Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q /A
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
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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 , 2010
Commission File No. 001-34793
LONGWEI PETROLEUM
INVESTMENT HOLDING LIMITED
(Name of registrant as specified 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 Avenue, 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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(727) 641-1357
(Registrant’s telephone number, including area code)Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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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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x
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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 x
As of January 14, 2011, the registrant had 100,197,133 shares of its common stock issued and outstanding.
EXPLANATORY NOTE
This amendment on Form 10-Q/A (the “Amendment”) amends the Quarterly Report on Form 10-Q for Longwei Petroleum Investment Holding Limited, as initially filed with the Securities and Exchange Commission (“SEC”) on November 15, 2010 (the “Original Report”). The purpose of this Amendment is to amend certain information in Item 2 related to the reconciliation of GAAP to non-GAAP financial measures. Other than as amended by this Amendment, the Original Report remains in full effect.
2
This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements, including statements regarding our ability to continue to create innovative technology products, our ability to continue to generate new business based on our sales and marketing efforts, referrals and existing relationships, our financing strategy and ability to access the capital markets and other risks discussed in our Risk Factor section included in our Form 10-K for the year ended June 30, 2010, as filed with the Securities and Exchange Commission on September 28, 2010. Although we believe the expectations expressed in the forward-looking statements included in this Form 10-Q are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause our actual results to differ materially from those expressed in any forward-looking statements. We cannot assure you that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
Highlights and Executive Summary
Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the People’s Republic of China (the “PRC”). Our oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC. We purchase diesel, gasoline, fuel oil and solvents (the “Products”) from various petroleum refineries in the PRC. Our headquarters are located in Taiyuan City, Shanxi Province (“Taiyuan”). The Company has a storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi (“Gujiao”), 50,000 metric tons and 70,000 metric tons of capacity respectively at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in January of 2010. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. The Company has the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC. The Company seeks to earn profits by selling its Products at competitive prices with timely delivery to coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue under an agency fee by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at the Company’s facilities. The sales price and the cost basis of the Company’s products are largely dependent on regulations and price control measures instituted and controlled by the PRC government as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond the Company’s control.
The Company was incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc. On October 12, 2007, the Company changed its name to Longwei Petroleum Investment Holding Limited.
(All numbers referenced are "in thousands,” except price per metric ton “mt”)
Revenues
For the three months ended September 30, 2010, we reported revenues of $113,348, an increase of $53,987 or 91% from revenues of $59,361 reported for the three months ended September 30, 2009. We continued to expand our customer base and distribution platform. Our Taiyuan and Gujiao fuel storage depots generated revenues of $66,021 and $41,466, respectively, and we earned an additional $5,862 in agency fees during the three months ended September 30, 2010. During this period our product mix was evenly split between diesel and gasoline sales. The sales increase was primarily due to the addition of our Gujiao facility, which began operations in January of 2010. The weighted average sales price per metric ton (“mt”) of product sold increased approximately 17% to $905mt from $774mt during the three months ended September 30, 2010 and 2009, respectively.
Costs of Sales
Costs of sales for the three months ended September 30, 2010 were $91,250 as compared to $47,752 for the three months ended September 30, 2009. The increase of $43,498 or 91% was directly attributable to the increase in sales. The Company’s gross profit remained flat at 20% of revenues, for the three months ended September 30, 2010 and 2009. The average cost per metric ton of product the Company purchases have been steadily increasing in recent quarters and we have carefully managed our inventory levels to adjust to pricing fluctuations. The weighted average cost basis per metric ton (“mt”) of product sold increased approximately 16% to $762mt from $656mt during the three months ended September 30, 2010 and 2009, respectively.
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Operating Expenses
Operating expenses for the three months ended September 30, 2010 increased to $1,556 from $545 for the three months ended September 30, 2009. The increase of $1,011 or 186% was primarily due to higher depreciation expense associated with Gujiao facility and public company expenses associated with legal, accounting, insurance and other professional fees. As a percentage of sales, operating expenses remained approximately 1% of sales during the three months ended September 30, 2010 and 2009, respectively.
Operating Income
Operating income for the three months ended September 30, 2010 increased $9,478 or 86% to $20,542 from $11,064 for the three months ended September 30, 2009, primarily driven by strong revenue growth, and inventory and cost management.
Income Before Taxes
Income before taxes for the three months ended September 30, 2010 increased $157 or 2% to $10,139 from $9,982 for the three months ended September 30, 2009, primarily due to the increase in other expenses associated with the accounting for the warrant derivative liability.
Other expense for the three months ended September 30, 2010 increased $9,350 or 885% to $10,406 from $1,056 for the three months ended September 30, 2009. In accordance with GAAP, we recorded a noncash expense for the change in the fair value of the warrant derivative. The financial instrument classified as derivatives consisted of stock warrants issued in connection with our October 2009 Financing. The warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255. If the noncash adjustment had not been required, our income before taxes would have been $20,545, which would represent an increase of 86% for the three months ended September 30, 2010, as compared to $11,038 for the three months ended September 30, 2009.
Income tax expense for the three months ended September 30, 2010 increased $2,468 or 89% to $5,245 from $2,777 for the three months ended September 30, 2009, due to the increase in operating income earned during the period.
Net Income
Net income for the three months ended September 30, 2010 decreased $2,311 or 47% to $4,894 from $7,205 for the three months ended September 30, 2009, due to the reasons set forth above regarding the noncash charge related to the accounting for the warrant derivative liability. In accordance with GAAP, we recorded a noncash expense for the change in the fair value of derivatives of $10,406 for the three months ended September 30, 2010. If the noncash adjustment had not been required, our net income would have been $15,300, which would represent an increase of 85% for the three months ended September 30, 2010, as compared to $8,261 for the three months ended September 30, 2009.
Basic and Diluted Income Attributable to Common Shareholders per Share
The Company’s basic net income attributable to common shareholders per share decreased to $0.05 from $0.09 for the three months ended September 30, 2010 and 2009, respectively. In accordance with GAAP, we recorded a noncash expense for the change in the fair value of derivatives of $10,406 or $0.11 per basic share for the three months ended September 30, 2010. If the noncash adjustment had not been necessary to record, the Company’s basic net income attributable to common shareholders would have been $15,193 and basic net income attributable to common shareholders per share would have been $0.16 for the three months ended March 31, 2010, as compared to $8,261 or $0.10 per share for the three months ended September 30, 2009.
The Company’s dilutive net income attributable to common shareholders per share decreased to $0.04 from $0.08 for the three months ended September 30, 2010 and 2009, respectively. In accordance with GAAP, we recorded a noncash expense for the change in the fair value of derivatives of $10,406 or $0.09 per diluted share for the three months ended September 30, 2010. If the noncash adjustment had not been necessary to record, the Company’s diluted net income attributable to common shareholders would have been $15,193 and diluted net income attributable to common shareholders per share would have been $0.13 for the three months ended March 31, 2010, as compared to $8,261 or $0.10 per share for the three months ended September 30, 2009.
Reconciliation of GAAP to non-GAAP Financial Measures
The following table contains financial measures that are not calculated in accordance with GAAP. Such measures, which are unaudited and should only be read in conjunction with our financial statements and related notes included elsewhere in this report, are intended to serve as a supplement to the GAAP results. The unaudited non-GAAP information reflects the adjustment to GAAP Net Income Attributable to Common Shareholders on a non-GAAP basis, whereby the effect of the noncash adjustment for each period presented of the change in the fair value of derivatives associated with the October 2009 Warrants is added back to the GAAP Net Income Attributable to Common Shareholders. This non-GAAP adjustment has been used to calculate the non-GAAP basic and diluted earnings per share. The non-GAAP operating results for the quarters presented are not necessarily indicative of results for any future periods, but management believes these non-GAAP financial measures provide useful information to investors for a more accurate picture of the Company’s operations on an ongoing basis.
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Longwei Petroleum Investment Holding Limited
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data)
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Nine Months Ended
September 30
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2010
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2009
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GAAP Net Income Attributable to Common Shareholders
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$
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4,787
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$
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7,205
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Non-GAAP adjustment:
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Add: Non-Cash Charge for Change in Fair Value of Derivative
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10,406
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1,056
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Non-GAAP Net Income Attributable to Common Shareholders (a)
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$
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15,193
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$
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8,261
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GAAP Earnings Per Share:
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Basic
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$
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0.05
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$
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0.09
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Diluted
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$
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0.04
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$
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0.08
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Non-GAAP Earnings Per Share:
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Basic
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$
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0.16
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$
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0.10
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Diluted
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$
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0.13
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$
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0.10
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Weighted Average Common Shares Outstanding:
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Basic
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93,167,952
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82,321,110
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Diluted
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114,494,959
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85,465,029
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(a) Non-GAAP adjustment net of the noncash expense for the change in the fair value of the Warrant Derivative Liability of $10,406 and $1,056 for the three months ended September 30, 2010 and 2009, respectively. The adjustment is added back to the GAAP Net Income Attributable to Common Shareholders in order to calculate the Non-GAAP Net Income Attributable to Common Shareholders and Non-GAAP Earnings Per Share. A reconciliation of these calculations is provided above. (The warrant derivative liability noncash charge is associated with the issuance of Warrants for the October 2009 Financing. The Warrants have a three year term and exercise price of $2.255 per share.)
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Liquidity and Capital Resources
General
As of September 30, 2010 our current assets increased $15,329 or 11% from $143,994 at year end June 30, 2009 to $159,323 at the three month period ended September 30, 2010. Cash and cash equivalents totaled $11,897 at September 30, 2010. Overall, we had an increase in cash flows of $1,772 during the three month period ended September 30, 2010 resulting from $3,331 of cash provided by operating activities, cash used in investing activities of $(1,943), and cash used in financing activities of $(107).
Our current ratio is approximately 9:1 (current assets to current liabilities) and improves to 25:1 net of the fair value of the warrant derivative liability at September 30, 2010. We have no long term debt as of September 30, 2010. Our asset turnover ratios have remained in a consistent range during the three month period ended September 30, 2010. Accounts receivable turnover improved from 27 days to 24 days, inventory turnover increased from 32 days to 36 days, and the ratio of advances to suppliers to inventory decrease from 2.2:1 to 2.0:1 from year ended June 30, 2010 to September 30, 2010, respectively. We have continued to improve our working capital management to enhance our flexibility on inventory management and purchasing capability to react to changes in market prices.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:
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(In thousands)
Three Months Ended September 30,
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2010
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2009
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Cash at beginning of period
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$
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10,125
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$
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7,308
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Net cash provided by operating activities
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3,331
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9,565
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Net cash used by investing activities
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(1,943
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(7,644
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)
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Net cash provided by financing activities
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(107
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76
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Effect of exchange rate changes on cash
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491
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127
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Cash at end of period
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$
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11,897
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$
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9,432
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Cash Flows from Operating Activities
For the three months ended September 30, 2010, net cash provided by operations was $3,331 compared to net cash provided by operations of $9,565 for the three months ended September 30, 2010. The decrease of $6,234 or 187% in net cash provided by operations was primarily due the increases in our operating assets of $3,600 in accounts receivable, $4,469 in inventory, and $3,143 in advances to suppliers. We increased these balances as our capacity utilization has expanded from 50,000mt to 120,000mt during the last fiscal year with operations commencing at the Gujiao facility in January of 2010. Based on the three months ended September 30, 2010 inventory product mix we have 50,682mt (or 16.7M gallons) of Product on-hand or 42% of our total storage capacity of 120,000mt valued at $38,825. Our supplier advance balance with refineries allows us to lock-in supply so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments and adjust our on-hand inventory levels accordingly.
Cash Flows from Investing Activities
For the three months ended September 30, 2010, net cash used in investing activities was $(1,943) compared to net cash used in investing activities of $(7,644) for the three months ended September 30, 2009. The decrease of $5,701 or 293% in net cash used in investing activities was primarily due lower capital expenditures in the three months ended September 30, 2010. The capital expenditures for the three months ended September 30, 2009 included the investment into the renovation and retrofit of the Gujiao facility, as well as improvements to our Taiyuan facility.
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Cash flows from Financing Activities
For the three months ended September 30, 2010, net cash used in financing activities was $(107) for the preferred stock dividend, compared to the three months ended September 30, 2009 net cash provided by financing activities of $76 from the proceeds of the sale of common stock.
Plan of Operations
Based on our current operations, we do not anticipate the purchase or sale of any significant equipment or expect any significant additions to the number of our employees.
We expect to continue to expand our customer base utilizing our existing distribution platform. Our strategy is to leverage our customer and supplier relationships to develop additional business. We may also look for opportunities to expand our business that we consider accretive to earnings.
We will continue to operate within our business model, which allows us a competitive advantage by utilizing our large storage capacity to adjust inventory levels based on the anticipated movement of industry pricing and acts as a hedge on pricing levels. Utilizing our excess storage capacity allows us flexibility to take advantage of pricing, supply and demand fluctuations within the marketplace. Our supplier advance balance with refineries allows us to lock-in supply so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships that are currently material or reasonably likely to be material to our financial position or results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s results of operations and liquidity and capital resources are based on the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. In connection with the preparation of consolidated financial statements, the Company is required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates and judgments included within these estimates are based on historical experience, current trends and other factors the Company believes to be relevant at the time the consolidated financial statements were prepared. On a regular basis, the accounting policies, assumptions, estimates and judgments are reviewed to ensure that the consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from the assumptions and estimates, and such differences could be material.
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are used for, but are not limited to: (1) inventory costs and reserves; (2) asset impairments (3) and depreciable lives of assets. Future events and their effects cannot be predicted with certainty, and accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates these assumptions and estimates on an ongoing basis and may employ outside experts to assist with these evaluations. Actual results could differ from the estimates that have been used.
Significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements. The Company believes the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, as they require management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain.
Warrant Derivative Liability
The Company issued warrants in connection with financing instruments. The Company analyzed the accounting treatment and classification of the warrants and summarized the effects and conclusions. The Company accounts for the warrants pursuant to FASB ASC Topic 815.
Impairment analysis for long-lived assets and intangible assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through September 30, 2010, the Company had not experienced impairment losses on its long-lived assets.
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Inventories
Inventories consist of finished petroleum products. Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the three months ended September 30, 2010 and 2009.
Management has discussed the development and selection of these critical accounting policies with the Board of Directors and the Board has reviewed the disclosures presented above relating to them.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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Exhibit No.
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Description
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31.1
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Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of Chief Executive Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification of Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Principal Executive Officers of
Longwei Petroleum Investment Holding Limited
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January 14, 2011
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By:
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/s/ Cai Yongjun
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Cai Yongjun
Chief Executive Officer
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By:
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/s/ Michael Toups
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Michael Toups
Chief Financial Officer
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