Financial Statements
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24
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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25
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ITEM
9A(T).
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Controls
and Procedures
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25
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ITEM
9B.
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Other
Information
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25
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PART
III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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26
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ITEM
11.
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Executive
Compensation
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29
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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30
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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30
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ITEM
14.
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Principal
Accounting Fees and Services
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30
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PART
IV
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ITEM
15.
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Exhibits,
Financial Statement Schedules
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31
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SIGNATURES
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32 | |||
2
ITEM
1. BUSINESS
Overview
Longwei
Petroleum Investment Holding, Limited (the “Company”) is an energy company that,
through its subsidiaries, engages in oil and gas operations in the People’s
Republic of China (“PRC”). Oil and gas operations consist of
transporting, marketing and selling finished petroleum products. The
Company’s headquarters and primary facilities are located in Taiyuan, Shanxi
Province (“Shanxi”). The Company purchases diesel, gasoline, fuel oil and
kerosene (the “Products”) from various petroleum refineries in the PRC. The
Company is 1 of 5 licensed intermediaries in Shanxi that operates its own large
scale storage tanks and has the necessary licenses to operate and sell Products
not only in Shanxi but throughout the entire PRC. The Company’s storage tanks
have the largest storage capacity of any non-government operated entity in
Shanxi. The Company seeks to earn profits by selling its Products at
competitive prices to large scale gas stations, coal plants and other power
supply customers and small, independent gas stations. The Company also earns
revenue by acting as a purchasing agent for other intermediaries in Shanxi and
through the sale of diesel and gasoline at a gas station located on the
Company’s property in Taiyuan. The sales price and the cost basis of the
Company’s products are largely dependent on the price of crude oil. The price of
crude oil is subject to fluctuation due to a variety of factors, all of which
are beyond the Company’s control.
For the
year ended June 30, 2009, the Company reported revenues of approximately $197
million, an increase of 37% from revenues of approximately $144 million
reported for the year ended June 30, 2008. The Company continued to
expand its customer base and the pricing of the Company’s Products continued to
follow a trend towards higher, more profitable pricing.
The Company profit margins
by product and service category for 2009 and 2008 are provided
below:
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Average
Profit Margins by Product or Service Type
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Product
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2009
*
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2008
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Diesel
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12%
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15%
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Gasoline
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17%
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15%
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Fuel
Oil
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12%
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9%
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Solvent
Oil
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19%
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15%
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Agency
Fees
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79%
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84%
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Customers
The
Company’s primary customers are large-scale gas stations, which represented
approximately 45% and 55% of the Company’s revenues for the years ended June 30,
2009 and 2008, respectively. These customers primarily buy diesel and
gasoline. The second largest group of customers consists of coal plants which
use diesel, gasoline and fuel oil for heat and solvents. These
customers represented approximately 45% and 35% of the Company’s revenues for
the years ended June 30, 2009 and 2008, respectively. The Company’s third
largest group of customers consists of small, independent gas stations. These
gas stations represented approximately 10% and 10% of the Company’s revenues for
the years ended June 30, 2009 and 2008, respectively. These gas stations
buy gasoline and diesel.
Products
The
Company purchases diesel, gasoline, fuel oil and kerosene from various petroleum
refineries in the PRC. The Company has historically sold large
quantities of diesel and gasoline products and has a large and expanding supply
chain in place. The Company does not generally modify the Products prior to
sale. However, in some scenarios the Company will further refine and modify its
Products upon the request of its customers.
Facilities
Taiyuan
The
Company has two facilities where operations will be conducted in the
future. The facility in Taiyuan, Shanxi was the Company’s original
facility and remains the Company’s headquarters today. This facility
has a total of 14 storage tanks with a capacity to store approximately 50,000
metric tons of Products. All of the Company’s revenues earned during
the years ended June 30, 2009 and 2008, respectively, were earned through this
facility. The Company maintains delivery and distribution platforms, including a
railroad and a vehicle loading and unloading station at this
facility.
Gujiao
In July,
2007 the Company made an initial deposit of approximately $9.2 million on a
$30.0 million purchase contract for the Company’s second facility in Gujiao,
Shanxi (the “Gujiao Facility”). On June 30, 2009, the Company made
the final payment on the purchase contract for approximately $7.1
million. The Gujiao Facility has a total of 7 storage tanks with a
capacity to store approximately 70,000 metric tons of the Company’s Products.
The Company is in the process of finalizing the restoration of this facility,
which is currently estimated to be complete in January, 2010. Once
the facility is restored, the Company will also maintain delivery and
distribution platforms, including a railroad and a vehicle loading and unloading
station at this facility.
Operating
Licenses
The
Company holds a Finish Oil Wholesale License (“FO License”), granted by the PRC
government. The FO License allows the Company to sell its Products to
wholesale customers and other users of gasoline, fuel oil and diesel oil.
This license must be renewed every 5 years. The Company holds
this license at the discretion of the PRC government. The Company
also holds a Dangerous Chemical Products Businesses License (“DGP License”) that
allows the Company and its personnel to handle and transport gasoline and diesel
oil. The DGP License has to be renewed every 3 years. The
constitution of the PRC states that all mineral and oil resources belong to the
PRC. Without these licenses, the Company would not be able to sell
its Products.
Industry
Overview and Market Opportunity
According to www.Platts.com, the PRC is
the second largest oil consumer in the world. Platts also noted that
in July, 2009, the PRC reached all-time highs in crude oil imports and refining
rates and had an implied demand of approximately 35 million metric tons of
oil. The Company’s operations are in Shanxi, which is a center of
industrial operations and energy supply within the PRC. The Company
believes its Taiyuan facility is well positioned to continue revenue
growth. The Gujiao Facility is located within a dense industrial
geography and is expected to generate significant revenue growth within its
initial year of operations and going forward. The two facilities have
a combined storage capacity of 120,000 metric tons.
We belive there are four key market trends that will allow
the Company to achieve substantial growth in the next five years.
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1.
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Oil
consumption by the PRC is growing by 7.5%, according to the Institute for
the Analysis of Global Security.
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2.
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Car
ownership in the PRC is expected to grow at an annual rate of 19%. The
Company's primary end users are individuals driving
cars.
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3.
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The
PRC currently imports 32% of its oil. The company is located in a province
in the PRC that does not have any oil refineries. The Company's storage
tanks and strong supply network are extremely strong barriers to
entry whereby the competitive marketplace is not lively to change
dramatically in the future.
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4.
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A
report by the International Energy Agency suggests that the PRC may
surpass the Unites States in Oil imports by
2030.
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3
Business
Strengths
Storage
Capacity
The Company has a distinct advantage
over its competitors in Shanxi as a result of operating its facility in Taiyuan,
which is the largest non-government owned petroleum storage and distribution
facility in Shanxi. The storage capacity is critical as there are no
petroleum refineries operating in Shanxi as of the date of this
report. All petroleum products are imported to Shanxi from other
provinces within the PRC. Additionally, maintaining adequate and
potentially excessive storage capacity allows the Company to be flexible and
take advantage of pricing, supply and demand fluctuations within the
marketplace.
Licenses
to Operate
The
Company’s FO License allows the Company to operate throughout the
PRC. The FO License held by the Company is 1 of 17 such licenses
currently effective within Shanxi. Furthermore, only 4 of the
Company’s non-government controlled competitors hold both the FO License
and operate a significant storage facility.
Business
Strategy
Expansion
of Customer Base
The
Company continues to seek expansion of its customer base within Taiyuan City,
Shanxi, and is focused on the development of its customer base at the Gujiao
Facility.
Monitoring
and Management of Market Pricing
The
Company will continue to monitor and manage its current inventory, the level of
demand for the Company’s Products from its customers, and will continue to
ensure the Company’s supply chain remains strong.
Acquistion
of Additional Facilities
The
Company will continue to seek out additional facilities with the intention of
acquiring additional facilities in the future. The Company expects to
be successful with its operations at the Gujiao Facility. Future
potential acquisitions will be contemplated by the Company’s management with the
knowledge and understanding the Company has gained from operations and business
development work completed at both the Taiyuan and Gujiao
facilities. In general, the Company intends to review potential
acquisitions of facilities that the Company believes will generate profits over
the initial 5 year term for the Company that equals or exceeds the total
purchase price of a new facility.
Company
History
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. On October 16, 2007, the
Company entered into a Share Exchange Agreement and agreed to issue 69,000,000
shares of its common stock in exchange for 100% of the outstanding ownership
units of Longwei Petroleum Investment Holding Limited (“Longwei BVI”), a British
Virgin Islands entity. This transaction was accounted for as a
reverse acquisition. Longwei Petroleum Investment Holding Limited, formerly
known as Tabatha II, Inc., did not have any operations and majority-voting
control was transferred to Longwei BVI. The transaction required a
recapitalization of Longwei BVI. Since Longwei BVI acquired a controlling voting
interest; it was deemed the accounting acquirer, while Longwei Petroleum
Investment Holding Limited (formerly Tabatha II, Inc.) was deemed the legal
acquirer.
Research
and Development
The
Company does not currently conduct any research and development.
4
Supply
Chain
The
Company depends on suppliers, namely refineries, for inventory. The cost of
inventory may fluctuate substantially and it is possible that the Company’s
demand for inventory could be met with a short supply, may be available from
only one or a limited number of suppliers, or may only be available from foreign
suppliers. Increased costs or difficulties in obtaining inventory in the
requisite quantities, or at all, could have a material adverse effect on the
Company’s results of operations. The credit crisis and rapidly escalating raw
material costs across a variety of industries created additional risks for the
Company’s supplier base. In the fiscal year ending June 30, 2010, the Company’s
suppliers could face financial difficulties as a result of the global economic
downturn. The Company actively monitors its suppliers' financial condition, but
to date the Company has no knowledge of significant concerns with the financial
stability of any of the Company’s major suppliers. See Item 1A, Risk Factors in
Part I of this Annual Report on Form 10-K for a discussion of
suppliers.
The Company is dependent upon the
ability of refinery suppliers to meet product specifications, standards and
delivery schedules at anticipated costs. While the Company maintains a
qualification and performance surveillance system to control risk associated
with this reliance on third parties, the failure of suppliers or to meet
commitments could adversely affect delivery schedules and profitability, while
jeopardizing the Company’s ability to fulfill commitments to customers. See
Item 1A, Risk
Factors in Part I of this Annual Report on Form 10-K for a
discussion of suppliers.
Intellectual
Property
The Company holds a Finish Oil
Wholesale License and a Dangerous Chemical Products Businesses
License. These two licenses were initially acquired when the Company
began operations in 1995. These two licenses do not appear on the
Company’s balance sheets within the consolidated financial
statements. However, the FO License has a 5 year term and the DGP
License has a renewable 3 year term. The Company considers these
licenses to be extremely valuable and believes the Company’s operations would be
severely impacted if these licenses were not maintained by the
Company.
Inflation
Inflationary
factors such as increases in the cost of the Company’s product and overhead
costs may adversely affect the Company’s operating results. Although the Company
does not believe that inflation has had a material impact on the Company’s
financial position or results of operations to date, a high rate of inflation in
the future may have an adverse effect on the Company’sability to maintain
current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of the Company’s products
do not increase with these increased costs.
Foreign
Currency Translation Adjustment
The
Company’s operating subsidiaries purchase all products and render services in
the PRC, and receive payment from customers in the PRC using RMB as the
functional currency. All of the Company’s customers and suppliers are
located in the PRC. While the Company’s reporting currency is the U.S. Dollar,
all of the Company’s consolidated revenues and the majority of consolidated
operating costs and expenses are denominated in RMB. Substantially all of the
Company’s assets and liabilities are denominated in RMB. As a result, the
Company is exposed to foreign exchange risk as the Company’s revenues and
results of operations may be affected by fluctuations in the exchange rate
between U.S. Dollars and RMB. The Company has not entered into any hedging
transactions in an effort to reduce the Company’s exposure to foreign exchange
risk.
The
Company incurred a foreign currency translation adjustment of $(1,372) for the
year ended June 30, 2009, as compared with the foreign currency translation
adjustment of $7,709 for the year ended June 30, 2008. On July 21,
2005, China reformed its foreign currency exchange policy, revalued the RMB by
2.1 percent and allowed the RMB to appreciate as much as 0.3 percent per day
against the U.S. dollar. The Company implemented exchange rates in translating
RMB into U.S. dollars in the Company’s financial statements for years ended June
30, 2009 and 2008, respectively. Assets and liabilities are
translated at exchange rates at the balance sheet dates and revenue and expenses
are translated at the average exchange rates for the periods presented and
shareholders’ equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign currency translation adjustment to other comprehensive
income, a component of shareholders’ equity. If the RMB appreciates
against the U.S. dollar, revenue and expenses would be higher than they would
have been if there were no fluctuations in the currencies. Conversely, if
the RMB depreciates against the U.S. dollar, revenue and expenses would be lower
than they would have been if there were no fluctuations in the
currencies.
5
Personnel
As of
June 30, 2009, the Company had a total of 65 employees.
Management
The
following table sets forth certain information related to the Company’s
executive officers and directors as of October 9, 2009.
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Name
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Age
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Positions
and Offices Held
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Mr. Cai
Yongjun
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57
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Chief
Executive Officer and Director
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Mr.
James Crane
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33
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Chief
Financial Officer
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Mr.
Xue Yongping
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42
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Secretary
and Director
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Cai
Yongjun, Chief Executive Officer
Mr. Cai
has been a founder and the Chief Executive of Taiyuan Longwei, the Company's
wholly-owned subsidiary, since October 1995. He has over 12 years
experience in the trading, storage and handling of petroleum products. Mr. Cai
acts as the general manager overseeing operations on a daily basis. From
1995 to 1999, Mr. Cai attended Shanxi University where he majored in Business
Administration.
James
Crane, Chief Financial Officer
Mr. Crane
was appointed as the Company's Chief Financial Officer on June 30, 2009. Mr.
Crane is a certified public accountant licensed by the Commonwealth of
Massachusetts and in good standing. Mr. Crane received a B.S. degree in
Accountancy from Bentley University in May 1999. Mr. Crane was employed by
Ernst & Young LLP from August 1999 through May 2001. Mr. Crane initially
organized J. Crane & Company in September 1999. Mr. Crane was a
partner in the Lexington, Massachusetts professional services firm of Baker
O’Connor, LLC from January 1, 2005 through June 30, 2006. Mr. Crane then
reorganized J. Crane & Company on July 1, 2006 and continues to operate J.
Crane & Company through the date of this report. Mr. Crane has also served
as Chief Financial Officer of Mystaru.com, Inc. and Bioneutral Group, Inc. since
October 2007 and January 2009, respectively. Each of these businesses are
public companies listed on the Over the Counter Bulletin Board stock market in
the United States of America.
Xue
Yongping, Secretary and Treasurer
Ms. Xue
was a founder of the Company and has been director and secretary of the Company
since the reverse merger was completed in Octoober 2007, and had been director,
secretary and treasurer since November 1998 of Taiyuan Longwei, the Company's
wholly-owned subsidiary. From August 1994 until November 1998, she was the
deputy manager for Taiyuan Hua Xin Trading Company, Ltd., where she served
as the deputy general manager. Taiyuan Hua Xin Trading Company is a
wholesale petroleum company engaged in the selling of diesel and gasoline to
other wholesale users. From September 1991 to July 1994, Ms. Xue attended
Shanxi Law School where she earned her law degree.
6
Taxation,
Fees and Royalty
Companies
which operate petroleum and petrochemical businesses in China are subject to a
variety of taxes, fees and royalties.
On March
26, 2006, the PRC government imposed a special oil income levy on revenues
generated from the sale of domestically produced crude oil when the realized
price exceeds US$ 40 per barrel. The special oil income levy has five levels and
is calculated and charged according to the progressive ad valorem rates on the
excess amounts. The levy is calculated on a monthly basis and collected on a
quarterly basis. The applicable rate of the levy is determined based on the
weighted average crude oil sale price of the exploration and production company
of a particular month.
Starting
from January 1, 2008, the general enterprise income tax rate imposed on
entities, other than certain enterprises defined in the new Enterprise Income
Tax Law of the PRC, shall be 25%.
According
to the Notice on Implementing Reforms on Prices of Refined Products and Tax,
starting from January 1, 2009, consumption tax on refined petroleum products
were adjusted. Applicable tax, fees and royalties on refined petroleum products
and other refined products generally payable by us or by other companies in
similar industries are shown below.
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Tax Item
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Tax Base
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Tax Rate
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Enterprise
income tax
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Taxable
income
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25%
starting from January 1, 2008.
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Value-added
tax
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Revenue
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13%
for liquefied petroleum gas, natural gas, and low density polyethylene for
production of agricultural film and fertilizers and 17% for other items.
The Company generally charges value-added tax to the Company’s customers
at the time of settlement on top of the selling prices of the Company’s
products on behalf of the taxation authority. The Company may directly
claim refund from the value-added tax collected from the Company’s
customers of any value-added tax that the Company paid for (i) purchasing
materials consumed during the production process; (ii) charges paid for
drilling and other engineering services; and (iii) labor consumed during
the production process.
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Business
tax
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Revenue
from pipeline transportation services
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3%.
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Consumption
tax
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Aggregate
volume sold or self-consumed
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RMB
1 per liter for gasoline, naphtha, solvent oil and lubricant; RMB 0.8 per
liter for diesel, fuel oil and jet fuel. Prior to December 31, 2010, the
consumption tax paid for imported naphtha for the production of ethylene
and aromatic hydrocarbon will be refunded, and naphtha procured from
domestic sources for the production of ethylene and aromatic hydrocarbon
will remain tax-free. Consumption tax on jet fuel is currently
exempted.
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|
Import
tariff
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CIF
China price
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5%
for gasoline, 6% for light diesel and 9% for jet kerosene. The actual
applicable tax rate in 2009 for gasoline, diesel and jet kerosene is
1%.
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Resource
tax
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Aggregate
volume sold or self-consumed
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RMB
14 to RMB 30 per tonne for crude oil. RMB 7 to RMB 15 per thousand cubic
meters for natural gas.
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City
construction tax
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Total
amount of value-added tax, consumption tax and business
tax
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1%,
5% and 7%.
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Education
Surcharge
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Total
amount of value-added tax, consumption tax and business
tax
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3%.
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|
Special
Oil Income Levy
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Any
revenue derived from sale of domestically produced crude oil when the
realized crude oil price exceeds US$ 40 per
|
Progressive
rate of 20% to 40% for revenue derived from crude oil with realized price
in excess of US$ 40 per barrel, i.e. 20% for the portion in excess of US$
40 per barrel up to US$ 45 per barrel (inclusive); 25% for the portion in
excess of US$ 45 per barrel up to US$ 50
per
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7
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to the Company’s securities. The statements contained in or
incorporated into this annual report that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward looking statements. If any of the following risks actually
occurs, the Company’s business, financial condition or results of operations
could be harmed. In that case, the trading price of the Company’s common stock
could decline, and you may lose all or part of your investment.
Risks
Related to Business Operations
The
Company may be unable to manage its growth.
The
Company is planning for rapid growth and intends to aggressively expand
operations. The growth in the size and geographic range of the Company’s
business will place significant demands on management and the Company’s
operating systems. The Company’s ability to manage growth effectively will
depend on the Company’s ability to attract additional management personnel; to
develop and improve operating systems; to hire, train, and manage an employee
base; and to maintain adequate service capacity. Additionally, the proposed
expansion of operations may require hiring additional management personnel to
oversee procurement duties. The Company will also be required to rapidly expand
operating systems and processes in order to support the projected increase in
product demand. There can be no assurance that the Company will be able to
effectively manage growth and build the infrastructure necessary to achieve
growth as management has forecasted.
The
strategy of acquiring complementary businesses and assets may fail which could
reduce the Company’s ability to compete for customers.
As part
of the Company’s business strategy, the Company has pursued, and intends to
continue to pursue, selective strategic acquisitions of businesses, assets and
technologies that complement the Company’s existing business. The Company
intends to make other acquisitions in the future if suitable opportunities
arise. Acquisitions involve uncertainties and risks, including:
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•
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potential
ongoing financial obligations and unforeseen or hidden
liabilities;
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•
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failure
to achieve the intended objectives, benefits or revenue-enhancing
opportunities;
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•
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costs
and difficulties of integrating acquired businesses and managing a larger
business; and
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•
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diversion
of resources and management
attention.
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The
failure to address these risks successfully may have a material adverse effect
on the Company’s financial condition and results of operations. Any such
acquisition may require a significant amount of capital investment, which would
decrease the amount of cash available for working capital or capital
expenditures. In addition, if the Company uses its equity securities to pay for
acquisitions, the Company may dilute the value of your shares. If the Company
borrows funds to finance acquisitions, such debt instruments may contain
restrictive covenants that could, among other things, restrict the Company from
distributing dividends. Such acquisitions may also generate significant
amortization expense related to intangible assets.
The
Company’s operating results may fluctuate, which makes the Company’s results
difficult to predict and could cause the Company’s results to fall short of
expectations.
The
Company currently consumes a large amount of refined diesel and gasoline. While
the Company tries to adjust the sale price of the Products to track
international crude oil price fluctuations, the Company’s ability to pass on the
increased cost resulting in diesel and gasoline price increases to the Company’s
customers is dependent on international and domestic market conditions as well
as the PRC government’s price control over refined petroleum products. For
example, the international crude oil price reached its historically high level
in July 2008, but the Company was not able to effectively pass the increased
cost to its customers. Although the current price-setting mechanism for refined
petroleum products in China allows the PRC government to adjust price in the PRC
market when the average international crude oil price fluctuates beyond certain
levels within a certain time period, the PRC government still retains discretion
as to whether or when to adjust the refined petroleum products price. The PRC
government will exercise certain price controls over refined petroleum
products once international crude oil price experiences sustained growth or
becomes significantly volatile. As a result, the Company’s results of operations
and financial condition may be materially and adversely affected by the
fluctuation of crude oil and refined petroleum product prices. The Company’s
operating results may fluctuate as a result of a number of factors, many of
which are outside of the Company’s control, such as the price of crude oil. For
these reasons, comparing operating results on a period-to-period basis may not
be meaningful, and you should not rely on the Company’s past results as an
indication of future performance. Quarterly and annual revenues, costs and
expenses as a percentage of the Company’s revenues may be significantly
different from the Company’s historical or projected rates. Operating results in
future quarters may fall below expectations. Any of these events could cause the
price of the Company’s common stock to fall.
The
Company relies heavily on outside suppliers for products derived from crude oil
and other raw materials, and may even experience disruption of the Company’s
ability to obtain products refined from crude oil and other raw
materials.
The
Company purchases a significant portion of its Products from outside suppliers
located in different provinces within the PRC. The Company is also aware that a
large portion of its Products originated in other countries. The
Company is subject to the political, geographical and economic risks associated
with these other provinces and perhaps even the countries where the Products
have originated. If one or more of the Company’s material supply contracts were
terminated or disrupted due to any natural disasters or political events, it is
possible that the Company would not be able to find sufficient alternative
sources of supply in a timely manner or on commercially reasonable terms. As a
result, the Company’s business and financial condition would be materially and
adversely affected.
8
The
Company’s business faces operation risks and natural disasters that may cause
significant property damages, personal injuries and interruption of operations,
and the Company may not have sufficient insurance coverage for all potential
financial losses incurred.
Transporting
petroleum products involves a number of operating
hazards. Significant operating hazards and natural disasters may
cause interruption to business operations, property or environmental damages as
well as personal injuries, and each of these incidents could have a material
adverse effect on the Company’s financial condition and results of
operations.
The
Company does not yet maintain insurance coverage on the Company’s property,
plant, equipment and inventory. However, preventative measures such as insurance
may not be effective in any event and if the Company should acquire insurance
coverage it may not be sufficient to cover all the financial losses caused by
operation risks and potential natural disasters, among other risks. Losses
incurred or payments required to be made by the Company due to operating hazards
or natural disasters, which are not fully insured, may have a material adverse
effect on the Company’s financial condition and results of
operations.
The
Company’s success depends on its ability to retain key personnel.
The
Company’s present and future performance will depend on the continued service of
senior management personnel, key sales personnel, and consultants. The key
employees include Cai Yongjun, the Company’s Chairman. The loss of the services
of Mr. Cai could have an adverse effect on the Company. The Company does not
have long term employment agreements with its officers. The Company does not
maintain any key man life insurance on any personnel.
The
Company is dependent on third parties to transport its Products, so their
failure to transport the Products could adversely affect the Company’s earnings,
sales and geographic market.
The
Company uses third parties for the vast majority of its shipping and
transportation needs. If these parties fail to deliver Products in a timely
fashion, including lack of available trucks or drivers, labor stoppages or if
there is an increase in transportation costs, including increased fuel costs, it
would have a material adverse effect on the Company’s earnings and could reduce
the Company’s sales and geographic market.
The
Company has limited business insurance coverage and potential liabilities could
exceed the Company’s ability to pay them.
The
insurance industry in the PRC is still at an early stage of development.
Insurance companies in the PRC offer limited business insurance products. The
Company does not have any business liability or disruption insurance coverage
for the Company’s operations in the PRC. Any business disruption, litigation or
natural disaster may result in substantial costs and the diversion of the
Company’s resources.
Risks
Related to Corporate Governance and Common Stock
The
Company’s common stock is classified as a “penny stock” as that term is
generally defined in the Securities Exchange Act of 1934 to mean equity
securities with a price of less than $5.00. The Company’s common
stock will be subject to rules that impose sales practice and disclosure
requirements on broker-dealers who engage in certain transactions involving a
penny stock.
The
Company is subject to the penny stock rules adopted by the Securities and
Exchange Commission that require brokers to provide extensive disclosure to its
customers prior to executing trades in penny stocks. These disclosure
requirements may cause a reduction in the trading activity of the Company’s
Common Stock, which in all likelihood would make it difficult for the Company’s
stockholders to sell their securities.
Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a
"penny stock," for purposes relevant to us, as any equity security that has a
minimum bid price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to a limited number of exceptions which are not
available to us. It is likely that the Company’s shares will be considered to be
penny stocks for the immediately foreseeable future. This classification
severely and adversely affects any market liquidity for the Company’s Common
Stock.
9
For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person's account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's account for
transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that that person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market,
which, in highlight form, sets forth:
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the
basis on which the broker or dealer made the suitability determination,
and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions.
Finally,
monthly statements have to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and/or may encounter
difficulties in their attempt to sell shares of the Company’s common stock,
which may affect the ability of selling shareholders or other holders to sell
their shares in any secondary market and have the effect of reducing the
level of trading activity in any secondary market. These additional sales
practice and disclosure requirements could impede the sale of the Company’s
common stock. In addition, the liquidity for the Company’s common stock may
decrease, with a corresponding decrease in the price of the Company’s common
stock. The Company’s common stock is subject to such penny stock rules for the
foreseeable future and the Company’s shareholders will, in all likelihood, find
it difficult to sell their common stock.
The
market for penny stock has experienced numerous frauds and abuses which could
adversely impact subscribers of the Company’s stock.
The
Company believes that the market for penny stocks has suffered from patterns of
fraud and abuse. Such patterns include:
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control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or issuer;
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manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
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“boiler
room" practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales persons;
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excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
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wholesale
dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the inevitable
collapse of those prices with consequent investor
losses.
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The
Company believes that many of these abuses have occurred with respect to the
promotion of low price stock companies that lacked experienced management,
adequate financial resources, an adequate business plan and/or marketable and
successful business or product.
The
Company is controlled by the officers and directors of the Company.
The
Company’s officers, directors and principal stockholders and their affiliates
own or control a majority of the Company’s outstanding common stock. As a
result, these stockholders, if acting together, would be able to effectively
control matters requiring approval by the stockholders of the Company, including
the election of the Company’s Board of Directors.
10
The
Company’s certificate of incorporation limits the liability of members of the
Board of Directors.
The
Company’s certificate of incorporation limits the personal liability of the
director of the Company for monetary damages for breach of fiduciary duty as a
director, subject to certain exceptions, to the fullest extent allowed. The
Company is organized under Colorado law. Accordingly, except in limited
circumstances, the Company’s directors will not be liable to the Company’s
stockholders for breach of their duties.
Provisions
of the Company’s certificate of incorporation, bylaws and Colorado corporate law
have anti-takeover effects.
Some
provisions in the Company’s certificate of incorporation and bylaws could delay
or prevent a change in control of the Company, even if that change might be
beneficial to the Company’s stockholders. The Company’s certificate of
incorporation and bylaws contain provisions that might make acquiring control of
the Company difficult, including provisions limiting rights to call special
meetings of stockholders and regulating the ability of the Company’s
stockholders to nominate directors for election at annual meetings of the
Company’s stockholders. In addition, the Company’s board of directors has the
authority, without further approval of the Company’s stockholders, to issue
common stock having such rights, preferences and privileges as the board of
directors may determine. Any such issuance of common stock could, under some
circumstances, have the effect of delaying or preventing a change in control of
the Company and might adversely affect the rights of holders of common
stock.
In
addition, the Company is subject to Colorado statutes regulating business
combinations, takeovers and control share acquisitions, which might also hinder
or delay a change in control of the Company. Anti-takeover provisions in the
Company’s certificate of incorporation and bylaws, anti-takeover provisions that
could be included in the common stock when issued and the Colorado statutes
regulating business combinations, takeovers and control share acquisitions can
depress the market price of the Company’s securities and can limit the
stockholders’ ability to receive a premium on their shares by discouraging
takeover and tender offer bids, even if such events could be viewed by the
Company’s shareholders or others as beneficial transactions.
The Company’s internal financial
reporting procedures are still being developed. During the fiscal year ending
June 30, 2010, the Company will need to allocate significant resources to meet
applicable internal financial reporting standards.
The
Company has adopted disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports that the Company submits under the Exchange Act are recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that the Company files or submits under the Exchange Act are accumulated and
communicated to management, including principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. The Company is taking steps to develop and adopt appropriate
disclosure controls and procedures.
These
efforts require significant time and resources. If the Company is unable to
establish appropriate internal financial reporting controls and procedures, the
Company’s reported financial information may be inaccurate and the Company will
encounter difficulties in the audit or review of its consolidated financial
statements by the Company’s independent auditors, which in turn may have
material adverse effects on the Company’s ability to prepare consolidated
financial statements in accordance with generally accepted accounting principles
and to comply with SEC reporting obligations.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes Oxley Act of 2002 could prevent the Company from producing
reliable financial reports or identifying fraud. In addition, current and
potential stockholders could lose confidence in the Company’s financial
reporting, which could have an adverse effect on the Company’s stock
price.
The
Company is subject to Section 404 of the Sarbanes-Oxley Act of 2002. Effective
internal controls are necessary for the Company to provide reliable financial
reports and effectively prevent fraud, and a lack of effective controls could
preclude the Company from accomplishing these critical functions. The Company is
required to document and test its internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, in
connection with, Public Company Accounting Oversight Board (“ PCAOB ”) Auditing
Standard No. 5 (“ AS 5 ”) which requires annual management assessments of the
effectiveness of the Company’s internal controls over financial reporting and a
report by the Company’s independent registered public accounting firm addressing
these assessments. Commencing with the Company's fiscal year ended June 30,
2010, the Company's auditor will be required to attest to the effectiveness of
these controls. Although the Company intends to augment its internal control
procedures and expand its accounting staff, there is no guarantee that this
effort will be adequate.
11
During
the course of testing, the Company may identify deficiencies which the Company
may not be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404 and AS5.
In addition, if the Company fails to maintain the adequacy of its internal
accounting controls, as such standards are modified, supplemented or amended
from time to time, the Company may not be able to ensure that the Company can
conclude on an ongoing basis that the Company has effective internal controls
over financial reporting in accordance with Section 404. Failure to achieve and
maintain effective internal controls could cause us to face regulatory action
and also cause investors to lose confidence in the Company’s reported financial
information, either of which could have an adverse effect on the Company’s stock
price.
Shareholders
may have difficulty trading and obtaining quotations for the Company’s common
stock.
The
Company’s common stock may not be actively traded, and the bid and ask prices
for the Company’s common stock on the OTC-BB may fluctuate widely. As a result,
shareholders may find it difficult to dispose of, or to obtain accurate
quotations of the price of, the Company’s securities. This severely limits
the liquidity of the common stock, and would likely reduce the market price of
the Company’s common stock and hamper the Company’s ability to raise additional
capital.
The
market price of the Company’s common stock may, and is likely to continue to be,
highly volatile and subject to wide fluctuations.
The
market price of the Company’s common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to a number of factors that
are beyond the Company’s control, including:
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dilution
caused by the issuance of additional shares of common stock and other
forms of equity securities in connection with future capital financings to
fund business operations and growth, to attract and retain valuable
personnel and in connection with future strategic partnerships with other
companies;
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announcements
of new acquisitions or other business initiatives by the Company’s
competitors;
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the
Company’s ability to take advantage of new acquisitions or other business
initiatives;
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fluctuations
in revenue from the Company’s petroleum products;
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•
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changes
in the market for petroleum products and/or in the capital markets
generally;
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•
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changes
in the demand for petroleum products, including changes resulting from the
introduction or expansion of new petroleum products;
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quarterly
variations in the Company’s revenues and operating
expenses;
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changes
in the valuation of similarly situated companies, both in the Company’s
industry and in other industries;
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•
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changes
in analysts’ estimates affecting the Company, its competitors and/or its
industry;
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•
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changes
in the accounting methods used in or otherwise affecting the Company’s
industry;
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•
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additions
and departures of key personnel;
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announcements
of technological innovations or new products available to the Company’s
industry;
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•
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announcements
by relevant governments pertaining to incentives for biodegradable product
development programs;
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fluctuations
in interest rates and the availability of capital in the capital markets;
and
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•
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significant
sales of the Company’s common stock, including sales by the investors
following registration of the shares of common stock issued in future
offerings by the Company
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These and
other factors are largely beyond the Company’s control, and the impact of these
risks, singly or in the aggregate, may result in material adverse changes to the
market price of the Company’s common stock and/or the Company’s results of
operations and financial condition.
The
Company’s operating results may fluctuate significantly, and these fluctuations
may cause the Company’s stock price to decline.
Operating
results will likely vary in the future primarily as the result of fluctuations
in the Company’s revenues and operating expenses, expenses that the Company
incurs, and other factors. If results of operations do not meet the expectations
of current or potential investors, the price of the Company’s common stock may
decline.
12
The
Company does not expect to pay dividends in the foreseeable future.
The
Company does not intend to declare dividends for the foreseeable
future. The Company anticipates that it will reinvest any future
earnings in the development and growth of the Company’s business. Therefore,
investors will not receive any funds unless they sell their common stock, and
stockholders may be unable to sell their shares on favorable terms or at all.
Investors cannot be assured of a positive return on investment or that they will
not lose the entire amount of their investment in the Company’s common
stock.
Risks
Related to the Company’s Corporate Structure
PRC
laws and regulations governing the Company’s business and the validity of
certain contractual arrangements are uncertain. If the Company is found to be in
violation, the Company could be subject to sanctions which could result in
significant disruptions to the Company’s operations and/or the Company’s ability
to generate revenues.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing the Company’s business, or the enforcement and performance of the
Company’s contractual arrangements with the Company’s vendors and customers. The
Company is considered a foreign person or foreign enterprise under PRC
law. These laws and regulations are relatively new and may be subject
to change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to the Company by relevant governmental bodies may be revoked
at a later time by higher regulatory bodies. The Company cannot predict the
effect of the interpretation of existing or new PRC laws or regulations on the
Company’s business. The Company cannot assure its shareholders that the
Company’s current ownership and operating structure would not be found in
violation of any current or future PRC laws or regulations. As a result, the
Company may be subject to sanctions, including fines, and could be required to
restructure the Company’s operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt the Company’s business
operations or restrict the Company from conducting a substantial portion of the
Company’s business operations, which could materially and adversely affect the
Company’s business, financial condition and results of operations.
Risks
Related to Doing Business in China
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of Renminbi (“RMB”) into
foreign currencies and, in certain cases, the remittance of currency out of
China. The Company receives substantially all of its revenues in RMB. Under the
Company’s current structure, the Company’s cash receipts are primarily derived
from cash transfers from the Company’s PRC subsidiaries. Shortages in the
availability of foreign currency may restrict the ability of the Company’s PRC
subsidiaries and the Company’s affiliated entities to remit sufficient foreign
currency to pay cash or other payments to the Company, or otherwise satisfy
their foreign currency denominated obligations. Under existing PRC foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents the
Company from obtaining sufficient foreign currency to satisfy the Company’s
currency demands, the Company may not be able to pay dividends in foreign
currencies to the Company’s shareholders, including holders of the Company’s
common stock.
13
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could limit the ability of the
Company’s PRC subsidiaries to distribute dividends or otherwise adversely affect
the implementation of the Company’s acquisition strategy.
The PRC
State Administration of Foreign Exchange (“SAFE”), issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company intends to
acquire a PRC company, such acquisition will be subject to strict examination by
the relevant foreign exchange authorities. The public notice also states that
the approval of the relevant foreign exchange authorities is required for any
sale or transfer by the PRC residents of a PRC company’s assets or equity
interests to foreign entities, such as the Company, for equity interests or
assets of the foreign entities.
In April
2005, SAFE issued another public notice clarifying the January notice. In
accordance with the April notice, if an acquisition of a PRC company by an
offshore company controlled by PRC residents had been confirmed by a Foreign
Investment Enterprise Certificate prior to the issuance of the January notice,
each of the PRC residents is required to submit a registration form to the local
SAFE branch to register his or her respective ownership interests in the
offshore company. The SAFE notices do not specify the timeframe during which
such registration must be completed. The PRC resident must also amend such
registration form if there is a material event affecting the offshore company,
such as, among other things, a change to share capital, a transfer of stock, or
if such company is involved in a merger and an acquisition or a spin-off
transaction or uses its assets in China to guarantee offshore obligations. The
Company has notified the Company’s shareholders who are PRC residents to
register with the local SAFE branch as required under the SAFE notices. However,
the Company cannot provide any assurances that all of the Company’s shareholders
who are PRC residents will comply with the Company’s request to make or obtain
any applicable registrations or approvals required by these SAFE notices. The
failure or inability of the Company’s PRC resident shareholders to comply with
the registration procedures set forth therein may subject us to fines and legal
sanctions, restrict the Company’s cross-border investment activities, or limit
the Company’s PRC subsidiaries’ ability to distribute dividends to the
Company.
As it is
uncertain how the SAFE notices will be interpreted or implemented, it is
difficult to predict how these regulations will affect the Company’s business
operations or future strategy. For example, the Company may be subject to more
stringent review and approval process with respect to the Company’s foreign
exchange activities, such as remittance of dividends and
foreign-currency-denominated borrowings, which may adversely affect the
Company’s results of operations and financial condition. In addition, if the
Company decides to acquire a PRC company, the Company cannot assure its
shareholders or the owners of such company, as the case may be, will be able to
obtain the necessary approvals or complete the necessary filings and
registrations required by the SAFE notices. This may restrict the Company’s
ability to implement its acquisition strategy and could adversely affect the
Company’s business and prospects.
Fluctuation
in the value of the RMB may have a material adverse effect on y
investment.
The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the U.S. dollar. The Company’s revenues and costs are denominated in
RMB. An appreciation of RMB against the U.S. dollar would also result in foreign
currency translation losses for financial reporting purposes when the Company
translates the Company’s RMB denominated financial assets into U.S. Dollars, as
the U.S. Dollar is the Company’s reporting currency.
14
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM
2. DESCRIPTION OF PROPERTIES
The
Company’s headquarters is located at No.30 Guanghua Street, Xiaojingyu Xiang,
Wanbailin District, Taiyuan City, Shanxi Province, Shanxi, China 030024. The
facility is 32,964 square feet of land. On this property the Company has 7
storage tanks, along with the various buildings listed below. The Company has a
railway line located on its property. The railway connects the Company to
the Taiyuan railway office, Yinjing Station, extending 16,278 linear feet
from station to station. This rail system services some of the Company’s
major customers. The storage tanks are in excellent condition, and maintenance
is provided on a regular basis by the Company’s own employees. If all of
the Company's tanks are full, they can hold up to 50,000 metric tons of
petroleum.
The
Company’s new facility in Gujiao, China is located in Langang County, Xiangyang,
Gujiao, Shanxi, PRC. This facility is expected to begin operations in January
2010 and will have a total storage capacity of 70,000 metric tons.
ITEM
3. DESCRIPTION OF LEGAL PROCEEDINGS
There is
no pending litigation against us.
15
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter
was submitted to a vote of the security holders, through the solicitation of
proxies or otherwise, during the fourth quarter ended June 30,
2009.
PART
II
ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Public
Market for Common Stock
The
Company’s common stock has been quoted on the OTC Bulletin Board under the
symbol "LPIH” since November 13, 2008. The following table sets forth
the range of quarterly high and sales prices of the common stock as reported for
the periods indicated:
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Price
Information*
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Financial
Quarter Ended
|
High
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Low
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|
September
30, 2007
|
-
|
-
|
|
December
31, 2007
|
-
|
-
|
|
March
31, 2008
|
-
|
-
|
|
June
30, 2008
|
-
|
-
|
|
September
30, 2008
|
-
|
-
|
|
December
31, 2008
|
2.25
|
0.20
|
|
March
31, 2009
|
0.51
|
0.20
|
|
June
30, 2009
|
1.30
|
0.27
|
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require: (i)
that a broker or dealer approve a person’s account for transactions in penny
stocks and (ii) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person’s account for
transactions in penny stocks, the broker or dealer must (i) obtain financial
information and investment experience and objectives of the person; and
(ii) make a reasonable determination that the transactions in penny stocks are
suitable for that person and that person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination and (ii) that the
broker or dealer received a signed, written agreement from the investor prior to
the transaction. Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading, and about
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks.
Common
Stock
The
Company is authorized to issue 500,000,000 shares of common stock, no par value
per share. The Company has 83,011,527 common shares issued and
outstanding as of October 13, 2009.
The
holders of the Company’s common stock have equal ratable rights to dividends
from funds legally available if and when declared by the board of directors and
are entitled to share ratably in all of the Company’s assets available for
distribution to holders of common stock upon liquidation, dissolution or winding
up of the Company’s affairs. The Company’s common stock does not provide the
right to preemptive, subscription or conversion rights and there is no
redemption or sinking fund provisions or rights. The Company’s common stock
holders are entitled to one non-cumulative vote per share on all matters on
which shareholders may vote.
16
All
shares of common stock now outstanding are fully paid and
non-assessable. The Company’s Articles of Incorporation, Bylaws and
the applicable statutes of the state of Colorado are available to the public for
a more complete description of the rights and liabilities of the holders of the
Company’s securities. All material terms of the Company’s common
stock have been addressed in this section.
The
holders of the Company’s common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting
for the election of directors, can elect all of the directors to be elected, if
they so choose, and, in that event, the holders of the remaining shares will not
be able to elect any of the Company’s directors.
As of June 30, 2009, there were 101
shareholders of record.
Preferred
Stock
The
Company is authorized to issue 100,000,000 shares of preferred
stock. The terms of the Company’s preferred stock are at the
discretion of the board of directors. There are no shares of
preferred stock that have been issued or outstanding.
Dividends
The
Company has never paid any cash dividends to shareholders and has no plans to do
so at this time. The declaration of any future cash dividends is at
the discretion of the board of directors and depends upon the Company’s
earnings, if any, the Company’s capital requirements and financial position,
general economic conditions, and other pertinent conditions.
Warrants
A total
of 2,700,000 detachable stock purchase warrants have been issued by the Company
and remained outstanding as of June 30, 2009. Each warrant is
convertible into shares of common stock on a cashless basis at an exercise price
of $0.70 per share. A total of 1,500,000 and 1,200,000 warrants
expire on February 9, 2012 and February 9, 2014, respectively.
Options
There are
no options to purchase the Company’s common stock or preferred stock that have
been issued or were outstanding as of June 30, 2009.
Recent
Sales of Unregistered Securities
On
September 3, 2008, the Company issued a total of 1,200,000 shares of common
stock to four entities in accordance with a settlement agreement dated May 27,
2008 for failure to timely register common stock underlying convertible debt
issued to four entities on December 18, 2007. An additional 5,000
shares of common stock were issued to a law firm for legal services provided in
connection with the settlement agreement. Such securities have not been
registered under the Securities Act of 1933. The issuance of these shares was
exempted from registration pursuant to Section 4(2) of the Securities Act of
1933.
On
February 9, 2009, the Company issued 15,000 shares of common stock to an entity
for marketing services to be provided over a three month term. 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.
On April
9, 2009, the Company entered into an agreement whereby the Company agreed that
upon certain contingent events, the Company would issue 1,900,000 shares of
common stock to an entity for marketing and investor relations services to be
provided over a six month term. The contingent events were met in May
and June 2009, respectively. 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.
On June
12, 2009, the Company entered into four separate consulting agreements whereby
the Company agreed to issue 1,909,967 shares of common stock to four individuals
for consulting services previously rendered. 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
May 2009, the holders of the Company’s convertible debt issued on December 18,
2007 agreed to convert a total of $436,000 of convertible debt, including $1,000
of accrued interest on the convertible debt, to 622,857 shares of common
stock. 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.
17
During
June 2009, the holders of the Company’s convertible debt issued on December 18,
2007 agreed to convert a total of $865,000 of convertible debt to 1,235,714
shares of common stock. 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.
On June
30, 2009, the Company entered into a consulting agreement whereby the Company
agreed to issue 25,000 shares of common stock to its Chief Financial Officer as
partial compensation pursuant to the terms of the consulting
agreement. Such securities have not been registered under the
Securities Act of 1933. The issuance of these shares was exempted from
registration pursuant to Section 4(2) of the Securities Act of
1933.
Equity
Compensation Plan Information
The
following table sets forth certain information as of October 9, 2009, with
respect to compensation plans under which the Company’s equity securities are
authorized for issuance:
|
(a)
|
(b)
|
(c)
|
||
|
_________________
|
_________________
|
_________________
|
||
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
The
weighted-average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||
|
Equity
compensation
|
None
|
-
|
-
|
|
|
Plans
approved by
|
||||
|
Security
holders
|
||||
|
Equity
compensation
|
None
|
-
|
-
|
|
|
Plans
not approved
|
||||
|
By
security holders
|
||||
|
Total
|
ITEM
6. SELECTED
FINANCIAL DATA
The
Company derived the selected historical consolidated financial data presented
below from its audited consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. You should refer to
Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, in Part II of this Annual Report on Form 10-K
and the notes to the accompanying consolidated financial statements for
additional information regarding the financial data presented below, including
matters that might cause this data not to be indicative of the Company’s future
financial condition or results of operations. In addition, you should note the
following information regarding the selected historical consolidated financial
data presented below.
18
|
As
of and for the Year Ended June 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(In
Thousands, Except per Share Data)
|
||||||||||||||||||||
|
Results
of Operations
|
||||||||||||||||||||
|
Net
Revenues
|
$ | 196,811 | $ | 143,788 | $ | 93,762 | $ | 93,082 | $ | 40,864 | ||||||||||
|
Operating
Income
|
31,803 | 32,124 | 17,717 | 21,843 | 12,304 | |||||||||||||||
|
Income
Before Income Tax Expense
|
30,897 | 30,377 | 17,906 | 21,948 | 12,352 | |||||||||||||||
|
Income
Tax Expense
|
(9,120 | ) | (9,662 | ) | (5,911 | ) | (7,245 | ) | (4,076 | ) | ||||||||||
|
Net
Income
|
21,777 | 20,715 | 11,995 | 14,703 | 8,276 | |||||||||||||||
|
Basic
Earnings Per Common Share
|
0.28 | 0.28 | 0.17 | 0.21 | 0.12 | |||||||||||||||
|
Diluted
Earnings Per Common Share
|
$ | 0.28 | $ | 0.27 | $ | 0.17 | $ | 0.21 | $ | 0.12 | ||||||||||
|
Weighted
Average Common Shares Outstanding:
|
||||||||||||||||||||
|
Basic
|
76,537 | 73,341 | 69,000 | 69,000 | 69,000 | |||||||||||||||
|
Diluted
|
78,524 | 75,739 | 69,000 | 69,000 | 69,000 | |||||||||||||||
|
Financial
Position at Year-End
|
||||||||||||||||||||
|
Property
and Equipment, net
|
$ | 36,745 | $ | 2,637 | $ | 2,693 | $ | 2,901 | ||||||||||||
|
Total
Assets
|
120,142 | 93,468 | 60,742 | 53,328 | ||||||||||||||||
|
Total
and Current Liabilities
|
5,219 | 4,927 | 2,998 | 10,062 | ||||||||||||||||
|
Shareholders'
Equity
|
$ | 114,923 | $ | 88,541 | $ | 57,744 | $ | 43,266 | $ | 27,480 | ||||||||||
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is designed to provide information that is
supplemental to, and should be read together with, the Company’s consolidated
financial statements and the accompanying notes contained in this Annual Report
on Form 10-K. Information in this Item 7 is intended to assist the
reader in obtaining an understanding of the consolidated financial statements,
the changes in certain key items in those financial statements from year to
year, the primary factors that accounted for those changes, and any known trends
or uncertainties that the Company is aware of that may have a material effect on
the Company’s future performance, as well as how certain accounting principles
affect the consolidated financial statements. MD&A includes the following
sections:
•
Highlights
and Executive Summary
•
Results
of Operations—an analysis of the Company’s consolidated results of operations,
for the two years presented in the consolidated financial
statements
•
Liquidity
and Capital Resources—an analysis of the effect of the Company’s operating,
financing and investing activities on the Company’s liquidity and capital
resources
•
Off-Balance
Sheet Arrangements—a discussion of such commitments and
arrangements
•
Critical
Accounting Policies and Estimates—a discussion of accounting policies that
require significant judgments and estimates
•
New
Accounting Pronouncements—a summary and discussion of the Company’s plans for
the adoption of relevant new accounting standards relevant
The following discussion contains
forward-looking statements that reflect the Company’s plans, estimates and
beliefs. Actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this Annual Report on Form 10-K, particularly in "Special Note Regarding
Forward-Looking Statements," "Market Data" and "Risk
Factors."
19
Highlights
and Executive Summary
Longwei
Petroleum Investment Holding Limited is one of the largest oil and gas
distributors in Shanxi Province in the People’s Republic of
China. The Company’s headquarters and primary facilities are located
in Taiyuan, Shanxi. The Company purchases diesel, gasoline, fuel oil and
kerosene from various petroleum refineries in the PRC. The Company is 1 of
5 licensed distributors in Shanxi that operates its own large scale storage
tanks. The Company’s storage tanks have the largest storage capacity of any
non-government operated entity in Shanxi. The Company seeks to earn
profits by selling its Products at competitive prices to large scale gas
stations, coal plants and other power supply customers and small, independent
gas stations. The Company also earns revenue by acting as a purchasing agent for
other distributors and through the sale of diesel and gasoline at a gas station
located on the Company’s property in Taiyuan. The sales price and the cost basis
of the Company’s products are largely dependent on the price of crude oil. The
price of crude oil is subject to fluctuation due to a variety of factors, all of
which are beyond the Company’s control.
For the
year ended June 30, 2009, the Company reported revenues of approximately $197
million, an increase of 37% from revenues of approximately $144 million
reported for the year ended June 30, 2008. The Company continued to
expand its customer base and the pricing of the Company’s Products continued to
follow a trend towards higher, more profitable pricing.
Results
of Operations
The
following tables set forth key components of the Company’s results of operations
for the years ended June 30, 2009 and 2008, respectively.
For
the Year Ended June 30, 2009 Compared to the Year Ended June 30,
2008
|
2009
|
2008
|
|||||||
|
Revenues
|
$ | 196,811 | $ | 143,788 | ||||
|
Costs
of Revenues
|
157,341 | 106,801 | ||||||
|
Gross
Profit
|
39,740 | 36,987 | ||||||
|
Total
Operating Expenses
|
7,667 | 4,863 | ||||||
|
Income
From Operations
|
31,803 | 32,124 | ||||||
|
Other
Income and Expenses
|
(906 | ) | (1,747 | ) | ||||
|
Provision
for Income Taxes
|
(9,120 | ) | (9,662 | ) | ||||
|
Net
Income
|
21,777 | 20,715 | ||||||
|
Foreign
Currency Translation Adjustment
|
(1,372 | ) | 7,709 | |||||
|
Comprehensive
Income
|
$ | 20,405 | $ | 28,424 | ||||
|
Basic
Earnings Per Share
|
$ | 0.28 | $ | 0.28 | ||||
|
Diluted
Earnings Per Share
|
$ | 0.28 | $ | 0.27 |
Revenues
Revenues
for the year ended June 30, 2009 were $196,811 as compared to $143,788 for the
year ended June 30, 2008. The Company generated increased revenues during the
year ended June 30, 2009 as a result of certain new customer
contracts. Additionally, the average sales price per metric ton of
product the Company sold was $781 and $730 during the years ended June 30, 2009
and 2008, respectively.
Costs
of Sales
Costs of
sales for the year ended June 30, 2009 were $157,341 as compared to $106,081 for
the year ended June 30, 2008. The Company’s gross profit was 20% and
26%, respectively, for the years ended June 30, 2009 and 2008. The
average cost basis per metric ton of product the Company sold was $676 and $621
during the years ended June 30, 2009 and 2008, respectively.
20
Operating
Expenses
Operating
expenses for the years ended June 30, 2009 amounted to $7,667 as compared to
$4,863 for the year ended June 30, 2008. Operating expenses in 2009
consisted of $3,664 in stock based compensation, $1,183 in repairs and
maintenance and $1,108 in debt extinguishment expense, among
others. Operating expenses in 2008 consisted of $0 in stock based
compensation, $2,549 in repairs and maintenance and $0 in debt extinguishment
expense, among others. Management expects salaries of all employees in the
PRC will be paid in cash. However, consultants and others located
outside of the PRC have been willing to accept stock based compensation in lieu
of cash. The Company has no plans to make stock based compensation a
normal attribute of its employees and consultants’ contracts but it is likely
some stock issuances for compensation will be awarded during the fiscal year
ending June 30, 2010 and forward. The large stock based compensation awards
granted during the year ended June 30, 2009 are not likely to be repeated during
the year ended June 30, 2010. Repairs and maintenance expense is likely to
increase as a result of the initial operations of the Gujiao
facility. Debt extinguishment expense was the result of a February
2009 settlement agreement with a group of investors. A similar expense is not
expected to be incurred in the year ended June 30, 2010.
Net
Income
Net
income for the years ended June 30, 2009 was $21,777 as compared to $20,715 for
the year ended June 30, 2008, due to the reasons set forth above. If the
one-time expenses for stock compensation and debt extinguishment costs are
removed, the Company's year over year net income growth was approximated
28%.
Basic
and Diluted Earnings per Share
The Company’s basic net
income per share was $0.28 and $0.28, respectively for the years ended June 30,
2009 and 2008, respectively.
Liquidity
and Capital Resources
As of
June 30, 2009, the Company’s current assets were $83,397 and current liabilities
were $5,219. Cash and cash equivalents totaled $7,308 as of June 30, 2009. The
Company’s shareholders’ equity at June 30, 2009 was $114,923. The Company had
cash provided by (used in) operating activities for the years ended June 30,
2009 and 2008 of $21,863 and $(172), respectively. The Company had net cash used
in investing activities of $(21,816) and $(28) for the years ended June 30, 2009
and 2008, respectively. The Company had net cash provided by financing
activities of $0 and $2,100 for the years ended June 30, 2009 and 2008,
respectively.
Off-Balance
Sheet Arrangements
The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
“special purpose entities” (SPEs).
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s results of operations and liquidity and
capital resources are based on the Company’s consolidated financial statements,
which have been prepared in accordance with GAAP. In connection with the
preparation of consolidated financial statements, the Company is required to
make assumptions and estimates about future events, and apply judgments that
affect the reported amounts of assets, liabilities, revenue, expenses, and the
related disclosures. The assumptions, estimates and judgments included within
these estimates are based on historical experience, current trends and other
factors the Company believes to be relevant at the time the consolidated
financial statements were prepared. On a regular basis, the accounting policies,
assumptions, estimates and judgments are reviewed to ensure that the
consolidated financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from the assumptions and estimates, and
such differences could be material.
The
preparation of consolidated financial statements in conformity with GAAP
requires the Company to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates and assumptions are used for, but are
not limited to: (1) inventory costs and reserves; (2) asset
impairments (3) and depreciable lives of assets. Future events and their
effects cannot be predicted with certainty, and accordingly, accounting
estimates require the exercise of judgment. The accounting estimates used in the
preparation of the consolidated financial statements will change as new events
occur, as more experience is acquired, as additional information is obtained and
as the Company’s operating environment changes. The Company evaluates and update
these assumptions and estimates on an ongoing basis and may employ outside
experts to assist with these evaluations. Actual results could differ from the
estimates that have been used.
Significant
accounting policies are discussed in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements. The
Company believes the following accounting policies are the most critical to aid
in fully understanding and evaluating the Company’s reported financial results,
as they require management to make difficult, subjective or complex judgments,
and to make estimates about the effect of matters that are inherently uncertain.
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results
Differ
from Assumptions
|
||
|
Inventories
|
||||
|
The
Company states its inventories at the lower of cost or market value and
net of the cost of excess and obsolete items.
|
The
determination of inventory valuation reserves requires management to make
estimates and judgments on the future salability of inventories. Valuation
reserves for excess, obsolete, and slow-moving inventory are estimated by
comparing the inventory levels of individual parts to both future sales
forecasts or production requirements and historical usage rates in order
to identify inventory for which the resale value or replacement value is
less than the inventoriable cost. Other factors that management considers
in determining these reserves include overall market conditions, and
other inventory management initiatives.
|
Estimates
of future product demand may prove to be inaccurate, in which case
inventory may be understated or overstated the provision required for
excess and obsolete inventories. In the future, if inventories are
determined to be overvalued, the Company would be required to recognize
such costs in cost of sales at the time of such determination. Likewise,
if inventories are determined to be undervalued, costs of sales may have
been over-reported in previous periods and the Company would be required
to recognize such additional operating income at the time of
sale.
|
21
|
Impairment
of Long Lived Assets
|
||||
|
The
carrying amounts of long-lived assets are reviewed periodically in order
to assess whether the recoverable amounts have declined below the carrying
amounts.
|
These
assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is
reduced to recoverable amount. The recoverable amount is the greater of
the net selling price and the value in use. It is difficult to
precisely estimate selling price because quoted market prices for the
Company’s assets or cash-generating units are not readily available. In
determining the value in use, expected cash flows generated by the asset
or the cash-generating unit are discounted to their present value, which
requires significant judgment relating to level of sales volume, selling
price and amount of operating costs. The Company uses all readily
available information in determining an amount that is a reasonable
approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sales volume,
selling price and amount of operating costs.
|
Estimates
contemplated by the Company with regard to the recoverability of carrying
amounts for its long lived assets may prove to be inaccurate, in which
case property, plant and equipment may be understated or overstated. In
the future, if property, plant and equipment are determined to be
overvalued, the Company would be required to recognize such costs in
operating expenses at the time of such determination. Likewise, if
property, plant and equipment are determined to be undervalued, operating
expenses may have been over-reported in previous periods and the Company
would be required to recognize such additional operating income at the
time of sale.
|
|
Depreciable
Lives
|
||||
|
The
estimated depreciable life of long lived assets is estimated upon the
acquisition of assets .
|
These
assets are reviewed by management and assigned a specific depreciable
life. The depreciable life is used to estimate the term for
which the assets cost basis should be depreciated or expense
over. The Company uses all readily available information in
determining a depreciable life that is a reasonable approximation of the
actual depreciable life of an asset.
|
Estimates
for depreciable life contemplated by the Company may prove to be
inaccurate, in which case property, plant and equipment may be understated
or overstated. In the future, if property, plant and equipment are
determined to be overvalued, the Company would be required to recognize
such costs in operating expenses at the time of such determination.
Likewise, if property, plant and equipment are determined to be
undervalued, operating expenses may have been over-reported in previous
periods and the Company would be required to recognize such additional
operating income at the time of
sale.
|
ITEM
7A QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
The
Company deposits surplus funds with Chinese banks earning daily interest. The
Company does not invest in any instruments for trading purposes. The Company’s
operations are not sensitive to fluctuations in interest rates.
Foreign
Exchange Risk
While the
Company’s reporting currency is the U.S. Dollar, the Company’s consolidated
revenues and consolidated costs and expenses are denominated in RMB.
Approximately all of the Company’s assets are denominated in RMB. As a result,
the Company is exposed to foreign exchange risk as the Company’s revenues and
results of operations may be affected by fluctuations in the exchange rate
between U.S. Dollars and RMB. If the RMB depreciates against the U.S. Dollar,
the value of the Company’s RMB revenues, earnings and assets as expressed in the
Company’s U.S. Dollar financial statements will decline. The Company has not
entered into any hedging transactions in an effort to reduce exposure to foreign
exchange risk.
Commodity
Risk
The risk
associated with maintaining large quantities of inventory and amounts of
advances to suppliers has the effect of locking in prices the Company pays for
fuel well in advance of the time the Company delivers the commodities and
establish customer pricing. A dip in short-term prices in fuel costs will
result in declining profits for the Company, which will affect the Company's
ability to purchase future petroleum products and make advances to suppliers,
since the Company uses its cash to purchase inventory and increase advances to
suppliers. The Company manages exposure in the following ways:
|
1.
|
If
the price of petroleum declines significantly, the Company will buy
additional petroleum inventory to provide a lower average
cost.
|
|
2.
|
The
Company purchases petroleum products from refineries using a reduced fixed
price based on significant volume.
|
22
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
 |
||
|
Douglas
W. Child, CPA
Marty
D. Van Wagoner, CPA
J.
Russ Bradshaw, CPA
William
R. Denney, CPA
Russell
E. Anderson, CPA
Scott
L. Farnes 1284
W. Flint Meadow Dr. #D
Kaysville,
Utah 84037
Telephone
801.927.1337
Facsimile
801.927.1344
5296
S. Commerce Dr. #300
Salt
Lake City, Utah 84107
Telephone
801.281.4700
Facsimile
801.281.4701
Suite
B, 4F
North
Cape Commercial Bldg.
388
King’s Road
North
Point, Hong Kong
www.cpaone.net |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The Board of Directors and Stockholders of
Longwei
Petroleum Investment Holding Limited
We
have audited the accompanying consolidated balance sheets of Longwei
Petroleum Investment Holding Limited (the “Company”) as of June 30, 2009
and 2008, and the related statements of operations and other comprehensive
income, stockholders’ equity, and cash flows for the years ended June 30,
2009 and 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal
control over financial reporting, as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial
reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Longwei Petroleum Investment Holding Limited as of June 30, 2009 and 2008,
and the related statements of operations and other comprehensive income,
stockholders’ equity and cash flows for the years ended June 30, 2009 and
2008, in conformity with accounting principles generally accepted in the
United States of America.
/s/
Child, Van Wagoner & Bradshaw, PLLC
Child,
Van Wagoner & Bradshaw, PLLC
October
12, 2009
Salt
Lake City, Utah |
|
23
Index
to Consolidated financial statements
|
CONSOLIDATED
BALANCE SHEETS
|
F–1
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
F–2
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
|
F–3
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F–4
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2009
AND 2008
|
F–5
|
24
Longwei
Petroleum Investment Holding Limited and Subsidiaries
Consolidated
Balance Sheets
|
As of June
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
(In Thousands,
|
|||||||
|
Current
Assets:
|
|
|||||||
|
Cash
|
$ | 7,308 | $ | 8,633 | ||||
|
Accounts
Receivable, Net of Allowance for Doubtful Accounts of $0 in 2009 and $0 in
2008
|
26,796 | 12,134 | ||||||
|
Inventories
|
13,976 | 29,053 | ||||||
|
Advances
to Suppliers
|
35,317 | 28,327 | ||||||
|
Deposits
|
— | 73 | ||||||
|
Total
Current Assets
|
83,397 | 78,220 | ||||||
| Long Term Deposits | - | 12,611 | ||||||
|
Property
Plant and Equipment, Net
|
36,745 | 2,637 | ||||||
|
Total
Assets
|
$ | 120,142 | $ | 93,468 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
Payable
|
$ | 2,275 | $ | 964 | ||||
|
Convertible
Notes Payable, Net of Discount of $0 and $595
|
800 | 1,508 | ||||||
|
Taxes
Payable
|
2,144 | 2,455 | ||||||
|
Total
Current Liabilities
|
5,219 | 4,927 | ||||||
|
Total
Liabilities
|
5,219 | 4,927 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity:
|
||||||||
|
Preferred
Stock, No Par Value, 100,000,000 Shares Authorized, 0 Issued and
Outstanding as of June 30, 2009 and 2008
|
- | - | ||||||
|
Common
Stock, No Par Value; 500,000,000 Shares Authorized; 81,852,831 and
76,205,000 Issued and Outstanding as of June 30, 2009 and
2008
|
11,949 | 7,009 | ||||||
|
Shares
to be Issued
|
126 | - | ||||||
|
Stock
Subscription Receivable
|
(76 | ) | - | |||||
|
Deferred
Stock Based Compensation
|
(25 | ) | - | |||||
|
Additional
Paid-in Capital
|
2,540 | 1,528 | ||||||
|
Retained
Earnings
|
90,519 | 68,742 | ||||||
|
Other
Comprehensive Income
|
9,890 | 11,262 | ||||||
|
Total
Shareholders' Equity
|
114,923 | 88,541 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 120,142 | $ | 93,468 | ||||
The
accompanying notes to these consolidated financial statements are an integral
part of these balance sheets.
F-1
Consolidated
Statements of Operations and Other Comprehensive Income
|
For the Years Ended June
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In Thousands, Except
Per Share Data)
|
||||||||
|
Net
Sales
|
$ | 196,811 | $ | 143,788 | ||||
|
Cost
of Sales
|
157,341 | 106,801 | ||||||
|
Gross
Profit
|
39,470 | 36,987 | ||||||
|
Operating
Expenses
|
||||||||
|
Stock
Based Compensation
|
3,664 | — | ||||||
|
General
and Administrative Expenses
|
4,003 | 4,863 | ||||||
|
Total
Operating Expenses
|
7,667 | 4,863 | ||||||
|
Operating
Income
|
31,803 | 32,124 | ||||||
|
Other
Income and Expenses, Net
|
(620 | ) | (1,702 | ) | ||||
|
Interest
Expense
|
(286 | ) | (45 | ) | ||||
|
Income
Before Income Tax Expense
|
30,897 | 30,377 | ||||||
|
Income
Tax Expense
|
(9,120 | ) | (9,662 | ) | ||||
|
Net
Income
|
21,777 | 20,715 | ||||||
|
Foreign
Currency Translation Adjustment
|
(1,372 | ) | 7,709 | |||||
|
Comprehensive
Income
|
$ | 20,405 | $ | 28,424 | ||||
|
Earnings
per Common Share:
|
||||||||
|
Basic
|
$ | 0.28 | $ | 0.28 | ||||
|
Diluted
|
$ | 0.28 | $ | 0.27 | ||||
|
Weighted
Average Common Shares Outstanding:
|
||||||||
|
Basic
|
76,537 | 73,341 | ||||||
|
Diluted
|
78,524 | 75,739 | ||||||
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
F-2
Consolidated
Statement of Changes in Shareholders' Equity
(In Thousands)
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares
Issued
|
No
Par Value
|
Shares
to be Issued
|
Deferred
Stock Based Compensation
|
Stock
Subscription Receivable
|
Additional
Paid in Capital
|
Other
Compre-hensive
Income
|
Retained
Earnings
|
Total
Stockholder’s Equity
|
||||||||||||||||||||||||||||
|
Balance,
June
30, 2007
|
69,000,000 | $ | 6,067 | $ | - | $ | - | $ | - | $ | - | $ | 3,553 | $ | 48,124 | $ | 57,744 | |||||||||||||||||||
|
Share
Exchange
|
6,000,000 | 98 | - | - | - | - | - | (97 | ) | 1 | ||||||||||||||||||||||||||
|
Issuance
of Detachable Stock Warrants
|
- | - | - | - | - | 1,528 | - | - | 1,528 | |||||||||||||||||||||||||||
|
Issuance
of Stock For Registration Rights Penalty
|
1,205,000 | 844 | - | - | - | - | - | - | 844 | |||||||||||||||||||||||||||
|
Unrealized
Loss on Available for Sale Marketable Securities
|
- | - | - | - | - | - | 7,709 | - | 7,709 | |||||||||||||||||||||||||||
|
Net
Income
|
- | - | - | - | - | - | - | 20,715 | 20,715 | |||||||||||||||||||||||||||
|
Balance,
June
30, 2008
|
76,205,000 | 7,009 | - | - | - | 1,528 | 11,262 | 68,742 | 88,541 | |||||||||||||||||||||||||||
|
Issuance
of Stock For Conversion of Debt
|
1,822,864 | 1,276 | 25 | - | - | - | - | 1,301 | ||||||||||||||||||||||||||||
|
Issuance
of Stock for Cash
|
- | - | 76 | - | (76 | ) | - | - | - | - | ||||||||||||||||||||||||||
|
Debt
Extinguishment
|
- | - | - | - | - | 1,012 | - | - | 1,012 | |||||||||||||||||||||||||||
|
Stock
Based Compensation
|
3,824,967 | 3,664 | 25 | (25 | ) | - | - | - | - | 3,664 | ||||||||||||||||||||||||||
|
Unrealized
Loss on Available for Sale Marketable Securities
|
- | - | - | - | - | - | (1,372 | ) | - | (1,372 | ) | |||||||||||||||||||||||||
|
Net
Loss
|
- | - | - | - | - | - | - | 21,777 | 21,777 | |||||||||||||||||||||||||||
|
Balance,
June
30, 2009
|
81,852,831 | $ | 11,949 | 126 | $ | (25 | ) | $ | (76 | ) | 2,540 | $ | 9,890 | $ | 90,519 | $ | 114,923 | |||||||||||||||||||
The
accompanying notes to these consolidated financial statements are an integral
part of these statements.
F-3
Longwei
Petroleum Investment Holding Limited and Subsidiaries
Consolidated
Statements of Cash Flows
| For the Years Ended | ||||||||
|
2009
|
2008 | |||||||
| (In Thousands) | ||||||||
|
Cash
Flows From Operating Activities:
|
||||||||
|
Net
Income
|
$ | 21,7777 | $ | 20,715 | ||||
|
Adjustments
to Reconcile Net Income to Net Cash Provided by (Used in) Operating
Activities—
|
||||||||
|
Depreciation
and Amortization
|
392 | 359 | ||||||
|
Stock
Based Compensation
|
3,664 | 891 | ||||||
|
Debt
Extinguishment
|
1,108 | - | ||||||
|
Amortization
of Debt Discount
|
592 | - | ||||||
|
Stock
Issued for Registration Rights Penalty
|
— | 844 | ||||||
|
(Increase)
Decrease in Assets—
|
||||||||
|
Accounts
Receivable
|
(14,662 | ) | (6,305 | ) | ||||
|
Inventories
|
15,077 | (8,644 | ) | |||||
|
Advances
to Suppliers
|
(6,990 | ) | 2,251 | |||||
|
Income
Taxes Receivable
|
- | 1,475 | ||||||
|
Other
Current Assets
|
- | (69 | ) | |||||
|
Deposits
|
- | (11,888 | ) | |||||
|
Increase
(Decrease) in Liabilities —
|
||||||||
|
Accounts
Payable
|
1,216 | 840 | ||||||
|
Advances
From Customers
|
- | (1,819 | ) | |||||
|
Taxes
Payable
|
(311 | ) | 1,220 | |||||
|
Other
Current Liabilities
|
- | (42 | ) | |||||
|
Net
Cash Provided By (Used in) Operating activities
|
21,863 | (172 | ) | |||||
|
Cash
Flows From Investing Activities:
|
||||||||
|
Purchase
of Land and Buildings
|
(21,816 | ) | (28 | ) | ||||
|
Net
Cash Used in Investing Activities
|
(21,816 | ) | (28 | ) | ||||
|
Cash
Flows From Financing Activities:
|
||||||||
|
Proceeds
From Issuance of Convertible Debt
|
- | 2,100 | ||||||
|
Net
Cash Provided By (Used in) Financing activities
|
- | 2,100 | ||||||
|
Effect
of Exchange Rate Changes in Cash
|
(1,372 | ) | 673 | |||||
|
(Decrease)
Increase in Cash
|
(1,325 | ) | 2,573 | |||||
|
Cash,
Beginning of Year
|
8,633 | 6,060 | ||||||
|
Cash,
End of Year
|
$ | 7,308 | $ | 8,633 | ||||
|
Supplemental
Cash Flow Information:
|
||||||||
|
Cash
Paid During the Year for
|
||||||||
|
Interest,
Net of Amounts Capitalized
|
$ | 168 | $ | - | ||||
|
Income
Taxes
|
$ | 9,431 | $ | 8,186 | ||||
|
Supplemental
Schedule of Noncash Investing and Financing Activities:
|
||||||||
|
None
|
$ | - | $ | - | ||||
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 Consolidated Financial Statements
For
the Years Ended June 30, 2009 and 2008
NOTE
1 - NATURE OF BUSINESS
Longwei
Petroleum Investment Holding, Limited (the “Company”) is an energy company that,
through its subsidiaries, engages in oil and gas operations in the People’s
Republic of China (“PRC”). Oil and gas operations consist of
transporting, marketing and selling finished petroleum products. The
Company’s headquarters and primary facilities are located in Taiyuan, Shanxi
Province (“Shanxi”). The Company purchases diesel, gasoline, fuel oil and
kerosene (the “Products”) from various petroleum refineries in the PRC. The
Company is 1 of 5 licensed intermediaries in Shanxi that operates its own large
scale storage tanks and has the necessary licenses to operate and sell Products
not only in Shanxi but throughout the entire PRC. The Company’s storage tanks
have the largest storage capacity of any non-government operated entity in
Shanxi. The Company seeks to earn profits by selling its Products at
competitive prices to large scale gas stations, coal plants and other power
supply customers and small, independent gas stations. The Company also earns
revenue by acting as a purchasing agent for other intermediaries in Shanxi and
through the sale of diesel and gasoline at a gas station located on the
Company’s property in Taiyuan. The sales price and the cost basis of the
Company’s products are largely dependent on the price of crude oil. The price of
crude oil is subject to fluctuation due to a variety of factors, all of which
are beyond the Company’s control.
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.
Financial
Statements Presented
On
October 16, 2007, the Company entered into a Share Exchange Agreement and agreed
to issue 69,000,000 shares of its common stock in exchange for 100% of the
outstanding ownership units of Longwei Petroleum Investment Holding Limited,
(“Longwei BVI”) a British Virgin Islands entity. This transaction was
accounted for as a reverse acquisition. Longwei Petroleum Investment Holding
Limited, formerly known as Tabatha II, Inc., did not have any operations and
majority-voting control was transferred to Longwei BVI. The
transaction also requires a recapitalization of Longwei BVI. Since Longwei BVI
acquired a controlling voting interest; it was deemed the accounting acquirer,
while Longwei Petroleum Investment Holding Limited (formerly Tabatha II, Inc.)
was deemed the legal acquirer.
The
historical consolidated financial statements of the Company are those of Longwei
BVI, and of the consolidated entities from October 16, 2007, the date of merger,
and subsequent. The consolidated financial statements for the Company
for the years ended June 30, 2009 and 2008 include the financial statements of
Longwei Petroleum Investment Holding Limited, Longwei BVI, Longwei BVI’s
subsidiary Taiyuan Yahua Energy Conversion Ltd. (“Taiyuan Yahua”), Taiyuan
Longwei Economy & Trading Co., Ltd., a subsidiary of Taiyuan Yahua and
Shanxi Heitan Zhingyou Petrochemical Co., Ltd. Intercompany transactions
and balances are eliminated in consolidation.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements, prepared in accordance with generally
accepted accounting principles (“GAAP”) in the United States of America, include
the assets, liabilities, revenues, expenses and cash flows of the Company and
all 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.
F-5
|
Subsidiaries
|
State
and Countries Registered In
|
Percentage of
Ownership
|
||
|
Longwei
Petroleum Investment Holding Limited
|
British
Virgin Islands
|
100.00
|
%
|
|
|
Taiyuan
Yahua Energy Conversion Ltd.
|
People’s
Republic of China
|
100.00
|
%
|
|
|
Taiyuan
Longwei Economy & Trading Ltd.
|
People’s
Republic of China
|
100.00
|
%
|
|
|
Shanxi
Heitan Zhingyou Petrochemical Co., Ltd
|
People’s
Republic of China
|
100.00
|
%
(a)
|
|
|
(a)
|
A total of 95% of the
ownership units are held by the Company. The remaining 5% of the ownership
units are held in trust by an individual who is also an employee of the
Company. This ownership structure is organized as such due to PRC business
ownership laws.
|
Cash
and Cash Equivalents
For
purposes of the consolidated balance sheets and cash flow statements, the
Company considers all highly liquid investments with original maturities of
three months or less at time of purchase to be cash equivalents.
Concentrations
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained at banks within
the PRC. Certain financial instruments, which subject the Company to
concentration of credit risk, consist of cash. The Company maintains
cash balances at financial institutions which do not provide for insurance
against lost funds. The Company has not experienced any losses with regard
to its bank accounts and believes it is not exposed to any risks on its cash in
bank accounts.
Accounts
Receivable
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.
Advances
to Suppliers
Advances
to suppliers represents cash paid in advance for purchases of inventory from
suppliers. The Company locks in prices with suppliers in advance by using
the Company’s cash resources. The Company expects to maintain this level
of advances in the future to ensure that the Company has adequate supplies and
can obtain the best possible price for the Company’s inventory for each
purchase. The Company does not foresee potential losses being possible with
regard to these advances as a result of the suppliers being large enterprises
that have significant controls placed on them by the PRC government.
The Company has not had to make any historical adjustments to these
accounts for any deficiencies or negative impacts related to the Company’s
suppliers. The Company receives preferential pricing by paying in advance
because the Company receives a discount from the spot price and the Company
locks in the price, which provides us with greater profitability.
Inventory
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 years ended June 30, 2009 and 2008.
Property
Plant and Equipment
Property
and equipment is located at the Company’s facilities in Taiyuan City and Gujiao
City in the PRC and is recorded at cost less accumulated depreciation.
Depreciation and amortization is calculated using the straight-line method over
the expected useful life of the asset, after the asset is placed in service. The
Company generally uses the following depreciable lives for its major
classifications of property and equipment:
|
Description
|
Useful
Lives
|
|
|
Land
and Buildings
|
20
years
|
|
|
Heavy
Machinery and Production Equipment
|
8-20
years
|
|
|
Railway
|
20
years
|
|
|
Motor
Vehicles
|
5
years
|
F-6
Valuation
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The Company uses an
estimate of undiscounted future net cash flows of the assets over the remaining
useful lives in determining whether the carrying value of the assets is
recoverable. If the carrying values of the assets exceed the expected future
cash flows of the assets, the Company recognizes an impairment loss equal to the
difference between the carrying values of the assets and their estimated fair
values. Impairment of long-lived assets is assessed at the lowest levels for
which there are identifiable cash flows that are independent from other groups
of assets. The evaluation of long-lived assets requires the Company to use
estimates of future cash flows. However, actual cash flows may differ from the
estimated future cash flows used in these impairment tests. As of June 30, 2009,
management does not believe any of the Company’s assets were
impaired.
Goodwill
and Intangible Assets
The
Company utilizes the purchase method of accounting for any business combinations
initiated after June 30, 2002, and further clarifies the criteria to recognize
intangible assets separately from goodwill. Goodwill and indefinite−life
intangible assets are not amortized but are reviewed for impairment
annually.
Comprehensive
Income
Accumulated
other comprehensive income represents unrealized gains and losses on marketable
securities held by the Company, which are included in the consolidated statement
of shareholders’ equity.
Revenue
Recognition
The
Company records revenues when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the price to the customer is fixed or
determinable and (iv) collection of the resulting receivable is reasonably
assured.
The
Company negotiates contracts with its customers, which may include revenue
arrangements with multiple deliverables. The Company’s accounting policies are
defined such that each deliverable under a contract is accounted for separately.
Historically, the Company has not entered into contracts with its customers that
provided for multiple deliverables.
The
Company derives the bulk of its revenue from sales of gasoline, diesel, kerosene
and fuel oil. 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 collectibility 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 fee
revenues consists of fees charged to small fuel distributors who lack the
required licenses to purchase directly from large refineries. The Company
allocates a portion of its purchasing quota to these customers for a fee similar
to a sales commission. Agency fee revenues is 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 service revenues consists primarily of selling commissions.
Stock-Based
Compensation
The
Company does not have a formal stock option plan.
All
shares based payments to employees, consultants and others are required to
be recognized in the consolidated financial statements based on the estimated
fair value of the equity award.
F-7
Stock-based
compensation cost includes: compensation cost for the portions of all
share-based payments granted to consultants, based on the grant date fair value
estimated in accordance revelant accounting guidance amortized on a
straight-line basis over the vesting period of the stock awards.
Advertising
Advertising
costs are expensed as incurred.
Reclassification
Certain amounts in the 2008 financial statements
have been reclassified to conform to the 2009 financial statements presentation.
Such reclassification had no effect on net income, total assets or total
liabilities.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company
follows appropriate accounting guidance with regard to the accounting for
uncertainty in tax positions taken or expected to be taken in a return. The
Company reviews guidance on the measurement, recognition, classification and
disclosure of tax positions, along with accounting for the related interest and
penalties.
The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the consolidated financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
Net
Earnings Per Share
Basic
gain or loss per share is computed by dividing the gain or loss available to
common stockholders (as the numerator) by the weighted-average number of common
shares outstanding (as the denominator). Diluted gain or loss per share is
computed similar to basic gain or loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all potential common stock (including common stock equivalents)
had all been issued, and if such additional common shares were dilutive. If
the additional common shares are anti-dilutive, they are not added to the
denominator in the calculation. Where there is a loss, the inclusion of
additional common shares is anti-dilutive (since the increased number of shares
reduces the per share loss available to common stock holders).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Estimates and assumptions are periodically
reviewed and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary. The consolidated financial statements include some amounts
that are based on management’s best estimates and
judgments. Significant estimates include the stock based
compensation, warrant liabilities, depreciation, amortization, useful lives of
fixed assets and intangible assets, and tax liabilities. These estimates may be
adjusted as more current information becomes available, and any future
adjustments could be significant in nature to the consolidated financial
statements taken as a whole.
F-8
NOTE
3 – ACCOUNTS RECEIVABLE
The
Company’s business operations are conducted in the PRC. During the normal course
of business, the Company extends unsecured credit to its customers. Management
reviews its accounts receivable on a regular basis to determine if an allowance
for doubtful accounts is necessary and adequate. An estimate for doubtful
accounts is made when collection of the full amount is no longer probable.
Through the date of these financial statements, the Company has never
experienced a significant bad debt. As result, no
allowance for doubtful accounts has been recorded. Trade accounts receivable at
June 30, 2009 and June 30, 2008 consisted of the following:
|
June
30,
2009
(in thousands)
|
June
30,
2008
(in thousands)
|
|||||||
|
Trade
Accounts Receivable
|
$ | 26,796 | $ | 12,134 | ||||
|
Less:
Allowance for Doubtful Accounts
|
- | - | ||||||
|
Totals
|
$ | 26,796 | $ | 12,134 | ||||
NOTE
4 – INVENTORIES
As of
June 30, 2009 and 2008, inventory consisted of significant quantities of diesel
oil and gasoline, among others, as outlined herein:
|
June
30,
2009
(in thousands)
|
June
30,
2008
(in thousands)
|
|||||||
|
Diesel
Oil
|
$
|
7,951
|
$
|
16,433
|
||||
|
Gasoline
|
6,025
|
12,620
|
||||||
|
Fuel
Oil
|
-
|
-
|
||||||
|
White
Spirit
|
-
|
-
|
||||||
|
Total
|
$
|
13,976
|
$
|
29,053
|
||||
NOTE
5 – ADVANCES TO SUPPLIERS
As of
June 30, 2009 and 2008, 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 from the refinery
partners.
|
June
30,
2009
(in thousands)
|
June
30,
2008
(in thousands)
|
|||||||
|
Advances
to Suppliers
|
$
|
35,317
|
$
|
28,327
|
||||
|
Other
|
-
|
-
|
||||||
|
Total
|
$
|
35,317
|
$
|
28,327
|
||||
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
June
30,
2009
(in thousands)
|
June
30,
2008
(in thousands)
|
|||||||
|
Land
and Buildings
|
$
|
36,561
|
$
|
2,053
|
||||
|
Machinery
and Production Equipment
|
2,799
|
2,799
|
||||||
|
Railway
|
1,440
|
1,440
|
||||||
|
Motor
Vehicles
|
215
|
215
|
||||||
|
Total
Property, Plant and Equipment
|
41,015
|
6,507
|
||||||
|
Accumulated
Depreciation
|
(4,270
|
)
|
(3,870
|
)
|
||||
|
Total
|
$
|
36,745
|
$
|
2,637
|
||||
Depreciation
expense for the years ended June 30, 2009 and 2008 was $385 and $359,
respectively.
NOTE
7 – ACQUISITION OF GUJIAO
On August
7, 2007, the Company entered into an agreement to purchase the assets of Shanxi
Heitan Zhingyou Petrochemical Co., Ltd (“Shanxi Heitan”) for approximately
$17,000. On August 7, 2007, a payment was made towards the
acquisition price for approximately $9.2 million. On February 5,
2008, the purchase agreement was amended to change the terms of the purchase
agreement such that the total purchase price would be approximately $29,966
rather than $17,000 and the Company would not only acquire the assets of Shanxi
Heitan but the Company would also acquire a 95% ownership of Shanxi
Heitan. The remaining 5% of the Shanxi Heitan was not eligible to be
acquired under PRC law and was therefore allocated by Shanxi Heitan to an
individual from Taiyuan City who is also an employee of the Company. On January
22, 2009, the Company held majority control of the assets and ownership units of
Shanxi Heitan. The Company hired an external professional valuation firm to
conduct a valuation of the assets acquired from Shanxi Heitan. The
external professional valuation firm determined that the value of the assets was
in excess of the total purchase price paid by the Company of approximately
$30,000. In accordance with the purchase method of accounting, the
results of Shanxi Heitan and the estimated fair market value of the assets and
liabilities of Shanxi Heitan assumed have been included in the consolidated
financial statements from the date of acquisition, January 22, 2009 through June
30, 2009.
The
purchase price of Shanxi Heitan was allocated to the assets acquired and
liabilities assumed by the Company. The Company recorded the full value of the
purchase price to land and buildings within the Company’s property, plant and
equipment classification on the balance sheets.
| in thousands | ||||
|
Land
and Buildings
|
$
|
29,966
|
||
|
Net
Assets Acquired
|
$
|
29,966
|
||
|
Purchase
Consideration
|
$
|
29,966
|
Goodwill
is comprised of the residual amount of the purchase price over the fair value of
the acquired tangible and intangible assets. Shanxi Heitan was a dormant
operating entity upon the date of acquisition. As a result, the
inclusion of Shanxi Heitan’s operating results from January 22, 2009 through
June 30, 2009 had no impact on the Company’s statement of
operations. If the operating results had been included since the
beginning of the current fiscal year, July 1, 2008, the Company’s pro-forma
consolidated revenue and the Company’s pro-forma net income for the year ended
June 30, 2009 was $196,811 (unchanged) and $21,777 (unchanged),
respectively.
NOTE
8 – TAXES
Taxes
payable consisted of the following:
|
June
30,
2009
(in thousands)
|
June
30,
2008
(in thousands)
|
|||||||
|
Income
Tax Payable
|
$
|
960
|
$
|
1,190
|
||||
|
Value
Added Tax Payable
|
733
|
963
|
||||||
|
Business
Taxes and Other Payables
|
451
|
302
|
||||||
|
Total
|
$
|
2,144
|
$
|
2,455
|
||||
F-9
United
States of America
Since the
Company had no operations within the United States, there is no provision for US
taxes and there are no deferred tax amounts as of June 30, 2009 and 2008,
respectively.
Colorado
The
Company is incorporated in Colorado but does not conduct business in Colorado.
Therefore, the Company is not subject to corporate income tax.
British
Virgin Islands
The
Company’s subsidiary, Longwei BVI, is incorporated in the British Virgin Islands
and, under the current laws of the British Virgin Islands, is not subject to
income taxes.
People’s
Republic of China
Income
Tax
Enterprise
income tax in PRC is generally charged at 25% of a company’s assessable profit.
The Company’s subsidiaries incorporated in the PRC are subject to PRC
enterprises income tax at the applicable tax rates on the taxable income as
reported in their Chinese statutory accounts in accordance with the relevant
enterprises income tax laws applicable to foreign enterprises.
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (“the Income Tax Laws”). Under the Income Tax Laws,
foreign investment enterprises (“FIE”) generally are subject to an income tax at
an effective rate of 25% on income as reported in their statutory
financial statements after appropriate tax adjustments unless the enterprise is
located in specially designated regions of cities for which more favorable
effective tax rates apply.
The
following table reconciles the PRC statutory rates to the Company’s effective
tax rate for the years ended June 30, 2009 and June 30, 2008:
|
2009
|
2008
|
|||||||
|
U.S.
Statutory Income Tax Rate
|
35.0
|
%
|
35.0
|
%
|
||||
|
Foreign
Income Exclusion
|
(35.0
|
)
|
(35.0
|
)
|
||||
|
PRC
Income Tax
|
25.0
|
29.0
|
||||||
|
Effective
Income Tax Rate
|
25.0
|
%
|
29.0
|
%
|
||||
Value
Added Tax
In
accordance with the relevant taxation laws in the PRC, the normal VAT rate for
domestic sales is 13%, which is levied on the invoiced value of sales and is
payable by the purchaser. The Company is required to remit the VAT it collects
to the tax authority.
The value
added tax refundable presents the VAT that the Company paid for the purchasing
products and can be used to deduct the VAT related to the sale of
products.
NOTE
9 – CONVERTIBLE DEBT
On December 18, 2007, the Company
issued convertible debt totaling $2,100 (the “Convertible Debt”) to four
entities (the “Holders”). The Convertible Debt bore interest at an
annualized rate of 4%, was convertible to shares of the Company’s common stock
at a fixed exercise price of $0.70 per share, contained piggyback registration
rights and a cashless conversion provision if the Company was unable to register
the shares of the Company’s common stock underlying the Convertible Debt by
December 18, 2008. In connection with the Convertible Debt issuance,
the Company issued a total of 1,500,000 warrants (the “Class A Common Stock
Purchase Warrants”) to purchase 1,500,000 shares of the Company’s common
stock. The Class A Common Stock Purchase Warrants had an exercise
price of $0.80 and could be exercised at any time until December 18,
2010.
On May 27, 2008, the Company entered
into a settlement agreement with the Holders whereby the Company issued a total
of 1,200,000 shares of the Company’s common stock valued at $844. The
settlement agreement was entered into as a result of the Company’s decision to
remove the shares underlying the Convertible Debt from a registration statement
filed with the SEC during the fiscal year ending June 30, 2008.
F-10
On December 18, 2008, the Company
defaulted on the Convertible Debt when it failed to make repayment of the
Convertible Debt in accordance with the terms entered into with the Holders on
December 18, 2007.
On February 2, 2009, the Company
entered into a settlement agreement with the Holders of the Convertible
Debt. The significant terms of the settlement agreement are provided
below:
|
1.
|
The
maturity date of the Convertible Debt was extended to September 18,
2009
|
|
2.
|
The
interest rate on the Convertible Debt was retroactively adjusted to
approximately 8% for the period from December 17, 2007 through December
18, 2008 and $168 in interest was payable to the Holders
immediately
|
|
3.
|
The
exercise price of the Class A Common Stock Purchase Warrants was lowered
from $0.80 to $0.70
|
|
4.
|
The
exercise period of the Class A Common Stock Purchase Warrants was extended
from December 10, 2010 to December 10,
2012
|
|
5.
|
The
Company agreed to issue an additional 1,200,000 warrants (the “Class B
Common Stock Purchase Warrants”) to the Holders. The Class B
Common Stock Purchase Warrants had an exercise price of $0.70 and could be
exercised at any time until February 2,
2014.
|
|
6.
|
If
the Convertible Debt is not repaid upon the maturity date, September 18,
2009, the interest rate on the Convertible Debt would increase to a 10%
annualized rate
|
The
Company determined
that the conversion of debt instruments resulted in instruments being exchanged
with substantially different terms and applied debt extinguishment accounting.
The Company assessed the present value of both the original debt terms and the
new debt terms. The Company determined that the present value of the
cash flows associated with the new debt instruments exceeded the present value
of the old debt instruments by more than 10%. The present value, on February 2,
2009, of the new debt terms less the present value of the original debts,
resulted in a loss on extinguishment of debt of $1,108, which was recorded as an
increase to additional paid in capital and a loss on debt extinguishment within
the Company’s statement of operations and change in comprehensive
income. The Company also assessed the beneficial conversion feature
at a fair market value and determined the value to be $0.
As of
June 30, 2009, a balance of $800 remained outstanding on the Convertible
Debt. A total of $1,300 of the Convertible Debt was converted to
common stock in the months of May and June, 2009. Accrued interest as of June
30, 2009 totaled $89.
NOTE
10 – DETACHABLE STOCK PURCHASE WARRANTS
On December 18, 2007, in connection
with the issuance of the Convertible Debt, the Company issued Class A Common
Stock Purchase Warrants to purchase 1,500,000 shares of the Company’s common
stock. The Company valued the Class A Common Stock Purchase Warrants
at $1,528. The value of the Class A Common Stock Warrants was
recorded as an increase to equity and a debt discount which offset the principal
balance of the Convertible Debt on the Company’s balance sheets as presented
herein. The value of the warrants was then amortized over the
expected term of the Convertible Debt. As a result, as of June 30, 2009, a total
of $1,528 has been amortized and recorded as interest expense.
The
Company determined the fair value of the Class A Common Stock Purchase Warrants
and the beneficial conversion features based upon the following management
assumptions:
|
Fair
Market Value per Share
|
$1.50
|
|
Exercise
Price
|
$0.80
|
|
Expected
dividends
|
0%
|
|
Expected
volatility
|
78.05%
|
|
Expected
term
|
3
years
|
|
Risk
free interest rate
|
4.375%
|
On February 2, 2009, the Company
entered into a settlement agreement with the holders of the Convertible Debt.
The Company issued Class B Common Stock Purchase Warrants to purchase 1,200,000
shares of the Company’s common stock. The Company valued the Class B
Common Stock Purchase Warrants at $453. The value of the Class B
Common Stock Warrants was immediately expensed as a debt extinguishment
cost.
The
Company determined the fair value of the Class B Common Stock Purchase Warrants
and the beneficial conversion features based upon the following management
assumptions:
|
Fair
Market Value per Share
|
$0.45
|
|
Exercise
Price
|
$0.70
|
|
Expected
dividends
|
0%
|
|
Expected
volatility
|
123%
|
|
Expected
term
|
5
years
|
|
Risk
free interest rate
|
1.88%
|
F-11
The
following is a summary of the Company’s warrant activity, adjusted for changes
in the exercise price of the warrants:
|
Warrants
|
Weighted
Average Exercise Price
|
|||||||
|
Exercisable
– June 30, 2007
|
-
|
$
|
-
|
|||||
|
Granted
|
1,500,000
|
$
|
0.70
|
|||||
|
Exercised
|
-
|
$
|
-
|
|||||
|
Forfeited/Cancelled
|
-
|
$
|
-
|
|||||
|
Outstanding
– June 30, 2008
|
1,500,000
|
$
|
0.70
|
|||||
|
Exercisable
– June 30, 2008
|
1,500,000
|
$
|
0.70
|
|||||
|
Granted
|
1,200,000
|
$
|
0.70
|
|||||
|
Exercised
|
-
|
$
|
-
|
|||||
|
Forfeited/Cancelled
|
-
|
$
|
0.70
|
|||||
|
Outstanding
– June 30, 2009
|
2,700,000
|
$
|
0.70
|
|||||
|
Exercisable
– June 30, 2009
|
2,700,000
|
$
|
0.70
|
|||||
|
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||||||
|
Range
of
exercise
price
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (in years)
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercise Price
|
||||||||||||||
|
$
|
0.70
|
2,700,000
|
4.38
years
|
$
|
0.70
|
2,700,000
|
$
|
0.70
|
|||||||||||
At June
30, 2009 and June 30, 2008, the total intrinsic value of warrants outstanding
and exercisable was $2,673 and $4,050, respectively.
NOTE
11 – STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 600,000,000 shares, in aggregate, consisting
of 500,000,000 shares of common stock, no par value, and 100,000,000 shares of
preferred stock, no par value. The Company's current Certificate of
Incorporation authorizes the Board of Directors (the “Board”) to determine the
preferences, limitations and relative rights of any class or series of preferred
stock prior to issuance. Each such class or series must be given
distinguishable designated rights prior to issuance. As of June 30, 2009, 0
shares of the Company’s Preferred Stock and 81,852,831 shares of the Company’s
common stock were issued and outstanding.
Debt
Conversions
During
May 2009, the holders of the Convertible Debt issued on December 18, 2007 agreed
to convert a total of $436 of convertible debt and accrued interest to
622,857 shares of common stock.
During
June 2009, the holders of the Convertible Debt issued on December 18, 2007
agreed to convert a total of $865 of convertible debt to 1,235,714 shares
of common stock.
Stock
Based Compensation
On
February 9, 2009, the Company entered issued 15,000 shares of common stock
valued at $7 to an entity for marketing services to be provided over a three
month term.
On April
9, 2009, the Company entered into an agreement whereby the Company agreed to
certain contingent events whereby the Company would issue 1,900,000 shares of
common stock valued at $1,537 to an entity for marketing and investor relations
services to be provided over a six month term. The contingent events
were met in May and June 2009, respectively. The stock award was valued as of
each date each contingent event was met.
On June
12, 2009, the Company entered into four separate consulting agreements whereby
the Company agreed to issue 1,909,967 shares of common stock valued at $2,120 to
four individuals for consulting services previously rendered.
F-12
On June
30, 2009, the Company entered into a consulting agreement whereby the Company
agreed to issue 25,000 shares of common stock valued at $25 to its Chief
Financial Officer as partial compensation pursuant to the terms of the
consulting agreement. The consulting agreement is effective on July
1, 2009 for a three month term. The stock award will be amortized over the three
month term.
NOTE
12 – COMMITMENTS & CONTINGENCIES
Litigation
We may be
involved from time to time in ordinary litigation that will not have a material
effect on the Company’s operations or finances. The Company is not aware of any
pending or threatened litigation against the Company or the Company’s officers
and directors in their capacity as such that could have a material impact on the
Company’s operations or finances.
Contingent
Fees - Consultant
On April
9, 2009, the Company entered into an agreement with an entity to provide
advisory services with regard to a potential capital raise to completed by the
Company. The agreement provides for negotiable cash fees for advisory
services provided in connection with the capital raise of between $400 and
$1,200. Fees to be paid in accordance with the agreement will be
finalized if and when a capital raise is completed.
Contingent
Fees - Placement Agent
On June 15, 2009, the Company entered
into an agreement with a placement agent for a four month term to facilitate a
capital raise for the Company. The placement agent is entitled to
cash compensation of up to 6.0% of all funds raised on behalf of the Company,
warrants equal to 10% of the total units sold to investors upon closing of the
capital raise and 50,000 shares of the Company’s common stock. As of October 13,
2009 the capital raise had not yet been completed.
NOTE
13 – CONCENTRATIONS
|
|
June
30,
2009
|
June
30,
2008
|
||||||
|
Customer
1
|
17
|
%
|
23
|
%
|
||||
|
Customer
2
|
16
|
%
|
27
|
%
|
||||
|
Customer
3
|
9
|
%
|
15
|
%
|
||||
|
Customer
4
|
6
|
%
|
4
|
%
|
||||
|
Customer
5
|
5
|
%
|
-
|
%
|
||||
The
Company has the following concentrations of business with customers constituting
greater than 5% of the Company’s revenues for the years ended June 30, 2009 and
June 30, 2008, respectively. The loss of these customers, individually or in the
aggregate, could have a material impact on the Company’s future results of
operations.
|
|
June
30,
2009
|
June
30,
2008
|
||||||
|
Taiyuan
Yanyu Oil Supply Company Limited
|
12
|
%
|
10
|
%
|
||||
|
Taiyuan
City XiShan Gujiao Material and Oil Storage Labor Service
Department2
|
9
|
%
|
10
|
%
|
||||
F-13
The
Company has the following concentrations of business with suppliers constituting
greater than 10% of the Company’s purchasing volume as of June 30, 2009 and June
30, 2008, respectively. The loss of any one of these suppliers, individually or
in the aggregate, could have a material impact on the Company’s future results
of operations.
|
|
June
30,
2009
|
June
30,
2008
|
||||||
|
Yanlian
Industry Group Selling Division
|
19
|
%
|
11
|
%
|
||||
|
Tuha
Oil Exploring and Exploiting Headquarters
|
13
|
%
|
13
|
%
|
||||
|
Tianjin
Dagang Jingyu Industry Company Limited
|
11
|
%
|
13
|
%
|
||||
|
Panjin
Jinjiang Oil Chemical Company Limited
|
11
|
%
|
22
|
%
|
||||
NOTE
14 – SEGMENT INFORMATION
|
1.
|
Product
Sales - The Company purchases and sells diesel, gasoline, fuel oil and
kerosene in the PRC.
|
|
2.
|
Agency
Sales - The Company acts as an agent in the purchase and sale of products
by other gas and oil distributors in the PRC
.
|
|
Year
Ended
June
30, 2009
|
Product
Sales
|
Agency
Sales
|
Consolidated
Total
|
|||||||||
|
Net
Sales
|
$
|
186,904
|
$
|
9,907
|
$
|
196,811
|
||||||
|
Cost
of Sales
|
155,325
|
2,016
|
157,341
|
|||||||||
|
Segment
Income
|
13,905
|
7,872
|
21,777
|
|||||||||
|
Segment
Assets
|
120,142
|
-
|
120,142
|
|||||||||
|
Expenditures
for Segment Assets
|
21,816
|
-
|
21,816
|
|||||||||
|
Year
Ended
June
30, 2008
|
Product
Sales
|
Agency
Sales
|
Consolidated
Total
|
|||||||||
|
Net
Sales
|
$ | 134,026 | $ | 9,762 | $ | 143,788 | ||||||
|
Cost
of Sales
|
105,205 | 1,596 | 106,801 | |||||||||
|
Segment
Income
|
12,549 | 8,166 | 20,715 | |||||||||
|
Segment
Assets
|
93,468 | - | 93,468 | |||||||||
|
Expenditures
for Segment Assets
|
28 | - | 28 | |||||||||
NOTE
15 – SUBSEQUENT EVENTS
The
Company has evaluated for subsequent events between the balance sheet date of
June 30, 2009 and October 13, 2009, the date the consolidated financial
statements were issued.
Approval
of Reverse Stock Split
On July
23, 2009, the Company’s Board of Directors unanimously approved a proposal to
implement a reverse stock split whereby one share of the Company’s common stock
will be issued for every three shares of the Company’s common stock held by a
shareholder. As of the date of the filing of this Form 10-K, the
reverse stock split has not been implemented by the Company’s
management. The Company can not be certain that the reverse stock
split will be implemented in the future.
Conversion
of Class A Common Stock Purchase Warrants
On August 18, 2009, a holder of 357,143
Class A Common Stock Purchase Warrants elected to convert the warrants to the
Company’s common stock on a cashless basis. A total of 184,729 shares
of common stock were issued to the holder upon conversion.
Extension
of Consulting Agreement with Chief Financial Officer
On
October 6, 2009, the Company agreed to extend the Chief Financial Officer’s
consulting agreement until October 31, 2009 under equivalent monthly
compensation and terms as previously agreed to.
Non-Reliance
on Previously Issued Financial Statements
On
October 12, 2009, the Company’s management concluded its review of accounting
issues previously identified that related to the February 2, 2009 settlement
agreement with the Company’s debtholders. The Company’s management concluded its
review process, discussed the issues with its independent auditor, and
determined that the Company’s previously issued financial statements for the
three months ended March 31, 2009 should no longer be relied
upon. The Company’s management determined the Company’s financial
statements for the three months ended March 31, 2009 overstated net income by
approximately $1.1 million due to a noncash expense which was not recorded
within the financial statements to account for a loss on debt
extinguishment. The loss on debt extinguishment is the result of
additional consideration, namely in the form of the Class B stock warrants, that
was awarded to the Company’s debtholders upon the finalizing of the February 2,
2009 settlement agreement. The Company intends to file an amendment
to its Form 10-Q for the three months ended March 31, 2009 as soon as
possible.
F-14
NOTE
16 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations. This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date. This
compares to the cost allocation method previously required by SFAS No.
141. SFAS 141R will require an entity to recognize as an asset or
liability at fair value for certain contingencies, either contractual or
non-contractual, if certain criteria are met. Finally, SFAS 141R will
require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date. This Statement
will be effective for business combinations completed on or after the first
annual reporting period beginning on or after December 15,
2008. Early adoption of this standard is not permitted and the
standards are to be applied prospectively only. Upon adoption of this
standard, there would be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed. The
adoption of SFAS No. 141R is not expected to have a material effect on its
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No 51” (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, changes in a
parent’s ownership of a noncontrolling interest, calculation and disclosure of
the consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The adoption of SFAS
No. 160 is not expected to have a material effect on its financial position,
results of operations or cash flows.
In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133.” (“SFAS 161”). SFAS 161 establishes the disclosure
requirements for derivative instruments and for hedging activities with the
intent to provide financial statement users with an enhanced understanding of
the entity’s use of derivative instruments, the accounting of derivative
instruments and related hedged items under Statement 133 and its related
interpretations, and the effects of these instruments on the entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company is evaluating the effect of
the adoption of SFAS 161 to have a material impact on its financial
position, results of operations or cash flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “ Determination of the Useful Life of
Intangible Assets” . This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, and other GAAP. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company does not expect the adoption of SFAS FSP 142-3, to have
a material impact on its financial position, results of operations or cash
flows.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” ( “FSP APB
14-1” ). FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
expect the adoption of FSP APB 14-1, to have a material impact on its financial
position, results of operations or cash flows.
In
October 2008, the FASB issued FSP FAS 157-3, “ Determining the Fair Value of a
Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS
157-3”), with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to
clarify the application of fair value in inactive markets and allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of FAS 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction that
is not a forced liquidation or distressed sale at the measurement date.
The adoption of FSP FAS 157-3 did not have a material effect on the Company’s
financial position, results of operations or cash flows.
F-15
In April
2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,” which further clarifies the
principles established by SFAS No. 157. The guidance is effective for the
periods ending after June 15, 2009 with early adoption permitted for the periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 did not have a
material effect on the Company’s financial position, results of operations, or
cash flows.
In June
2009, the FASB issued SFAS No. 166 “Accounting
for Transfers of Financial Assets—an amendment of FASB Statement No. 140”
(“SFAS 166”). SFAS 166 improves the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
SFAS 166 is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. The Company is evaluating the impact the adoption of SFAS
166 will have on its financial statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments
to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 improves
financial reporting by enterprises involved with variable interest entities and
to address (1) the effects on certain provisions of FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities”, as a
result of the elimination of the qualifying special-purpose entity concept in
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of Interpretation 46(R), including those in which the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprise’s involvement in a variable interest entity.
SFAS 167 is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company is evaluating the impact the adoption of SFAS
167 will have on its financial statements.
In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162”. The FASB Accounting Standards Codification
(“Codification”) will be the single source of authoritative nongovernmental U.S.
generally accepted accounting principles. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009. All existing accounting standards are
superseded as described in SFAS 168. All other accounting literature not
included in the Codification is nonauthoritative. The Codification is not
expected to have a significant impact on the Company’s consolidated financial
statements.
Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the consolidated financial
statements upon adoption.
F-16
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act ("Exchange Act") of 1934,
the Company carried out an evaluation with the participation of the Company's
management, including Cai Yongjun, the Company's Chief Executive Officer ("CEO")
and James Crane, the Company's Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures (as defined
under Rule 13a-15(e) under the Exchange Act) as of the year ended June 30, 2009.
Based upon that evaluation, the Company's CEO and CFO concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including the Company's CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure.
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Lonwei Petrolium Investment Holding Limited is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, the company's
principal executive and principal financial officers and effected by the
company's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America and
includes those policies and procedures that:
- Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the
company;
- Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
- Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management
assessed the effectiveness of the Company's internal control over financial
reporting as of June 30, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework.
Based on
its assessment, management concluded that, as of June 30, 2009, the Company's
internal control over financial reporting is effective based on those
criteria.
This
annual report does not include an attestation report of the Company's registered
accounting firm regarding internal control over financial reporting. The
management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL
No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
ITEM
9. OTHER INFORMATION
None
25
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Appointment
of New Officer
On June
30, 2009, the Company appointed James Crane as its Chief Financial
Officer.
The
following table sets forth the names, ages, and positions of the Company’s
executive officers and directors as of June 30, 2009. Executive officers are
elected annually by the Company’s Board of Directors. Each executive officer
holds his office until he resigns, is removed by the Board, or his successor is
elected and qualified. Directors are elected annually by the Company’s
shareholders at the annual meeting. Each director holds his office until his
successor is elected and qualified or his earlier resignation or
removal.
|
Name
|
Age
|
Positions
and Offices Held
|
||
|
Mr. Cai
Yongjun
|
57
|
Chief
Executive Officer and Director
|
||
|
Mr.
James Crane
|
33
|
Chief
Financial Officer
|
||
|
Mr.
Xue Yongping
|
42
|
Secretary
and Director
|
The
following summarizes the occupation and business experience for the Company’s
officers, directors, and key employees.
Cai
Yongjun, Chief Executive Officer
Mr. Cai
has been the founder and the Chief Executive of Taiyuan Longwei, the Company's
wholly-owned subsidiary, since October 1995. He has over 12 years
experience in the trading, storage and handling of petroleum products. Mr. Cai
acts as the general manager overseeing operations on a daily basis. From
1995 to 1999, Mr. Cai attended Shanxi University where he majored in Business
Administration.
Mr. Cai
has had no involvement in certain legal proceedings as defined by Item 401(f) of
Regulation S-K.
James
Crane, Chief Financial Officer
Mr. Crane
was appointed Chief Financial Officer on June 30, 2009. Mr. Crane is a certified
public accountant licensed by the Commonwealth of Massachusetts and in good
standing. Mr. Crane received a B.S. degree in Accountancy from Bentley
University in May 1999. Mr. Crane was employed by Ernst & Young LLP
from August 1999 through May 2001. Mr. Crane initially organized J. Crane &
Company in September 1999. Mr. Crane was a partner in the Lexington,
Massachusetts professional services firm of Baker O’Connor, LLC from January 1,
2005 through June 30, 2006. Mr. Crane then reorganized J. Crane &
Company on July 1, 2006 and continues to operate J. Crane & Company through
the date of this report. Mr. Crane has also served as Chief Financial Officer of
Mystaru.com, Inc. and Bioneutral Group, Inc. since October 2007 and January
2009, respectively. Each of these businesses are public companies listed
on the Over the Counter Bulletin Board stock market in the United States of
America.
Xue
Yongping, Secretary and Treasurer
Ms. Xue
has been director, secretary and treasurer since November 1998 of Taiyuan
Longwei, the Company's wholly-owned subsidiary. From August 1994 until November
1998, she was the deputy manager for Taiyuan Hua Xin Trading Company, Ltd.,
where she served as the deputy general manager. Taiyuan Hua Xin
Trading Company is a wholesale petroleum company engaged in the selling of
diesel and gasoline to other wholesale users. From September 1991 to July
1994, Ms. Xue attended Shanxi Law School where she earned her law
degree.
26
Family
Relationships
None.
Conflicts
of Interest
Certain
potential conflicts of interest are inherent in the relationships between the
Company’s officers and directors and the Company.
From time
to time, one or more of the Company’s affiliates may form or hold an ownership
interest in and/or manage other businesses both related and unrelated to the
type of business that the Company own and operate. These persons expect to
continue to form, hold an ownership interest in and/or manage additional other
businesses which may compete with the Company’s business with respect to
operations, including financing and marketing, management time and services and
potential customers. These activities may give rise to conflicts between or
among the interests of us and other businesses with which the Company’s
affiliates are associated. The Company’s affiliates are in no way prohibited
from undertaking such activities, and neither the Company nor the Company’s
shareholders will have any right to require participation in such other
activities.
Further,
because The Company intend to transact business with some of the Company’s
officers, directors and affiliates, as well as with firms in which some of the
Company’s officers, directors or affiliates have a material interest, potential
conflicts may arise between the respective interests of us and these related
persons or entities. The Company believes that such transactions will be
effected on terms at least as favorable to us as those available from unrelated
third parties.
With
respect to transactions involving real or apparent conflicts of interest, The
Company have adopted policies and procedures which require that: (i) the fact of
the relationship or interest giving rise to the potential conflict be disclosed
or known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority of the
Company’s disinterested outside directors, and (iii) the transaction be fair and
reasonable to us at the time it is authorized or approved by the Company’s
directors.
The
Company’s policies and procedures regarding transactions involving potential
conflicts of interest are not in writing. The Company understands
that it will be difficult to enforce the Company’s policies and procedures and
will rely and trust the Company’s officers and directors to follow the Company’s
policies and procedures. The Company will implement the Company’s
policies and procedures by requiring the officer or director who is not in
compliance with the Company’s policies and procedures to remove himself and the
other officers and directors will decide how to implement the policies and
procedures, accordingly.
Involvement
in Certain Legal Proceedings
To the
Company’s knowledge, during the past five (5) years, none of the Company’s
directors, executive officers, promoters, control persons, or nominees has
been:
|
Є
|
the
subject of any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that
time;
|
|
Є
|
convicted
in a criminal proceeding or is subject to a pending criminal proceeding
(excluding traffic violations and other minor
offenses);
|
|
Є
|
subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
|
Є
|
found
by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law
|
Compliance
With Section 16(A) Of The Exchange Act.
Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
persons who beneficially own more than 10% of a registered class of the
Company’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and are required to
furnish copies to the Company. To the best of the Company’s knowledge, any
reports required to be filed are timely filed for the fiscal years ended June
30, 2009 and 2008, respectively.
27
Auditors;
Code of Ethics; Financial Expert
The
Company does not have an audit committee financial expert. Mr. Crane,
the Company’s Chief Financial Officer, qualifies as an audit committee financial
expert. The Company does not currently have an audit committee.
Management expects to review and possibly implement an audit committee during
the year ended June 30, 2010.
DESCRIPTION
OF SECURITIES
Common
Stock
The
Company is authorized to issue 500,000,000 shares of common stock, no par value
per share. As of October 13, 2009 there were 82,258,187 common shares
issued and outstanding.
The
holders of the Company’s common stock have equal ratable rights to dividends
from funds legally available if and when declared by the Company’s board of
directors and are entitled to share ratably in all of the Company’s assets
available for distribution to holders of common stock upon liquidation,
dissolution or winding up of the Company’s affairs. The Company’s common stock
does not provide the right to a preemptive, subscription or conversion rights
and there are no redemption or sinking fund provisions or rights. The Company’s
common stock holders are entitled to one non-cumulative vote per share on all
matters on which shareholders may vote.
All
shares of common stock now outstanding are fully paid for and
non-assessable. The Company’s Articles of Incorporation, Bylaws and
the applicable statutes of the State of Colorado for a more complete description
of the rights and liabilities of holders ofthe Company’s
securities. All material terms of the Company’s common stock have
been addressed in this section.
Holders
of shares of the Company’s common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting
for the election of directors, can elect all of the directors to be elected, if
they so choose, and, in that event, the holders of the remaining shares will not
be able to elect any of the Company’s directors.
Preferred
Stock
The
Company is authorized to issue 100,000,000 shares of preferred stock, no par
value per share. The terms of the preferred shares are at the
discretion of the board of directors. As of October 13, 2009,
no preferred shares are issued or outstanding.
Dividends
The
Company has not paid any cash dividends to shareholders. The
declaration of any future cash dividends is at the discretion of the Company’s
board of directors and depends upon the Company’s earnings, if any,
the Company’s capital requirements and financial position, the Company’s general
economic conditions, and other pertinent conditions. It is the
Company’s present intention not to pay any cash dividends in the foreseeable
future, but rather to reinvest earnings, if any, in the Company’s business
operations.
Warrants
As of
October 13, 2009, there are 2,342,857outstanding warrants to purchase
the Company’s securities.
Options
As of
October 13, 2009, there are no options to purchase the Company’s
securities issued or outstanding.
RECENT
SALES OF UNREGISTERD SECURITIES
Reference
is made to Item 3.02 of this Current Report on Form 8-K for a description of
recent sales of unregistered securities, which is hereby incorporated by
reference.
INDEMINIFICATION
OF OFFICERS AND DIRECTORS
The
Company’sdirectors and officers are indemnified as provided by the Colorado
Statutes and the Company’s Bylaws. The Company has agreed to indemnify each of
the Company’s directors and certain officers against certain liabilities,
including liabilities under the Securities Act of 1933. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to the Company’s directors, officers and controlling persons pursuant
to the provisions described above, or otherwise, The Company have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the Company’s payment of
expenses incurred or paid by the Company’s director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, The Company will, unless in the opinion of the
Company’s counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The
Company has been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by one of the Company’s directors, officers, or
controlling persons in connection with the securities being registered, The
Company will, unless in the opinion of the Company’s legal counsel the matter
has been settled by controlling precedent, submit the question of whether such
indemnification is against public policy to a court of appropriate jurisdiction.
The Company will then be governed by the court’s decision.
28
ITEM
11. EXECUTIVE COMPENSATION
Longwei
Petroleum Investment Holding Limited Executive Compensation Summary
Summary
Compensation Table
The
following table shows the compensation awarded or paid to, or earned by the
officers and directors of Longwei Petroleum Investment Holding Limited for the
years ended June 30, 2009 and 2008, respectively.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Non-Qualified
Deferred Compensation Earnings
($)
|
All
Other Compensation
($)
|
Totals
($)
|
|||||||||||||||||
|
Cai
Yongjun,
Chief
Executive
|
2009
|
$11,217
|
0
|
0
|
0
|
0
|
0
|
0
|
$11,217
|
|||||||||||||||||
| Officer, Director |
2008
|
10,371
|
0
|
0
|
0
|
0
|
0
|
0
|
10,371
|
|||||||||||||||||
|
James
Crane,
Chief
Financial Officer, principal Accounting Officer
|
2009
|
0
|
0
|
24,750
|
0
|
0
|
0
|
0
|
24,750
|
|||||||||||||||||
| (3) |
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||
|
Xue
Yongping, Secretary and
|
2009
|
5,229
|
0
|
0
|
0
|
0
|
0
|
0
|
5,229
|
|||||||||||||||||
| Director |
2008
|
4,865
|
0
|
0
|
0
|
0
|
0
|
0
|
4,865
|
|||||||||||||||||
(3) James
Crane was hired on June 30, 2009. Mr. Crane receives cash
compensation equal to $10,000 per month and was awarded 25,000 shares of common
stock as compensation through September 30, 2009.
Director
Compensation
The
Company’s directors will not receive a fee for attending each board of directors
meeting or meeting of a committee of the board of directors. All directors will
be reimbursed for their reasonable out-of-pocket expenses incurred in connection
with attending board of director and committee meetings.
29
Certain
Relationships and Related Transactions
The
Company will present all possible transactions between us and the Company’s
officers, directors or 5% shareholders, and the Company’s affiliates to the
Board of Directors for their consideration and approval. Any such transaction
will require approval by a majority of the disinterested directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.
Employment
Agreements
The
Company has entered into an employment agreement with James Crane dated June 30,
2009. The employment agreement was verbally extended to October 31,
2009 on October 6, 2009.
The
number of shares beneficially owned by each stockholder is determined under
rules promulgated by the SEC. The information is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting or investment power and any shares as to which the individual or
entity has the right to acquire beneficial ownership within 60 days after
June 30, 2009 through the exercise of any stock option, warrant or other right.
The inclusion in the following table of those shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding the Company’s common
stock beneficially owned on June 30, 2009, for (i) each shareholder known to be
the beneficial owner of 5% or more of the Company’s outstanding common stock,
(ii) each executive officer and director, and (iii) all executive officers and
directors as a group, after the closing of the Share Exchange
Agreement.
|
(1)
|
||||
|
Name
and Address of
Beneficial
Owner (2)
|
Number
of Shares
Beneficially
Owned
|
Percentage
of
Class
|
||
|
Cai
Yongjun (3)
|
34,500,000
|
41.56%
|
||
|
Xue
Yongping (4)
|
34,500,000
|
41.56%
|
||
|
James
Crane (5)
|
25,000
|
*
|
||
|
All
Directors and Officers (3 Persons)
|
69,025,000
|
83.15%
|
(1) Based
upon 83,011,527 shares of stock issued and outstanding as of October 13,
2009
(2)
Unless otherwise stated, the address for all the officers and directors is No.30
Guanghua Street, Xiaojingyu Xiang, Wanbailin District Taiyuan City, Shanxi
Province, Shanxi, China.
(3) Cai
Yongjun is the Chief Executive Officer and the Chairman of the Board of
Directors of Longwei Petroleum Investment Holding Limited.
(4) Xue
Yongping is Secretary and Director of Longwei petroleum Investment Holding
Limited.
(5) James
Crane is the Chief Financial Officer of Longwei Petroleum Investment Holding
Limited.
* Less
than 1%
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
None.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
For the
Company’s consolidated financial statements for the year ended June 30, 2009,
the Company was billed $128,100 for professional services rendered for the audit
of the Company’s consolidated financial statements and review of the Company’s
quarterly financial statements.
30
Legal
Fees
None.
All
Other Fees
The
Company did not incur any other fees related to services rendered by the
Company’s principal accountant for the year ended June 30, 2009.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PART
IV
ITEM
15. 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
|
31
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
|
|||
|
Date: October
13, 2009
|
By:
|
/s/ Cai
Yongjun
|
|
|
Cai
Yongjun,
Chief
Executive Office
|
|||
|
By:
|
/s/
James Crane
|
||
|
James
Crane
Chief
Financial Officer and Principal Accounting Officer
|
|||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the issuer and in the capacities and on the dates
indicated.
| SIGNATURE | TITLE | DATE | |||
| By: /s/ Yongium Cai | Chief Executive Officer, Director | October 13, 2009 | |||
| Yongium Cai | (Principal Executive Officer) | ||||
| By: /s/ James Crane | Chief Financial Officer | October 13, 2009 | |||
| James Crane | (Principal Financial and Accounting Officer) | ||||
| By: /s/ Yongping Xue | Director | October 13, 2009 | |||
| Yongping Xue | |||||
32