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Executives

Jon Cunningham – Director, IR

Michael Toups – CFO

Analysts

John Semenoff – Goldforge Management

Eric Guo – MaxSoar Financial

Jeffrey Scott – Scott Asset Management

Ezzat Jallad – Silver Rock

Ron Santos – Private Investor

Longwei Petroleum Investment Hold Limited (LPH) F1Q13 Earnings Call November 14, 2012 10:00 AM ET

Operator

Welcome to the Longwei Petroleum First Quarter Fiscal 2013 Earnings Call. (Operator Instructions). At this I would like to turn the conference over to Mr. Jon Cunningham, Director of Investor Relations for RedChip Companies Inc. Please go ahead sir.

Jon Cunningham

Thank you Matt. Good morning everyone and welcome to Longwei Petroleum Investment Holdings Limited first quarter fiscal 2013 earnings conference call. With me today is Longwei’s Chief Financial Officer, Mr. Michael Toups. Before I turn the call over to Mr. Toups may I remind our listeners that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your question. Information regarding forward-looking statements except for historical information contained herein, the statements on this conference call are forward-looking statements that are made pursuant to the Safe Harbor Provisions of Private Securities Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results and future periods to defer materially from forecasted results. Actual results may defer from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. Now it's my pleasure to turn the call over to Longwei Petroleum’s Chief Financial Officer, Michael Toups. Mike, please go ahead.

Michael Toups

I would like to thank RedChip for helping us organize this call and we like to welcome everyone this morning. I will begin today’s call with a brief discussion of our operations followed by an overview of our first quarter operating results and then we will open up the line for questions. This first quarter was a very successful quarter for the company. We had some major milestones accomplished this quarter in terms of the finalization and the output of our tax reconciliation as well as the closing on the Huajie storage facility. For those who aren’t familiar with the company we are in the petroleum distribution business in Central China based in Shanxi Province. We operate historically two large storage facilities where we had 110,000 metric tons of storage; a capacity recently added the Huajie storage facility which added an additional 100,000 metric tons of storage capacity to give us a total of 220,000 metric ton. So, very pleased with the addition of this new facility and certainly glad to be able to share that in our first quarter results with you.

This first quarter our revenues for the quarter increased 12.4% to a 133.4 million compared to a 118.6 million in the first quarter of 2011. The sales increase was primarily due to a 17.8% increase in product volume sales as a result of improving economic conditions and regional growth within Shanxi Province. This increase was partially offset by a decrease in product sales price, the weighted average sales price per metric ton of petroleum product decreased approximately 2.8% to $1159 metric ton compared to $1205 a year ago and that decrease is primarily driven by the decrease in international pricing. The pricing on the international markets took a significant dip around the end of June this past year and again has subsequently increased.

The PRC has now increased prices once in August and again in September to bring that more closely in line with international pricing. Our cost of sales increased 11.3 million or 11.7% year-over-year to a 108 million as a percentage of total revenues the cost of sales between the periods actually decreased one half of 1%, 80.9% from 81.4%. This decrease was primarily due to the lower weighted average inventory cost from inventory purchased in the prior quarter. This was again during the period of declining international prices, again with the dip around the June 30 timeframe which was a reason why we had significantly increased our advances to suppliers and inventory on hand during that time frame. And again during this current period of rise in petroleum prices the PRC has now increased prices retail prices in August and September of 2012. Our Taiyuan and Gujiao storage facilities contributed approximately 70.6 million for Taiyuan and the Gujiao facility contributed 57.6 million respectively.

The Gujiao facility was down for plant service during the quarter and refurbishment of tanks and repainting of the tanks so we had some lower sales at that facility for the plant service. Our agency fees contributed 5.2 million during the quarter, our operating income increased 16.5% to 24.5 million and this compares to 21 million year-over-year. Our GAAP net income for the quarter remained approximately flat year-over-year again this was primarily attributable to the non-cash expense for the change in the fair value of the warrant derivative liability for this quarter which is approximately $0.5 million, compared to year-over-year quarter last year which was an income of 2.1 million.

Again this is a swing of about 2.6 million on a non-cash basis because of the accounting for the warrant derivative liability which is associated with the outstanding warrants tied to the financing in October of 2009. Again once the warrants experience that warrant derivative liability expense goes away.

The non-GAAP net income when you remove that warrant derivative liability the non-GAAP net income attributable to common shareholders increased year-over-year 16.7% to 18.3 million for this quarter up from 15.7 million in the first fiscal quarter of 2012. Basic GAAP earnings per share remain unchanged at $0.18 per quarter and the diluted GAAP earnings per share were up $0.02 to $0.17 per share per quarter.

Our cash for the quarter at quarter end was 14.4 million, our current assets however decreased 5.2 million or roughly 2.5% to 203 million to 208 million by year end June 30. This was primarily due to the use of cash on hand as well as the conversion of some of the working capital assets during the quarter where the final payment of 23.7 million for the balance of the Huajie Petroleum assets.

With that been said I would like to review some of the non-financial highlights from this quarter. In early July we released an independent verification of our numbers as filed with the SEC and comparison of that with the SAT and the SAIC which are the tax authorities in China the tax filings that are required in the PRC.

Again comparing that with our GAAP income numbers that we filed with the SEC as our internal audited predicted the independent review verified our numbers were in-line with the filings with no material differences and for those interested in seeing our auditor’s report that is available online on our website, LongweiPetroleum.com under financial information.

Again on our website LongweiPetroleum.com in the website under financial information. The second item I would like to briefly discuss and we can open this up during the Q&A period but that’s a completion of the Huajie assets purchased. This transaction was completed using our own cash resources with no dilution to our shareholders. We completed this at the end of September and we began selling product to our customers again making first sales at that facility on October 11.

This facility nearly doubles our storage capacity to a total of 220,000 metric tons and extends our reach into this fast growing region within Northern Shanxi Province. Our two existing facilities in Taiyuan and Gujiao have some overlapped in the capital of the province region which is Taiyuan. This new facility which is in Fanshi County and Northern Shanxi Province really open ups an entirely new region to us and again we think that we are will be a key piece in terms of a stimulant for regional growth and the infrastructure to support employment and economic development within that region. So again a very much of a growing industrial region, it's about 200 kilometers north of our existing facilities. Within the first few weeks of opening the facilities we had signed nine major contracts, again these were regional industrial companies in mining, steel and logistics. I’m very pleased to say just within the last two weeks, 10 days we have added another 7 major customers so that brings us up to 16 and we feel like we will begin seeing good results with this, beginning with results we will report for the second quarter of fiscal 2013.

In regards to our guidance for this fiscal year ended June 30, 2013 we expect to generate 646 million in revenues which would be an increase of almost 27% over our 2012 revenues with net income of approximately 78 million in adjusted net of the non-cash warrant derivative liability expense but 78 million and that does not assume any outside capital investment into the company but that net income is up about 24% year-over-year from 2012.

Our guidance is primarily driven by the ramp up of the Huajie as well as continued organic growth at both the Taiyuan and Gujiao facilities. Believe we continue to maintain our profitability within a range band of our historical margins. Again our profit margin was up this quarter and we feel like it will be very strong in the second quarter based on the international prices. We believe we can maintain this level of profitability and we feel like we have proven that with our track record during the times of volatile price fluctuations in the price of international crude.

Though again our profitability model is very stable, again we have maintained a band within our historical margins over the last several years even though the international price of crude oil has dipped and gone up over time.

Jon with that we certainly can open it up if there is any further questions related to business.

Jon Cunningham

Thank you Mike. Before opening the call for questions I would like to ask our participants to please respect everyone’s time and carefully listen to the questions and Mike’s responses so we are not been repetitive with the Q&A session. Matt can you please give our listeners the instructions for the Q&A?

Question-and-Answer Session

Operator

(Operator Instructions). We go first to John Semenoff with Goldforge Management.

John Semenoff – Goldforge Management

Well I have to see how we have been doing obviously it's nice to see things getting very much on track both at the corporate and equity levels here. My question is very simple, I think that you covered how the business matters are going quite nicely, I’m sure on everyone’s mind is what can we look forward to in the coming quarters from Longwei in regards to something that may help prove to the market that it's very, very well situated company is worth considerably more than a forward PE of 2 such as either a dividend possibly buying assets outside of China or any other strategies that you guys may have the value.

Michael Toups

The company again, we feel like we have got a very straightforward business model, the key for us is to continue to quarter-over-quarter shifted results and I think it's been shown specifically in the Chinese sector you have to go a little over and above that. So we feel like with two of the catalyst that we completed this past quarter with the publishing of our reconciliation numbers with the SAIC and the SAT versus our SEC numbers with the closing of the Huajie facility again using cash resources. I think we have done some major things in terms of trying to move to the front of the pack so to speak in the Chinese sector.

Going forward again our primary focus is ramping up our sales with this new facility. We have now added 16 new customers which we think will start to show some significant contribution here in the second and third quarter up this year. So again we feel like we will have good numbers, good operating performance. Certainly something that has been discussed and we have mentioned this on the previous conference calls is the fact that the company, the Board of Directors is open at some point to doing a dividend again that will probably take the form of some sort of a dividend policy. We may come out with later in the year but again looking at cash resources, looking at the inventory requirements that we have currently with the new facility that’s something that we will have to consider and that maybe a few quarters before we can consider doing that. Again we will continue to report our numbers, again we are trying to improve our transparency. We have tried to get the word out and the message out on the company.

One of the other things that we’re doing is an open day for investor, shareholders, analyst at the company that will have some time before the Chinese New Year but probably towards the end of January. In 2013 we’re working on couple of specific dates but again basically opening things up, letting people come in, see the facilities, let them see all three, let them meet with the chairman, let them meet with some of the other management at the company I think again we think that’s very important and we think that getting some independent analyst coverage on the company to help reach the institutional buyers will certainly help drive an improve the liquidity in the stock which we think will improve the overall efficiency and help get the price where it needs to be. I’m sorry it was a little bit of long one question but it was a good question and kind of a multifaceted question and I hope I addressed it.

John Semenoff – Goldforge Management

That’s a good answer and I just want to make clear it's not for my attitude and what we researched here and stuff has borne out, that the company is operating that’s really not the issue here we are just trying to get this perception shaken with this association with such a reference. Anyway it's a good quarter I have nothing else to say.

Operator

And we’ll take our next question from Eric Guo with MaxSoar Financial.

Eric Guo – MaxSoar Financial

I have two questions, first do you have any adjustment so far for the revenue estimate on Huajie project. You give the number of 110 million last time and the second question do you have any details scheduled for the company (inaudible) can generate.

Michael Toups

We have not updated any guidance based on the operations with the Huajie facility at this point. We look forward to giving an update based on the October and November numbers later once we ramp up our November operations and that will give us a little bit of guidance in terms of where we will be for the second quarter and based on that and based on the second quarter performance that will give us the opportunity to adjust our year end guidance but we feel like the Huajie facility we tried to come in on a more conservative estimates again, conservative estimate organic growth as well as with Huajie giving us the ability to adjust as we go.

I think it's been well publicized that the Chinese economy in general seems to have turned around for the fourth quarter so I think general the overall economic conditions continue to improve significantly and that obviously will have a good impact on our business going forward to this fiscal year.

In terms of the date for the investor analyst shareholders days, that has not been specifically picked. We had a couple of people giving us some feedback on some dates, so we should be coming out with that date here in the near future, we will put that in a press release.

Operator

And we will take our next question from Jeffrey Scott with Scott Asset Management.

Jeffrey Scott – Scott Asset Management

For 2013 in the press release you talked about revenue growth of 26.6% to 646.3. Could you break out for us the unit numbers that went into that assumption in terms of metric tons and specifically the metric tons that you’re assuming for the new Huajie facility.

Michael Toups

Jeff what we will do is we are actually looking at updating that guidance so I think that would be better served through a press release with that update but in terms of the metric ton guidance, we are looking at we basically have fixed it based on where the pricing was set in September and kind of held that pricing flat. We think coming up the pricing, the international pricing has been down a little bit just based on the general economic conditions between the U.S., Europe, and just some question marks regarding where the U.S. economy is going after the election. So we forecast actually probably seeing a small dip in international prices which would probably lead to another price decrease in the PRC but again we feel like our estimates were relatively conservative with about 7% or 8% growth year-over-year for Huajie and Taiyuan and roughly 100 million to 110 million growth with the Huajie facility about 7% or 8% was Taiyuan and Gujiao and 100 million to 110 million was Huajie.

Jeffrey Scott – Scott Asset Management

Okay so organic growth 7% to 8% and an incremental of 100 million to 110 million at the new facility?

Michael Toups

Right.

Operator

We will take our next question from (inaudible).

Unidentified Analyst

Mike as you will recall or have known in the last year and half, two years, the China space that we are dealing with is has had a pretty tough time and the sentiments have been pretty low. With respect to a number of these RTOs that have been considered for going private and have actually executed that you know typically companies like YONG, ALN, TBOW (ph).

The share price has increased significantly and by all intentions it looks as if other companies are going to go the same route. Is it Longwei Petroleum’s intention to explore that avenue, to possibly take the company private and if so what would be a fair value on the company and if not is the company considering a dual listing in Hong Kong.

Michael Toups

Sure that’s a good question, that’s something that has been asked to the company quite frequently. We probably get one or two calls a week from different funds asking if we’re interested in going private. It seems to be the flavor of the day for Chinese companies. But it's certainly something that from the company’s perspective certainly all options are on the table. It's something that we have looked at, it's something that may or may not make sense, sorry to give you at this point of direct answer on that but certainly something that we have explored.

When you look at that as an option it's a type of thing that to protect all the shareholders not just the majority shareholders but all the shareholders what you do is you have a special committee and that’s made up of couple of outside directors who have no affiliation with the company so you bring in some new outside directors and what their job is to protect smaller shareholders to make sure that they get the best valuation possible. You got to go out and do a fair market assessment on the company. Our stock price is significantly under what our book value is, if we are at 220 and our book value is at 347 you can see there is a big wide disconnect there so certainly if anything was done we would certainly make sure that the smaller shareholders are protected and I think this company has tremendous upside value potential, obviously not only from where the book value is but certainly on an earnings per share basis. Our multiple is roughly currently 3.5 times based on the current stock price.

So we feel like that’s significantly (inaudible) our peers and that’s probably in the 8 to 12 DE range and certainly when you look at the Hong Kong exchange those companies are probably trading on the low side on the 15 times multiple. So, we think that there is a wide disconnect, certainly it could make sense for the company. Can’t really go into more detail about it other than that, other than to say that certainly all the shareholders majority shareholders, smaller shareholders would certainly be protected at any type of transaction that the company would do.

Unidentified Analyst

Just on a more speculative note, I know that and in talking with friends and colleague that it would seem that the value in the stock if one were to go that route would be better explored as a dual listing rather than selling the stock and I think perception is that the stock could trade as much as $3 million or thereabouts in the North American markets angle private when it actually could be better served a dual listing prior to that to get the price or on behalf of the investors and warrant holders and everybody in that regard. Would it make sense to consider a dual listing prior to doing private deal?

Michael Toups

I think it certainly makes sense to take a look at that. We’re trying to follow a couple of companies that are looking at doing that and trying to go through that process not just to see how efficient that is when you’ve got the stock traded on the two exchanges. So it’s certainly something that we’re exploring and as I said, certainly all options are on the table right now.

Operator

We’ll take our next question from Ezzat Jallad with Silver Rock.

Ezzat Jallad – Silver Rock

Got a couple of questions, the first one, along way being the size it is now, don't you think it’s time to get a big four auditor for the company especially if the past conversation that you’re having about maybe, it would serve well for the company maybe to trade on a Hong Kong Exchange. To be able to do that you would definitely need to have a big four auditor. So I think it serves from all direction to have that. So wanted to get your comments on that.

Michael Toups

The auditing firm that we currently use, again, it’s a US based firm TCOB Audit Firm that handles US clients as well as clients in Europe and Asia. They've done a good job for us. Again, we just recently completed our year-end audits fiscal year ended June 30. We use them for this quarter. We certainly have had a good relationship with that. At some point the company will have to move up to a new auditor and that's something that the board and the audit committee have discussed. Based on the timing of that, I can’t give you certain timing on that but it certainly going forward and we've had the discussion with the current auditors but that's something that the company will need to do as it moves up and comes forward.

Ezzat Jallad – Silver Rock

Definitely, you’re going to need it because I've been evaluating this whole situation with the Hong Kong offerings and you really have to be big firm auditing to be able to really enter the Hong Kong market. I have another business question, the advanced suppliers, why is it so high and are these suppliers, is it diversified over a lot of suppliers or do we have some that are concentrated on that number?

Michael Toups

Sure, the advanced suppliers are relatively historical same level as where it’s been based on the volume in the business. We deal primarily with about 10 refineries within China. As we spelled out in fairly good detail in the 10-K in terms of who they are, in terms of what the percentage of business with each of those are, we try to keep anyone refinery that we deal with under 20% of our supply. Again, these are longstanding, very good relationships that we've had. So we feel like we’re able to manage that and that works to our advantage, that's fairly capital intensive but works to our advantage in terms of being able to lock in supply as well as being able to lock in favorable pricing with our suppliers.

Ezzat Jallad – Silver Rock

And I really think you should look into the Hong Kong listing going and you don't need anybody to go, the company go private by itself with all the existing shareholders, all of us joining all of you and going private and then relive it on Hong Kong, but I definitely I think the big four would move that forward.

Operator

And we’ll go next to (inaudible) with FTM Capital.

Unidentified Analyst

A quick question. On this new facility you’ve already signed contracts with government and local business. Question with bids, where were these business bids and local government getting their energy supply needs, before Longwei came to town and could you talk about, a little bit about the competitive advantages that Longwei holds over these prior suppliers?

Michael Toups

Sure and really the biggest advantages just the proximity to these customers. I mean it would be similar where you lived there was a gas station but you had to consistently go to that was five miles away and a new one opened up at roughly the same pricing that was only a mile away, certainly would lead to you using the new facility. So, in our case it’s kind of a simplified example, but in our case, it’s really what it was. There were some other competitors that were at a greater distance where people had to tuck in products. Again this isn't a very much of a growing region within Fanshi County which is a fast growing area about 200 kilometers north of Taiyuan that the local leaders were really looking poor facility like to open to help with as basically an economic stimulants for the region in terms of having a closer proximity of good supply, consistent supply of products to help fuel the growth in that region.

Unidentified Analyst

So are you guys deeper than these prior suppliers or would you say, it is to the same amount of price but you’re I guess a little more convenient.

Michael Toups

Really it’s not so much a competition on price; it’s really the proximity, the customer service, just the overall ability of product that we offer. So those are really our big competitive advantages right now hoping nothing in this region.

Operator

And we go next to Fred (inaudible) International.

Unidentified Analyst

As a question about your Taiwan and Fuji office abilities, could you discuss the capacity utilization there in your first quarter and also discuss your guidance for this second quarter for utilization rates at the two existing facilities and give me a sense of how the business of those two facilities is trending so far this quarter? Thank you.

Michael Toups

With the two existing facilities, the utilization rates typically, the inventory level on inventory level that we keep at these facilities is roughly in the 45 to 50% in terms of the total capacity available for us there. Again, a lot of that comes down to how quickly we want to be able to turn that inventory and typically on hand inventory returns that about eight times a year. We can throttle that up or down a little bit depending on the quantity and the timing of deliveries in and out of the facility. But with those two facilities, we are seeing a fairly steady trend up, again just based on the numbers that we’re seeing from September and October, we feel like we’ll have a very good second quarter organically with our two facilities and certainly adding a Fanshi facility in the third quarter will give us a good pump in terms of our overall numbers and net income numbers.

Unidentified Analyst

So just focusing on the trend again, we’re halfway through the second quarter on the trend so far this quarter is, it needs and equal to the last quarter to the first quarter?

Michael Toups

Yes, at this point, we’re trending ahead of this past quarter in terms of overall volume growth and certainly in absolute dollars as well because the pricing was adjusted in August and September, so again that pricing is all factored into the revenues, the dollar revenue numbers for this quarter but also on a volume basis, we’re seeing that upward trend again, in line with our organic growth estimates.

Operator

(Operator Instructions). We’ll go next to Ron Santos, Private Investor.

Ron Santos – Private Investor

What I would like to ask, is a question on where are we really looking long term? Given the pace of the ramp up so far, how you did effectively ramping up in the year or so on (inaudible) and now you’re ramping Fanshi. What rough calendar period would you think LPH would be considering, if what acquisition and at what point would you think cash flow and inventory levels based on current rates might be about time to be looking at that?

Michael Toups

With comparison to the Fuji office facility, in that particular case becomes the proximity there with the Taiyuan facility which was the original facility. It’s about 30 kilometers apart. So with that facility that's a pretty quick ramp-up because we’re able to allocate some business from the Taiyuan facility to the newer (inaudible) facility at that time. So we were able to kind of split up some of the business just based on where the customer base was located. With the Fanshi facility, because it’s obviously a new customer base, the ramp up has been a little more gradual in terms of signing these customers, we feel like obviously this is all new business coming into us, so certainly not spreading the business out between just the two facilities. We think that with that ramp up, we’ll see a decent bump in the second fiscal quarter; we’ll really start to see some new impact from these new customers beginning in the third fiscal quarter of the year which would begin January 1st.

Ron Santos – Private Investor

As far as when would you consider looking at a fourth facility, again, the next cycle in your rounded expansion? What does your gut tell you as far as what calendar point might Longwei feel that their inventory levels are sufficient, cash flow sufficient; you are starting to be ready to do it again?

Michael Toups

In terms of looking at that, the Fanshi facility is certainly on the larger and in terms of any type of facility that we would look at. There are some other opportunities available to us. Again, these are in some new markets from smaller facilities that would take some refurbishment and additional storage capacity at. In terms of our forward-looking, we’re really not looking to add anything, certainly wouldn’t be before, probably the fourth quarter or first quarter of next year.

Operator

And we’ll go next to Chris Wilson with (inaudible) Connections.

Chris Wilson

Just reading between the lines a little bit with regards to some of the comments you’ve made regarding the ramp up of Huajie and the opportunity perhaps for outside capital. Are you suggesting that the ramp up of Huajie and the future of Huajie would go faster and larger and more opportunities if you did have more cash basically to fill the tanks at this point in time?

Michael Toups

Just based on our inventory turn cycle, we certainly think probably with some additional capital, we could probably be able to turn that more quickly and be able to grow that facility. The guidance that we've given is based on just organic capital growth from the company. There is certainly some outside capital we think would help accelerate the whole process.

Unidentified Analyst

It’s a big facility and it’s also in a very under serviced area which you’ve mentioned, so I was assuming that there is a ton of opportunity there that you guys want to take advantage of if you had a little more cash to do it, you could do it faster.

Michael Toups

Right.

Chris Wilson

Just also, I won’t repeat the question but thank you for providing clarity on the whole taking private deals, sort of ironic that some of us who have been involved with Huajie as an investment for two or three years now have gone through the ups and certainly the downs. It’s kind of ironic that a year ago, we were worried about everything being above board and now we’re all worried about perhaps somebody taking a private and not letting us realize full value. So I appreciate further communication on that in the future and also just as much transparency and clarity as you can provide on that regard would be very helpful to us. Long stuff for LPH holders.

Just one other question, I don't know if you can answer this or not, but at what point do you think or is this something that you’ve even thought about or Mr. Cai said about, what point does Michael Toups become full time 100% the CFO for Longwei Petroleum?

Michael Toups

At this point I consider myself 100% full time CFO of Longwei. As my reminded me, I actually just got back to the US on Friday after we finished up the quarterly numbers and got that wrapped but, out of the last six months, I've been in the US for three weeks. So in terms of full time commitment, I would say, I am already there.

Chris Wilson

I hear you; it’s a tough travel schedule, that's for sure when you’re dealing so far away.

Michael Toups

It is but I think again, the opportunity with Longwei is tremendous and the grow opportunities in Shanxi currently taking off and again would like to invite anyone who is able to make it to our investor, shareholder, analyst time in Taiwan. I think they would find it very worthwhile.

Chris Wilson

I've had interest in that some funds or larger institutional investors, is that why you are looking for dates right now as we had some interest from that sort demographic I guess?

Michael Toups

We have and again, what we feel is one of the keys going forward is to bring in that institutional investor who can help improve the liquidity for the stock which we think will add some efficiency in terms of where our prices and really where it should be.

Operator

And we’ll go next to Kevin Chen with (inaudible) Financials.

Kevin Chen

I've just a couple of questions regarding your (inaudible). I think some people ask about that earlier and I think a lot of the investors kind of really clear just phone like conversations with them and so my question is, you are auditing from like you said is in (inaudible).

Michael Toups

Yes.

Kevin Chen

And on your website I see a photo of large facility and you note on the photo that there is your auditor is sending the photo with you, right?

Michael Toups

Yes.

Kevin Chen

Okay, and so is that auditor the director you (inaudible) headquarters? Is he sort of based on that location and we see somebody there?

Michael Toups

Yes. He was the US based audit partner at that time.

Kevin Chen

Okay, great. Because I think some Chinese companies that have kind of their auditor are based in China and doing the auditing and so in your case, it’s actually inside of American auditor, American CDA inside of going to your headquarters every fiscal year and do the fiscal check.

Michael Toups

We do. They send their US based team, they also have an office out of Hong Kong that they service that worth but send the US team to come in at least once a year often times, two or three times a year to meet the company to meet with Cai and again, dealing directly with our audit committee on a yearend audit.

Kevin Chen

And I assume when they go to your office, then for the year end kind of auditing or whatever, do they check some documents, maybe some important ones against and verify those documents with government offices and maybe your vendors and customers do something like that?

Michael Toups

They do and certainly they follow all the GAAP procedures would be the independent audit verification. So they verify our accounts receivable, they verify our advances to suppliers, certainly verify all of our licenses, our asset transfers. So all of that again, they have to have completed because they in turn are then audited and inspected by the PCOB who comes in and looks through their books. Obviously with the Chinese company, they really look at it under a microscope based on some of the other circumstances within the space but we feel like we've had a good inspection and again, I try to be as transparent as possible with all of our activities.

Kevin Chen

That's very good and it sounds to me that in their regard your auditing process is probably, I don't want to discourage you from upgrading to a big profile. We speak for, I guess investors are constantly heard some problem that they outsourced the auditing to their kind of China ventures something but in your case it’s kind of really American auditor based on (inaudible) directly go into your office floor. That's great.

And one last question, do they only do the kind of physical check or total your office in Taiyuan during annual reporting or they sometimes go there during quarter reporting too?

Michael Toups

Obviously with the yearend audit is when they’ll do some of their larger audit procedures, but they (inaudible) two or three times a year. So they’ll come and they check certain things certainly with the acquisition. They were very involved with us on that in terms of looking at their appraisals, doing the physical inspections, working with those in terms of the deposits that we had on hand interview the seller. So I mean it was a fairly detailed procedures that they went through certainly at the year and now that we've got this acquisition wrapped up.

Kevin Chen

In terms of warrant exploration, I just want to confirm this with you last time, people don't know and I don't know for sure, in the last time you tend to worry and it’s because it’s like what you say (inaudible) because some warrant holders kind of demanded?

Michael Toups

Right and with that certainly the warrants were initially set to expire on October 29th and obviously I guess this would fall under an act of God but with the storm, with the implications on New York City and obviously with the number of the funds that were involved in the institutional investors that were involved in that and affected by that, we felt like obviously any of those being large good shareholders of the company, that it was in the best interest of the company. So work with them and give them essentially a one month extension to the end of November, November 29th to be exact. But company has no intention to extend the warrants, so we’re going to let those expire again, feel like somewhat the price has been only artificially held within that range band as a warrant price and we hopefully with the exploration of that on November 29th, we can see that stock hopefully bounce up which should be a more normalized level.

Operator

And gentlemen we have no further questions. I’d like to turn the call back to you for any additional or closing comments.

Michael Toups

Again, I would just like to say that overall with the company, appreciate the questions that were asked. We appreciate everyone’s input, we feel like the company has continued to stay on the path that we have set. We are able to close on Huajie which we think will be a significant catalyst to our growth and help improve the long-term shareholder value and certainly appreciate the support of our long term shareholders I think as Chris Wilson had said, many of you have been with the company, you’ve lived the story, so again, we appreciate your support and think that everyone will be rewarded as we go forward. We look forward to another strong financial performance in 2013 and again, just would like to say thank you.

Operator

And that does conclude today’s call. Again, thank you for your participation. Have a good day.

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