10-Q 1 llen10q3-2013.htm 10 Q3, 2013 llen10q3-2013.htm - Generated by SEC Publisher for SEC Filing  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

——————————

FORM 10-Q

 

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ON JANUARY 31, 2013.

 

OR

 

[  ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission file number: 000-32505 

 

 

L & L ENERGY, INC.

 (Exact name of Registrant as specified in its charter)

 

 

NEVADA

91-2103949

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

130 Andover Park East, Suite 200, Seattle, WA

 

98188

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant's telephone number, including area code: (206) 264-8065

 

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 past 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 [   ] 

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ]No [  ] 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]     Accelerated filer [X]    Non-accelerated filer [  ]     Smaller reporting company []

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of March 11, 2013 there were 38,149,277 shares of common stock outstanding, with par value of $0.001.

 

1


 
 

                                                                                            L & L ENERGY, INC.

                                  

                                                                                        Form 10-Q Quarterly Report

 

 

 

Table of Contents

 
     
   

Page

PART I – FINANCIAL INFORMATION

 
     

Item 1.

Condensed Consolidated Financial Statements – Unaudited

 
 

Balance Sheets as of January 31, 2013 and April 30, 2012

3

 

Statements of Income and Other Comprehensive Income for the three and nine months

 
 

ended January 31, 2013 and 2012

4

 

Statements of Cash Flows for the three and nine months ended January 31, 2013 and 2012

5

 

Notes to Condensed Consolidated Financial Statements - Unaudited

6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

45

     
     

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

47

Item 1B.

Unresolved Staff Comments

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults upon Senior Securities

58

Item 4.

Reserved

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

     

Signatures

 

59

Index to Exhibits

60

 

When we use the terms "we," "us," "our," "L & L" and "the Company," we mean L & L ENERGY, INC., a Nevada corporation, and its subsidiaries.

 

This report contains forward-looking statements that involve risks and uncertainties. Please see the sections entitled "Forward-Looking Statements" and "Risk Factors" below for important information to consider when evaluating such statements.

 

 

 

 

 

 

 

2


 
 

                                                                                          PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

L & L ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

AS OF JANUARY 31, 2013 AND APRIL 30, 2012

 

(Unaudited)

     

January 31, 2013

 

April 30, 2012

ASSETS

       
 

CURRENT ASSETS:

       
 

Cash and cash equivalents

$

5,117,515

$

3,547,953

 

Accounts receivables

 

38,499,154

 

26,032,123

 

Prepaid and other current assets

 

23,045,587

 

17,540,206

 

Other receivables

 

21,094,124

 

8,738,868

 

Inventories

 

8,722,746

 

4,701,954

 

Assets held for sales

 

-

 

68,769,279

 

Total current assets

 

96,479,126

 

129,330,383

           
 

Property, plant, equipment, and mine development, net

 

159,220,393

 

85,469,222

 

Construction-in-progress

 

11,200,140

 

26,417,686

 

Intangible assets, net

 

221,176

 

79,491

 

Goodwill

 

2,914,424

 

919,017

 

Other assets

 

993,355

 

404,689

 

Long term receivable

 

26,280,607

 

27,840,433

 

Related party notes receivable

 

6,040,433

 

6,096,617

 

Total non-current assets

 

206,870,528

 

147,227,155

     

 

 

 

TOTAL ASSETS

$

303,349,654

$

276,557,538

           

LIABILITIES AND EQUITY

       

CURRENT LIABILITIES:

       
 

Accounts payable

$

3,790,146

$

799,102

 

Accrued expenses and other current liabilities

 

916,908

 

916,001

 

Other payables

 

32,047,140

 

34,491,367

 

Related party payables

 

2,759,608

 

1,863,413

 

Due to officers

 

1,450,375

 

414,667

 

Tax payable

 

15,240,845

 

12,633,204

 

Customer deposits

 

978,194

 

1,381,300

 

Liabilities held for sales

 

-

 

6,126,253

 

Total current liabilities

 

57,183,216

 

58,625,307

           

LONG-TERM LIABILITIES

       
 

Related party payable- Long term

 

-

 

304,951

 

Asset retirement obligations

 

3,514,215

 

1,772,833

 

Total long-term liabilities

 

3,514,215

 

2,077,784

           
 

Total Liabilities

 

60,697,431

 

60,703,091

           

EQUITY:

       

L&L ENERGY STOCKHOLDERS' EQUITY:

       
 

Preferred stock, no par value, 2,500,000 shares authorized, none issued and outstanding

 

-

 

-

 

Common stock ($0.001 par value, 120,000,000 shares authorized: 37,979,414 and 36,991,397 shares issued and outstanding at January 31, 2013 and April 30, 2012 respectively)

 

37,979

 

36,991

 

Additional paid-in capital

 

67,850,688

 

65,752,560

 

Accumulated other comprehensive income

 

9,313,948

 

10,622,683

 

Retained Earnings

 

125,660,995

 

96,134,782

 

Treasury stock (86,595 shares and 143,093 shares at January 31, 2013 and April 30, 2012 respectively)

 

(68,035)

 

(123,968)

 

Total L & L Energy stockholders' equity

 

202,795,575

 

172,423,048

 

Non-controlling interest

 

39,856,648

 

43,431,399

 

Total equity

 

242,652,223

 

215,854,447

TOTAL LIABILITIES AND EQUITY

$

303,349,654

$

276,557,538

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

3


 
 

 

L & L ENERGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS PERIODS ENDED JANUARY 31, 2013 AND 2012

(Unaudited)

   

For The Three Months Periods Ended January 31,

   

For The Nine Months Periods Ended January 31,

   

2013

 

2012

   

2013

 

2012

NET REVENUES

$

59,852,361

$

19,384,566

 

$

144,804,738

$

78,336,628

COST OF REVENUES

 

39,396,382

 

14,238,311

   

102,569,810

 

57,271,928

GROSS PROFIT

 

20,455,979

 

5,146,255

   

42,234,928

 

21,064,700

                   

OPERATING COSTS AND EXPENSES:

                 

Salaries & wages-selling, general and administrative

 

703,121

 

1,014,187

   

2,597,634

 

4,530,049

Selling, general and administrative expenses, excluding salaries and wages

 

3,358,112

 

1,502,100

   

9,260,485

 

5,995,523

Total operating expenses

 

4,061,233

 

2,516,287

   

11,858,119

 

10,525,572

                   

INCOME FROM OPERATIONS

 

16,394,746

 

2,629,968

   

30,376,809

 

10,539,128

OTHER INCOME (EXPENSE):

                 

Interest income (expense)

 

116,926

 

85,078

   

341,261

 

461,451

Other income (expense),net

 

71,828

 

(208,967)

   

962,243

 

(1,326,566)

Total other income (expense)

 

188,754

 

(123,889)

   

1,303,504

 

(865,116)

                   

INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES

16,583,500

 

2,506,079

   

31,680,313

 

9,674,012

PROVISION FOR INCOME TAXES

 

1,574,799

 

336,085

   

3,072,766

 

1,426,412

INCOME FROM CONTINUING OPERATIONS

 

15,008,701

 

2,169,994

   

28,607,547

 

8,247,600

                   

Income attributable to non-controlling interests

 

3,007,604

 

510,282

   

6,334,799

 

2,217,152

Income attributable to L & L

 

12,001,097

 

1,659,712

   

22,272,748

 

6,030,448

                   

DISCONTINUED OPERATIONS

                 

Gain on disposal

 

3,260,086

 

-

   

3,260,086

 

-

Net income from discontinued operations attributable to non-controlling interests

176,375

 

527,243

   

2,236,402

 

983,128

Net income from discontinued operations attributable to L & L

 

335,615

 

2,199,758

   

3,993,377

 

4,004,851

TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS

 

3,772,076

 

2,727,001

   

9,489,865

 

4,987,979

                   

NET INCOME

$

18,780,777

$

4,896,996

 

$

38,097,412

$

13,235,579

                   

Net income attributable to non-controlling interests

$

3,183,979

$

1,037,525

 

$

8,571,201

$

3,200,279

Net income attributable to L & L

 

15,596,798

 

3,859,471

   

29,526,211

 

10,035,300

                   

OTHER COMPREHENSIVE INCOME:

                 

Foreign currency translation (loss) gain

 

(977,322)

 

347,024

   

(1,308,735)

 

4,833,525

COMPREHENSIVE INCOME

$

17,803,455

$

5,244,020

 

$

36,788,677

$

18,069,104

                   

Comprehensive income attributable to non-controlling interests

$

3,049,642

$

1,093,359

 

$

8,377,845

$

3,961,242

Comprehensive income attributable to L & L

 

14,753,813

 

4,150,661

   

28,410,832

 

14,107,862

                   
                   

INCOME PER COMMON SHARE – basic from continuing operations

$

0.32

$

0.05

 

$

0.60

$

0.19

(LOSS) INCOME PER COMMON SHARE – basic from discontinued operations

$

0.10

$

0.07

 

$

0.19

$

0.12

INCOME PER COMMON SHARE – basic

$

0.42

$

0.12

 

$

0.79

$

0.31

                   

INCOME PER COMMON SHARE – diluted from continuing operations

$

0.32

$

0.05

 

$

0.60

$

0.18

(LOSS) INCOME PER COMMON SHARE – diluted from discontinued operations

$

0.10

$

0.07

 

$

0.19

$

0.12

INCOME PER COMMON SHARE – diluted

$

0.42

$

0.12

 

$

0.79

$

0.30

                   

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – basic

 

37,318,789

 

32,723,159

   

37,562,695

 

32,093,512

                   

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - diluted

 

37,318,789

 

33,539,928

   

37,562,695

 

33,004,193

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

4


 
 

 

L & L ENERGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED JANUARY 31, 2013 AND 2012

   

For The Nine Months Periods Ended January 31,

     

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income

$

38,097,412

$

13,235,579

 

Loss from discontinued operations, net of income taxes

 

(6,229,779)

 

(4,987,979)

Adjustments to reconcile net income to net cash provided by operating activities:

 

Gain on sale of subsidiary

 

(3,260,086)

 

-

 

Income from continuing operations, net of income taxes

 

28,607,547

 

8,247,600

Adjustments to reconcile net income to net cash provided by operating activities:

       
 

Depreciation and amortization

 

5,124,945

 

2,752,804

 

Stock compensation

 

2,099,117

 

2,913,347

 

Accretion of asset retirement obligation

 

137,134

 

108,240

 

Accounts receivable

 

(11,457,863)

 

(4,486,640)

 

Prepaid and other current assets

 

(3,584,643)

 

7,680,822

 

Inventories

 

(2,303,922)

 

(3,463,461)

 

Other receivable

 

(17,249,745)

 

755,196

 

Accounts payable and other payable

 

8,358,088

 

169,917

 

Customer deposit

 

(1,273,992)

 

405,791

 

Accrued and other liabilities

 

(417,174)

 

202,299

 

Taxes payable

 

2,513,694

 

1,107,490

 

Note receivable

 

56,184

 

(3,852,434)

Net cash provided by continuing operating activities

 

10,609,369

 

12,540,971

Net cash provided by discontinued operation

 

9,489,865

 

6,308,946

Net cash provided by operating activities

 

20,099,234

 

18,849,917

           

CASH FLOWS FROM INVESTING ACTIVITIES:

       
 

Acquisition of property and equipment

 

(1,596,161)

 

(681,228)

 

Construction-in-progress

 

(27,442,341)

 

(19,497,219)

 

Acquisition of businesses, net of cash acquired

 

(1,748,669)

 

-

 

Proceeds from repayment of long term receivable

 

1,559,826

 

-

 

Increase in investments

 

-

 

397,860

 

Cash received from HSC disposal

 

5,125,291

 

1,030,260

Net cash used in continuing investing activities

 

(24,102,054)

 

(18,750,327)

Net cash used in discontinuing investing activities

 

12,555,005

 

(1,988,052)

Net cash used in investing activities

 

(11,547,049)

 

(20,738,379)

           

CASH FLOWS FROM FINANCING ACTIVITIES:

       
 

Due to officers

 

1,035,708

 

(1,200)

 

Proceeds from Treasury stock sold

 

55,933

 

3,840,795

 

Payment to previous owner of acquired mine

 

(8,708,978)

   

Net cash provided by (used in) continuing financing activities

 

(7,617,337)

 

3,839,595

Net cash provided by discontinued financing activities

 

-

   

Net cash provided by (used in) financing activities

 

(7,617,337)

 

3,839,595

           

Effect of exchange rate changes on cash and cash equivalents

 

634,714

 

430,595

           

INCREASE IN CASH AND CASH EQUIVALENTS

 

1,569,562

 

2,381,728

CASH AND CASH EQUIVALENTS, BEGINNING OF YEARS

 

3,547,953

 

4,914,425

CASH AND CASH EQUIVALENTS, END OF YEARS

$

5,117,515

$

7,296,153

           

SUPPLEMENTAL INFORMATION

       

INTEREST PAID

$

-

$

344,116

INCOME TAX PAID

$

2,114,059

$

1,012,634

           

NON-CASH INVESTING AND FINANCING ACTIVITY:

       

Acquisition of business, net of cash acquired

$

(36,795,600)

$

-

Divestiture of business, net of cash disposed

$

35,046,931

$

-

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

 

 

5


 
 

 

L & L ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  ORGANIZATION AND BASIS OF PRESENTATION

Description of Business

L & L Energy, Inc. (“L&L” and/or the “Company”) was incorporated in Nevada, and is headquartered in Seattle, Washington.  Effective on January 4, 2010, the State of Nevada approved the Company’s name change from L&L International Holdings, Inc. to L & L Energy, Inc.  The Company is a coal (energy) company, and started its operations in 1995.  Coal sales are generated entirely in China, from coal mining, clean coal washing, and coal wholesale operations.  At the present time, the Company conducts its coal (energy) operations in Yunnan and Guizhou provinces, located in Southwest China.  

As of January 31, 2013, the Company has the following subsidiaries or operations in China:

·         Kunming Biaoyu Industrial Boiler Co., Ltd (“KMC”), which owns/controls coal wholesale operations, L&L Coal Partners (the “2 Mines” or “LLC”), which owns/controls two coal mining operations (DaPuAn Mine and SuTsong Mine) and DaPuAn Mine’s coal washing operations; KMC also owns BaoXing Economic Trade Co. which is in wholesale operations,

·         Yunnan L&L Tai Fung (“Tai Fung”), which owns/controls SeZone County Hong Xing Coal Washing Factory (“Hong Xing”) and coal wholesale and distribution operations,

·         Wei She Coal Mine (“WeiShe”),

·         DaXing L&L Co. Ltd.,

·         Guizhou LiWei Coal Co. Ltd,

·         LaShu Coal Mine (“LaShu”), and

·         LuoZhou Coal Mine (“LuoZhou”).

Basis of Presentation

The consolidated financial statements include the accounts of L & L Energy, Inc. and its affiliates. All intercompany transactions, profits and balances have been eliminated in consolidation.

 

6


 
 

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Principles

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in management’s opinion, are necessary for fair presentation of the information contained herein. These financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-K for the fiscal year ended April 30, 2012 as filed with the Securities and Exchange Commission (“SEC”) on July 31, 2012.

Principles of Consolidation

Principles of Consolidation - The fully consolidated financial statements include the accounts of (i) the Company, (ii) its 100% ownership of KMC, DaXing and Guizhou LiWei subsidiaries including coal wholesale, (iii) 80% of operations of LLC (“2 Mines”), (iv) 51% of WeiShe Mine, (v) 98% of Tai Fung, and (?) 95% of LaShu and 95% of LuoZhou Mines. The Company fully consolidates 100% of the assets and liabilities of its subsidiaries and shows the non-controlling interests owned by their respective minority owners as Non-Controlling Interests.  The results of operations of our subsidiaries less amounts attributable to non-controlling interest owners are net income attributable to the Company.  All inter-company accounts and transactions are eliminated.

 

Use of Estimates

 

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.

 

New Accounting Pronouncements

 

In July 2012, the FASB issued amended standards to simplify how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated condensed financial statements.

 

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 (“ASU 2011-12”). ASU 2011-12 amends certain pending paragraphs from ASU 2011-05. This amendment allows companies to defer the effective date of the change in presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The effective date for all other amendments put forth in ASU No. 2011-05 are unaffected by this update. This update is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The Company will adopt this guidance effective May 1, 2012, and we do not expect that its implementation will have a material impact on our consolidated financial statements.

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), to improve reporting and transparency of offsetting (netting) assets and liabilities and the related affects on the financial statements. ASU 2011-11 is effective for fiscal years and interim periods within those years beginning after January 31, 2013. The Company plans to adopt this guidance effective March 1, 2013, and we do not expect that its implementation will have a material effect on our consolidated financial statements.

7


 
 

NOTE 3.  BUSINESS COMBINATIONS

 

Acquisitions

 

DaPing Coal Mine

 

On March 15, 2011, the Company entered into an Acquisition Agreement to acquired 60% equity of the DaPing Coal Mine (“DaPing”), with an effective date of March 15, 2011, for a purchase price of 112,080,000 RMB (equivalent to approximately US$17,064,815). The Company had effective control of DaPing since right after the signing of the Acquisition Agreement on March 15, 2011. An initial installment of 10,000,000 RMB (equivalent to US$1,592,686) had been paid as of July 31, 2012. The remaining balance of 102,080,000 RMB is to be paid based on the achievement of several requirements by the Company and DaPing.  After meeting five requirements, 30% of the total purchase price, RMB 33,624,000 (equivalent to US$5,355,249) should be paid. The remaining balance of 68,456,000 RMB (equivalent to US$10,902,894) is payable after meeting another three requirements subsequent. On November 18, 2012, as part of the acquisition of LaShu and LuoZhou Mines, the Company transferred its 60% interest at DaPing as part of the payment for the new acquisition. Therefore, all the assets and liabilities had transferred to the new owner as of November 18, 2012. 

 

The following table summarizes the allocation of the purchase price to the fair values of the assets at the date of acquisition:

 

 Allocation of purchase price: 

 Current assets

$

528,914

 Property, plant and equipment

 

3,899,314

 Intangible assets*

 

26,673,895

 Fair value of assets

 

31,102,123

 Less: Fair value of liabilities 

 

(14,037,308)

Net assets acquired 

$

17,064,815

Non-controlling interest 

$

9,626,043

 

*Includes goodwill of $2,625,751

8


 
 

Tai Fung Energy Inc. (“Tai Fung”)

 

On March 8, 2011, the Company entered into an Operating Agreement to invest up to RMB 20,000,000 (equivalent to US$3,063,069) in a newly established entity, Tai Fung, a Chinese company established in SeZone Country, Yunnan Province, PRC. Tai Fung is a marketing and distributing company of coal throughout China. The net assets on acquisition date comprise only cash contributed by the 2% non-controlling interest.

 

The investment represent 98% control of Tai Fung and the investment is accounted for in accordance with ASC 805 and consolidated with the financial statements contained herein. The Company has paid RMB 4,178,718 (equivalent to US$665,539) and RMB 8,794,246 (equivalent to US$ 1,400,648) in fiscal year 2011 and 2012, respectively. The term of Tai Fung is initially set at six (6) years, subject to renewal upon mutual agreement of the founders.

 

WeiShe Coal Mine (“WeiShe”)

 

On February 3, 2012, the Company entered into the Weishe Coal Mine Equity Ownership Transfer Agreement (the “Agreement”) with Guizhou Union Energy, Inc., a Chinese corporation (“Union”), Guizhou Union Capital Investment Holding Co., Ltd., a Chinese corporation (“Union Capital”), and Mr. GuoXu Zhang, a Chinese citizen (“Mr. Zhang”), to purchase 51% of the equity ownership interest of WeiShe Coal Mine.      

 

Under the Agreement, the purchase price for 51% of the ownership interest in WeiShe Mine is about US$9.7 million, which will be paid in full by issuing 3,000,000 shares of common stock of the Company (“LLEN Stock”).  The 3,000,000 shares of Company Stock have been paid to Union or a designee of Union in installments, based on the satisfaction of certain conditions set forth in the Agreement. The stock price on February 3, 2012 was $3.22 per share. The non-controlling interest in WeiShe is measured at fair value at the acquisition date, with a discount rate approximately of 16% which reflected the factor of lack of marketability.

 

Allocation of purchase price:

Current assets

$

1,158,026

Fixed assets

 

30,188,177

Intangible assets*

 

779,075

Fair value of assets

$

32,125,278

Less: Fair value of Liabilities

 

(14,609,871)

Net assets acquired

$

17,515,407

Non-controlling interest

$

7,822,636

 

*Includes goodwill of $779,075

 

9


 
 

LuoZhou Coal Mine (“LuoZhou”) and LaShu Coal Mine (“LaShu”)

 

On November 18, 2012, the Company completed the acquisitions of the LuoZhou and LaShu Coal Mine Equity Ownership Transfer Agreement (the “Agreement”) with Guizhou Union Energy, Inc., a Chinese corporation (“Union”) and Guizhou Union Capital Investment Holding Co., Ltd., a Chinese corporation (“Union Capital”), to purchase 95% of the equity ownership interest of both LuoZhou and LaShu Coal Mine.

 

Under the Agreement, the purchase price for  95% of the ownership interest in both LuoZhou and LaShu Coal Mine was approximately RMB224.7 million (equivalent to US$37.1 million). The purchase price for 95% of the ownership interest in LuoZhou  was about RMB143.4 million (equivalent to US$22.8 million) and the purchase price for 95% of the ownership interest in LaShu Coal Mine was about RMB 90.3 million (equivalent to US$14.3 million), both of these two mines (LuoZhou and LaShu) will be paid together by a cash outlay of approximately $1.7 million and the transfer of the Company's interests in Zonelin Coking Plant (98%) and the DaPing Coal Mine (60%) which were valued at about $12.4 and $23.0 million respectively. LuoZhou Coal Mine has 27 million tons of reserves. LaShu Coal Mine has 7.2 million tons of reserve.

 

The estimated fair values of net assets acquired and presented below are preliminary and are based on the information that was available as of the acquisition date and at the time of the preparation of the financial statements. The Company believes that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, the Company is awaiting the finalization of certain third-party valuations to finalize those fair values. Thus, the preliminary measurements of fair value set forth below are subject to change. The Company expects to finalize the valuation and complete the purchase price allocations as soon as practicable, but no later than one year from the respective acquisition date.

 

The following tables summarize the allocation of the purchase price to the fair values of the assets at the date of acquisition:

 

Allocation of purchase price of LuoZhou:

Current assets

$

2,081,664

Fixed assets

 

21,488,633

Intangible assets*

 

2,432,713

Fair value of assets 

$

26,003,011

Less: Fair value of liabilities  

 

(2,213,239)

Net assets acquired 

$

23,789,772

Non-controlling interest

$

961,203

 

*Include goodwill of $1,651,981

 

Allocation of purchase price of LaShu:

Current assets

$

3,204,425

Fixed assets

 

13,127,030

Intangible assets*

 

910,916

Fair value of assets 

$

17,242,372

Less: Fair value of liabilities  

 

(2,264,401)

Net assets acquired 

$

14,977,971

Non-controlling interest

$

605,171

 

*Includes goodwill of $397,617

10


 
 

 

Pro-forma Information

 

The following unaudited pro forma financial information for the Company summarizes the results of operations for the periods indicated as if the WeiShe, LuoZhou and LaShu (collectively, the “Companies”) acquisitions had been completed as of May 1, 2011 (depending on when the acquisitions occurred) and the Ping Yi, ZoneLin and DaPing (collectively, the “Companies”) disposals also had been completed as of May 1, 2011.  This pro forma financial information considers principally (i) the Company’s audited financial results, (ii) the unaudited historical financial results of the Companies, as supplied to the Company, and (iii) select pro forma adjustments to the historical financial results of the Companies.  Such pro forma adjustments represent principally estimates of (i) the impact of the hypothetical amortization of acquired intangible assets and the recognition of fair value adjustments relating to tangible assets in pre-tax income in each period and (ii) the pro form impact of the transaction on the Company’s tax provision in each period.  These pro forma adjustments did not have a material impact on the pro forma net income attributable to L&L Energy, as presented below.  The following pro forma data does not purport to be indicative of the results of future operations or of the results that would have actually occurred had the acquisition taken place at the beginning of 2009:

 

 

For the nine months ended

 

 

January 31, 2013

 

January 31, 2012

Net revenue

$

151,198,725

$

87,289,440

Income from continuing operations

 

33,746,366

 

14,910,370

Net income attributable to L&L Energy

$

25,042,351

$

9,515,619

Basic proforma earning per share

 

0.67

 

0.29

Diluted proforma earning per share

 

0.67

 

0.28

 

11


 
 

 

Divestiture

 

Sale of HSC

 

In late 2009 to early 2010, the Company determined that it was in the best interest of the Company to expand on other prospective acquisitions that would provide a better return to its stockholders.  Therefore, on April 18, 2010, the Company entered into an Equity Sale and Purchase Agreement (the “Equity Sale Agreement”) with Guangxi Liuzhou Lifu Machinery Co, Ltd, whereby the Company sold its 93% equity ownership interest in HSC for 41,000,000 RMB (equivalent to approximately US$6,000,000).  Guangxi Liuzhou Lifu Machinery Co, Ltd assumed the obligation of the Company to pay to HSC 23,800,000 RMB (equivalent to approximately US$3,485,300) that remained payable to HSC pursuant to the December Agreement.  Guangxi Liuzhou Lifu Machinery Co, Ltd also agreed to pay the remaining balance of 17,200,000 RMB (equivalent to approximately US$2,514,700) to the Company in three installments, (1) 3,440,000 RMB (approximately US$502,940) within six months of the sale, (2) 5,160,000 RMB (approximately US$754,410) between six months and twelve months after the sale, and (3) 8,600,000 RMB (approximately US$1,257,350) between twelve and twenty-four months after the sale.  Pursuant to the Equity Sale Agreement, if Guangxi Liuzhou Lifu Machinery Co, Ltd does not make such scheduled payments, a penalty of 1% of the applicable payment will be assessed for any deadline that is missed.  Additionally, interest of 3.5% per annum of the applicable payment will be assessed as of the day after the applicable payment date.  The portions of the purchase price that are due within twelve months after the sale (i.e., the first two installments) are included as “Other receivables” on the Company’s consolidated balance sheets and the portion of the purchase price due within 24 months of the sale (i.e., the third installment) is included as a “Long term receivable” on the Company’s consolidated balance sheets.  The Company recorded US$834,181 as income from discontinued operations and recognized a gain of US$1,017,928 on the sale on April 18, 2010.  As of January 31, 2013, outstanding receivable from the sale of HSC was US$801, 256, which is expected to be received before April 30, 2013.

 

Sale of Ping Yi Mine

 

With consideration of several factors including continuing development strategies, the Company made the determination to dispose of the Ping Yi Mine.  On April 30, 2012, the Company entered into an Equity Sale and Purchase Agreement with Mr. Zhang, the previous owner of Ping Yi Mine, whereby the company sold its 100% equity ownership interest in Ping Yi Mine for RMB 196,000,000, approximately $31,000,000.  The payment was agreed to take the form of receipt with payment in two parts, (1) through receipt of coal extracted from Ping Yi Mine subsequent to the disposal, including priority receipt of future coal from Ping Yi mine at a 5% discounted price compared to the market price until 70% of the payment is received; (2) through receipt of the use of Ping Yi Mine’s washing facilities subsequent to disposal, including  usage fees charged at a 3%~5% discounted price compared to the market price until 30% of the payment is received. The terms of the agreement state that full payment must be received within five years, and that 70% of total receipts must occur by the end of year three. As of January 31, 2013, the Company received total payment of $5,619,088 which $5,324,718 as prepayment of raw coal and $294,370 as coal washing facilities service.

 

The Company recorded $408,020 as income from discontinued operations for the year-ended April 30, 2012.  Additionally, the Company recorded $3,183,786 of costs to dispose related to the provision of discounting the estimated receipt of the payment over the payment term (refer to Note 5 and 11). Subsequently, the Company has written back $477,568 as income related to the provision for the nine months ended January 31, 2013.

 

Sale of DaPing Coal Mine

 

With consideration of several factors including continuing development strategies, the Company made the determination to dispose of the DaPing Mine. On November 18, 2012, the Company decided to purchase two coal mines, which are LouZhou and LaShu mines by making a swap of the 60% equity interest in DaPing mine and 98% equity interest in ZoneLin Coking Plant. The fair value of the 60% equity interest in DaPing is reasonably stated by the amount of approximately $ 23 million, including $0.5 million on assets write-up per fair value measurement.

Sale of ZoneLin Coking Plant 

 

With consideration of several factors including continuing development strategies, the Company made the determination to dispose of the ZoneLin Coking Plant. On November 18, 2012, the Company decided to purchase two coal mines, which are LouZhou and LaShu mines by making a swap of the 60% equity interest in DaPing mine and 98% equity interest in ZoneLin Coking Plant. The fair value of the 100% equity interest in ZoneLin is reasonably stated by the amount of RMB 77,786,000 (approximately $ 12.4 million, including $2.7 million on assets write-up per fair value measurement).

The cancellation of L&L Yunnan Tiannen Industry Co. Ltd. (“TNI”)

 

L&L Yunnan Tiannen Industry Co. Ltd (“TNI”), a trading company, of which the Company owned 98% equity interest, was cancelled with its registration in November, 2012. TNI owned ZoneLin100% equity. On November 18, 2012, the Company disposed ZoneLin through acquisition of LuoZhou and LaShu Coal Mine. ZoneLin is no longer a subsidiary of the Company. At this point, TNI no longer holds any other subsidiary. Given the fact that the Company also has other trading companies such as TaiFung, DaXing, in order to streamline the organization and improve efficiency, the Company decided to withdraw TNI, and transfer TNI’s related business to TaiFung. During the quarter ended January 31, 2013, the Company completed the process of TNI’s cancellation and related matters.

12


 
 

NOTE 4.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Cash advances are made to coal suppliers to guarantee a certain delivery of coal to us at a specified time and price. Since the demand for coal is high, we set up agreements with these suppliers, with cash deposits, to ensure a constant supply of coal to our washing facilities. By signing purchase agreements with our suppliers which provide for the payment of deposits over a certain period of time, we ensure that our suppliers will deliver their coal to us in a timely manner. Certain agreements impose penalties on the suppliers for non-compliance.

 

All of the Company’s Bill receivable is Bank Acceptance from our customers.  Bank’s Acceptance is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank by the buyer.  The bank acceptance specifies the amount of money, the date, and the company to which the payment is due.  After acceptance, the draft becomes an unconditional liability of the bank.  But the holder of the draft can sell (exchange) it for cash at a discount to a bank or endorse it to another company instead of cash payment.

 

Additionally, the Company provides advances to employees for them to handle incidentals in our mining operations as well as washing expansion projects as these facilities are far away from our headquarters in Kunming.  There were no advances to officers or directors.

 

Advances to suppliers were $21.6 million as of January 31, 2013 increased by approximately $4.5 million compared to April 30, 2012.  The company keeps a high prepayment to suppliers in order to lock up coal. Furthermore, the company acquired LaShu mine and LuoZhou mines in this quarter and the two mines contribute about $2.7 million to advances to suppliers.

 

Prepaid expenses and other current assets consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

Advances to suppliers

$

21,634,935

$

17,133,782

Bill receivable

 

955,490

 

-

Advanced to employees

 

386,414

 

344,124

Other

 

68,747

 

62,300

Total

$

23,045,587

$

17,540,206

 

*Reclassification

13


 
 

NOTE 5.  OTHER RECEIVABLES

Other receivables consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

HSC receivable - current (note 3)

$

801,256

$

801,256

PYC receivable - current (note 3)

 

1,969,112

 

7,094,403

DaPing receivable-current

 

16,039,494

 

-

ZoneLin receivable-current

 

2,130,675

 

-

Other

 

153,587

 

288,483

Short term loans to business associates

 

-

 

554,726

Total

$

21,094,124

$

8,738,868

*Reclassification

The Company made short term loans to business partners in order to develop a long term business relationship.  Such loans are considered consistent with accepted business practices in China.  These business partners are suppliers to our Company and we believe that these loans result in securing adequate supplies for the expansion of production capacity in our mines.  As more fully discussed in Note 3, the Company sold its 100% equity ownership interest in Ping Yi Mine for RMB 196,000,000, approximately $31,200,000 on April 30, 2012. The estimated receipt of payment is expected to generally occur of a five-year term, in accordance with the contract. As such, a valuation allowance was recorded to reflect the net present value of the payments during that term at a rate of 5%, which is with reference to the discount explicit in the agreement. The initial recording of this discount resulted in the recognition of a cost of disposal in the period when the disposal incurred, which will be accreted as interest income by effective interest method over the life of the agreement. As of January 31, 2013, the receivable related to the disposal of the Ping Yi Mine, net of discount of $22,890,924 with a current portion of $1,969,112. The company sold its 60% equity ownership interest in DaPing and its 98% equity ownership interest in ZoneLin during this period.

As of the disposal day, DaPing mine recorded about $16 million payables to DaPuAn mine, SuTsong mine and HX washing facility. ZoneLin recorded about $2 million payables to DaPuAn mine and SuTsong mine. Prior to the sales of DaPing and ZoneLin, DaPuAu had inter-company receivables of RMB 13.4 and 72.6 million from ZoneLin and DaPing respectively. SuTsong had inter-company receivables of RMB 28.1 million from DaPing. Since we used net equity method for the disposal of DaPing and ZoneLin taking into account of net assets, we thus reclassified the two subsidiaries’ inter-company transactions as other receivables into each balance sheet. These other receivables reflected in the group consolidation statement.

14


 
 

NOTE 6.  INVENTORIES

Inventories are primarily related to coal located at KMC, WeiShe,Tai Fung, LuoZhou and LaShu. Inventories consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

Raw Coal

$

1,974,509

$

754,047

Coke Coal

 

-

 

-

Fine Coal

 

6,748,237

 

3,947,907

Total  

$

8,722,746

$

4,701,954

*Reclassification

15

 

 
 
 

NOTE 7.  PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

Property, plant, equipment and mine development consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

Mine development

$

100,751,264

$

43,878,467

Mineral rights

 

42,757,320

 

24,276,841

Building and improvements

 

5,652,743

 

5,554,882

Machinery and equipment

 

23,903,903

 

22,076,263

Assets retirement cost, net

 

3,061,843

 

1,488,895

Total Property, Plant and Equipment

 

176,127,073

 

97,275,348

Accumulated depreciation and amortization 

 

(16,906,680)

 

(11,806,126)

Total Property, Plant and Equipment, net

$

159,220,393

$

85,469,222

 
*Reclassification

Mineral rights represent the exclusive right, granted by the Chinese government, to operate the five mines, DaPuAn, SuTsong, WeiShe, LuoZhou, and LaShu. The rights were acquired in the first quarter of 2008 as a result of the acquisition of the “2 Mines” on May 1, 2008 and on November 1, 2009, the acquisition of the WeiShe on February 3, 2012 and the acquisition of LuoZhou and LaShu on November 18, 2012, respectively. The Company has elected to use unit-of-production method to depreciate its mineral rights.

Depreciation expense was $2,231,774 and $5,691,798 for the three and nine months ended January 31, 2013, respectively.

Depreciation expense was $1,189,496 and $4,644,380 for the three and nine months ended January 31, 2012, respectively. 

Amortization expense of Asset Retirement Cost was $29,246 and $17,551 for the nine months ended January 31, 2013 and 2012.

 

16


 
 

 

NOTE 8.  CONSTRUCTION IN PROGRESS

 

Construction in progress includes mine development, ventilation and electrical system improvements, building of staff quarters, and beginning construction of a sewage treatment system and road expansion for the washing facilities.  Construction in progress was $11,200,140 and $26,417,686 as of January 31, 2013 and April 30, 2012, respectively. The $13 million decrease was primary due to construction in progress had been completed in last quarter and transferred out to fixed assets. Capitalized interest costs included in construction in progress were approximately $0 and $74,903 for the nine months ended January 31, 2013 and 2012, respectively.

 

NOTE 9.  INTANGIBLE ASSETS

 

Customer relationship and technology assets are being amortized over a period of 7 years.  Amortization expense for these assets was $55,350 and $124,837 for the nine months ended January 31, 2013 and 2012, respectively. 

 

Intangible assets consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012

Technology

$

74,034

$

74,043

Land right

 

158,668

 

-

Customer Relationship

 

47,356

 

47,362

Total Intangible Assets  

 

280,058

 

121,405

Accumulated amortization

 

(58,882)

 

(41,914)

Total Intangible Asset, net

$

221,176

$

79,491

 

*Reclassification

 

We have reclassified Mineral Rights to Property, Plant, Equipment and Mine Development. Mineral Rights were disclosed as Intangible Assets in prior financial statements

 

Land right was new item related to the acquisition of LuoZhou and LaShu mines.

 

The amortization schedule for the upcoming five years is as below (amount in thousands):        

 

Remainder of Fiscal 2013

$

8

Fiscal 2014

 

32

Fiscal 2015

 

32

Fiscal 2016

 

32

Fiscal 2017

 

32

Thereafter

 

85

Total

$

221

17


 
 

 

NOTE 10.  OTHER ASSETS

 

Other assets represent the long-term restricted cash which included bank deposits placed as guarantee for the future payments of costs related to land subsidence, restoration, rehabilitation and environment protections required by the coal authority, amount of $993,355 and $404,689 of Yunnan and Guizhou province as of January 31, 2013 and April 30, 2012, respectively.

 

 

NOTE 11.  LONG TERM RECEIVABLE

 

In fiscal year of 2011, the Company entered into several agreements with Colorado-based Bowie Resources, LLC and have loaned a total of approximately $7 million.  The loan originally carried an interest rate of 9%.  The loan was co-senior with another lender.  The total owing to the Company as of January 31, 2013 was $5,358,796 including previously accrued interest of $312,783.  On February 28, 2013, the Company received payment of US$5,545,056 from Bowie as the full and final payment for the settlement of the outstanding loan.

 

As more fully disclosed in Note 3 and Note 5, the Company has recorded a long-term receivable related to the disposal of the Ping Yi Mine, as of January 31, 2013, the amount is of $20,921,812, net of a present value discount of $3,005,231 provided in the 10K ended April 30, 2012

 

 

 

18


 
 

NOTE 12.  RELATED PARTY TRANSACTIONS

 

Related Party Notes Receivable

 

The Company loaned money to various entities that have non-controlling interests (i.e. minority equity interest, or less than 50% equity interest in an entity.) with the Company.  Those loans are reflected in the consolidated balance sheets as related party notes receivables, and are secured by assets and machinery of the various mines or businesses, as indicated below.  Because these borrowers have business in which the Company has an interest or they are suppliers, customers, or people or party associated with our business entity, the Company considers these borrowers as related parties. The business purpose of these related party transactions relates to the maintenance of long-term business relationships.

 

There was no impact to the statements of income and other comprehensive income for the nine months ended January 31, 2013 and year ended April 30, 2012 as a result of these loans. For the nine months ended January 31, 2013, the total amount of loan repayments was approximate $6 million.

 

Related party notes receivable consisted of the following as of January 31, 2013:

 

Borrowers

Relationship

USD

Maturity

Collateralized by

Associates to TianRi Coal Mine

Shareholder & non-controlling interest holder

$1,367,943

May 1, 2015

Mining equipment

Associates to SuTsong

Shareholder & non-controlling interest holder

2,868,918

May 1, 2015

Mine Assets

Associates to DuPuAn

Shareholder & non-controlling interest holder

973,113

May 1, 2015

Mine Assets

Yunnan Tinnan Co. Ltd.

Non-controlling interest holder

489,254

May 1, 2015

Machinery

Others

Shareholder & non-controlling interest holder

341,205

Various dates

          None
 

Total

$6,040,433

   

 

Related party notes receivable consisted of the following as of April 30, 2012:

 

Borrowers

Relationship

USD

Maturity

Collateralized By

Associates to TianRi Coal Mine

Shareholder & non-controlling interest holder

$1,614,984

May 1, 2015

Mining Equipment

Associates to SuTsong

Shareholder & non-controlling interest holder

2,869,284

May 1, 2015

Mine Assets

Associates to DuPuAn

Shareholder & non-controlling interest holder

973,237

May 1, 2015

Mine Assets

Yunnan Tinnan Co. Ltd.

Non-controlling interest holder

443,128

May 1, 2015

Machinery

Others

Shareholder & non-controlling interest holder

195,984

Various dates

            None
 

Total

$6,096,617

   

 

Related Party Payable

 

Related party payable consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

Payable to Robert Lee

$

1,647,933

$

1,647,933

Share to be issued

 

-

 

215,480

Payable to Union Energy (previous owner of LuoZhou mine and LaShu mine)

 

1,111,675

 

-

Total current related party

$

2,759,608

$

1,863,413

Payable to previous owners of ZoneLin (non-current)

$

-

$

304,951

Total Payable-related party

$

2,759,608

$

2,168,364

 
* Reclassification

Related party payables do not bear interest and are un-collateralized. These related parties payable have no impact on the statements of income and other comprehensive income for the nine months ended January 31, 2013 and year ended April 30, 2012.

Due to Officers and Directors

Due to officers consisted of the following:

 

Due to officer

 

January 31, 2013

 

April 30, 2012

Dickson Lee

$

1,339,042

$

243,334

Clayton Fong

 

111,333

 

111,333

Shirley Kiang*

 

-

 

60,000

Total due to officers/directors

$

1,450,375

$

414,667

*no longer a director as of September 1, 2012

19


 
 

 

NOTE 13.  ASSET RETIREMENT OBLIGATION

 

With respect to the DaPuAn and SuTsong mines, the Company estimates the asset retirement obligation at a rate of 3 RMB per ton based on total reserves at the end of the useful lives of the mines. The Company expects to extract approximately 10 million tons of coal over the expected useful lives (29 and 17 years for DaPuAn and SuTsong Mine respectively).  The interest rate used in the net present value calculation is 7%.

 

As for the WeiShe mine, which acquired in February 2012, the management estimates the asset retirement obligation at a rate of 3 RMB per ton based on total reserves at the end of the useful lives of the mine. The Company expects to extract approximately 19 million tons of coal over the expected useful life of thirty years. The interest rate used in the net present value calculation is 8%.

 

The LuoZhou and LaShu mines were acquired by the Company in November 2012. According to the mine reservation report, management expects to extract approximately 26.6 million tons of coal and 7 million tons of coal from LuoZhou and LaShu over the remaining 30 years, respectively. LuoZhou Mine and LaShu Mine are located in Guizhou Province and the management estimates the asset retirement obligation at a rate of 3RMB per ton based on total reserves at the end of the useful lives of the mines. The interest rate used in the net present value calculation is 8%.

 

During the quarter ended October 31, 2010, the Company revised the forecasted cash flows used for the net present value calculations for the DaPuAn and SuTsong mines. The revisions to estimated cash flows pertain to revisions in the estimated amount and timing of required reclamation activities throughout the lives of the respective mines and reflect changes in estimates of closure volumes, disturbed acreages and third-party unit costs as of October 31, 2010. We based these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates. We evaluated the forecasted cash flows as of January 31, 2013, and no revision was deemed necessary.

 

The following is a summary of the change in the carrying amount of the asset retirement obligation during the quarter ended January 31, 2013 and year ended April 30, 2012.

 

   

January 31, 2013

 

April 30, 2012*

Beginning balance

$

1,772,833

$

1,978,877

Liabilities incurred during the period

 

1,604,249

 

902,178

Liabilities settle during the period

 

-

 

(673,214)

Accretion of interest

 

137,133

 

251,511

ARO from discontinued operation-DaPing

 

-

 

(686,519)

Ending balance

$

3,514,215

$

1,772,833

 

*Reclassification

20


 
 
 

NOTE 14.  OTHER PAYABLES

 

Other Payables consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

Payable to business partners

$

2,846,826

$

404,977

Payable to previous owners of DaPing Coal Mine

 

5,567,855

 

15,388,508

Resource surcharge payable of WeiShe Coal Mine

 

13,360,936

 

13,378,566

Note Payable

 

3,000,000

 

-

Others

 

7,271,523

 

5,319,316

Total other payable

$

32,047,140

$

34,491,367

 

*Reclassification

 

Total Other Payables was $32.0 million as of January 31, 2013. None of these payables are collateralized by any assets of the Company. $13.4 million is estimated resource surcharge payable of WeiShe Mine through acquisition. The estimated resources surcharge is determined by the coal reserve and surcharge per ton, which the guidance was issued by GuiZhou Land Resources Council. Payable to previous owners of DaPing Coal Mine was $5.6 million, which was reclassified from Due to Related Parties as the disposal. The other $7.3 million is for salary payable, notes payable, miscellaneous payment of fees related to maintenance, safety, employee training for security and environmental matters.

 

The Company issued a Note to an institutional lender to borrow US$3,000,000 loan with annual interest rate of 12%. This loan was collateralized by the loan from Bowie Resources LLC which has more information on Note 25.

21


 
 

 

NOTE 15.  TAX PAYABLES

 

Taxes payable consisted of the following:

 

Description

 

January 31, 2013

 

April 30, 2012*

VAT Payable

$

5,260,159

$

5,440,378

Income Tax Payable

 

6,939,156

 

4,537,204

Other Taxes Payable

 

3,041,530

 

2,655,622

Total Tax Payable

$

15,240,845

$

12,633,204

 

*Reclassification

 

Other Taxes Payables mainly include resources tax payable and business tax payable.

 

 

NOTE 16.  INCOME TAXES

 

Our effective tax rates were approximately 9% and 13% for the nine months ended January 31, 2013 and 2012, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates, and the Company has net operating loss carry-forwards available to offset current and future taxable income.

 

 

22


 
 

 

NOTE 17.  STOCKHOLDERS’ EQUITY

 

Stock Issued for Compensation:

 

The Board of Directors approved to issue shares in respect to the services provided by key employees during this quarter. For the three months ended January 31, 2013, the Company issued 150,683 shares to key employees with the share value of $277,777. Cancelled 86,667 shares issued to officer with the share value of $158,601.

 

For the three months ended January 31, 2013, the Company issued 9,564 shares of common stock to the Board of Directors, with the share value of $18,334.

 

For the three months ended January 31, 2013, the Company issued 15,000 shares of common stock with the share value of $27,450 for advisor.

 

For the three months ended January 31, 2013, the Company issued 3,279 shares of common stock with the share value of $6,000 for consultant.

 

Stock issued for Cash: 

 

For the three months ended January 31, 2013, 505,780 shares of common stock were issued to investor for cash proceed in the amount of $875,000. During the third quarter, no warrants were exercise, respectively.

 

Treasury Stock:

 

For three months ended January 31, 2013, no treasury stock has been purchased or sold by the Company.

 

 

NOTE 18.  WARRANTS

 

Warrants Issued for Compensation

 

The Company has authorized 1,100,000 Class D warrants to be issued to executives and 4,000,000 Class E warrants to be issued to Directors. 

 

During the year ended April 30, 2011, the Company issued 1,000 Class E warrants to a Director.  The warrants were fully vested as of April 30, 2011 and expire five years after issuance.  The grant date fair value was $8.92.  The Company issued 1,000 warrants to a non-employee. The warrants were fully vested as of April 30, 2011 and expire five years after issuance. The grant date fair value was $9.82.

 

The fair value was estimated on the date of the grant using the Black-Scholes option-pricing model. The following table displays the weighted average assumptions that have been applied to estimate the fair value of warrants on the date of grant for the three months ended January 31, 2013:

 

 

 

January 31, 2013

Expected life (years)

 

5.0

Risk-free interest rate

 

2.29%

Expected volatility

 

68.93%

Expected dividend yield

 

0%

 

 

23


 
 

 

(1)     Expected Life: The expected life was determined based on the option’s contractual term and employees’ expected early exercise and post-vesting employment termination behavior.

 

(2)     Risk Free Rate: The risk-free interest rate was based on U.S. Treasury yields with a remaining term that corresponds to the expected term of the option calculated on the granted date.

 

(3)     Expected Volatility: Expected volatility is computed based on the standard deviation of the continuously compounded rate of return of days when the stock price changed over the historical period of the expected life of the options.

 

(4)     Dividend Yield: The expected dividend yield is zero. The Company has not paid a dividend and does not anticipate paying dividends in the foreseeable future.

 

For the three months ended as January 31, 2013, no warrant was issued or exercised for compensation.

 

Following is a summary of the status of warrants outstanding at January 31, 2013:

 

Type of Warrants

 

Range of Exercise Prices

 

Total Warrants Outstanding

 

Weighted Average Remaining Life (Years)

 

Weighted Average Exercise Price

Executives-Class D

$

              2.25

 

                10,000

 

0.08

$

          2.25

Directors - Class E

$

        3.00 - 9.34

 

               210,916

 

1.79

$

              3.03

Non-employee

$

11.22

 

1,000

 

2.38

$

11.22

Total

     

                221,916

 

1.71

$

               3.03

 

Warrants Issued to Investors

 

On May 12, 2009, the Company issued 500,000 seven year warrants to purchase shares of the Company’s common stock pursuant to a security purchase agreement.  The exercise price is $5.62 per common stock and is exercisable immediately.

 

On June 28, 2009, The Company issued to various investors 3,498,800 one year warrants to purchase shares of the Company’s common stock pursuant to a stock purchase agreement.  The warrants are immediately exercisable and the exercise price varies between $1.00 and $2.60 depending on the class of warrant.

 

On October 8, 2009, the Company issued to various investors 882,613 five year warrants to purchase shares of the Company’s common stock pursuant to a stock purchase agreement.  The exercise price is $5.62 per common stock and is exercisable immediately.  In connection with the stock issuance, the Company issued 109,682 five year warrants to the placement agent with an exercise price of $6.11 that are immediately exercisable.

 

On November 6, 2009, the Company issued to various investors 501,236 five year warrants to purchase shares of the Company’s common stock pursuant to a stock purchase agreement.  The exercise price is $5.62 per common stock and is exercisable immediately.  In connection with the stock issuance, the Company issued 66,832 five year warrants to the placement agent with an exercise price of $6.11 that are immediately exercisable.

 

On June 1, 2010, the Company received a payment of $50,000 from an investor for extending the expiration date from June 1, 2010 to December 31, 2010 of the remaining 1,000,000 shares associated with warrant K that the investor owns. The investor exercised all the 1,000,000 shares before the extended expiration date. As such, no warrants K were outstanding as of October 31, 2011.

24


 
 

 

On January 28, 2011, the Company issued to various investors 80,000 one year warrants to purchase shares of the Company’s common stock pursuant to a stock purchase agreement. The exercise price is $9.50 per common stock and is exercisable immediately.

 

Effective on October 28, 2011, the Company issued promissory notes (unsecured) to certain accredited investors and employees of the Company in the principal amount of $384,872 of which $210,000 has been loaned to the company and $174,872 is considered irrevocable commitment contribution.  The proceeds of the notes were used primarily for general business purposes in the U.S.  The notes mature on the 330th day from the dates of receipt of cash contribution from the holders of the notes and the Company may prepay all or any portion of the notes without penalty.  Interest is payable on the unpaid balance of the notes at an annual rate of 10%. The interest payable on the promissory notes accrued in the amount of $15,262.71 as of April 30, 2012.   As further consideration for providing this financing, the holders of the notes have also received warrants to purchase an aggregate of 96,218 shares of the Company’s common stock at an exercise price of $4.00 per share.  The warrants expire at the end of the four-year period following the maturity dates of the corresponding promissory notes.  The issuance and sale of the warrants was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

 

On November 2, 2011, the company issued 36,000 warrants to prior investor. The warrants were completely exercised and the exercise price is $0.83, respectively.

 

On January 9, 2013, the company granted 111,271 three year warrants to investor to purchase shares of the Company’s common stock pursuant to a stock purchase agreement.  The exercise price is $2.10 per common stock and is exercisable immediately.

 

During the third quarter ended January 31, 2013, the company has no warrant exercised to investors.

 

The table below is a summary of all warrants activity as of January 31, 2013:

 

Warrants Roll-forward Summary

           
 

Units

 

Weighted Average Exercise Price

 

Weighted Average Remaining Life (in Years)

Outstanding at April 30, 2012

870,692

 

$5.19

 

2.88

Issued

-

 

-

   

Exercised

-

 

-

   

Expired

-

 

-

   

Outstanding at July 31, 2012

870,692

 

$5.19

 

2.63

Exercisable at July 31, 2012

870,692

 

$5.19

 

2.63

Issued

-

 

-

   

Exercised

-

 

-

   

Expired

-

 

-

   

Outstanding at October 31, 2012

870,692

 

$5.19

 

2.37

Exercisable at October 31, 2012

870,692

 

$5.19

 

2.37

Issued

111,271

 

$2.10

 

2.94

Exercised

-

 

-

   

Expired

-

 

-

   

Outstanding at January 31, 2013

981,963

 

$4.84

 

2.16

Exercisable at January 31, 2013

981,963

 

$4.84

 

2.16

25


 
 

 

NOTE 19.  NON-CONTROLLING INTEREST

 

As described in Note 1, to the consolidated financial statements, the Company has the majority controlling interest of L&L Coal Partners (3 coal mining and washing operations), Tai Fung, WeiShe, LuoZhou and LaShu. During the fiscal year 2010, the Company increased its ownership interest in L&L Coal Partners to 80% from 60% at April 30, 2009. The equity related to non-controlling interest as of January 31, 2013 represents 20% third party interest in L&L Coal Partners, 2% third party interest in Tai Fung, 49% third party interest in WeiShe, 5% third party interest in LuoZhou and 5% third party interest in LaShu. The non-controlling interest in WeiShe is measured at fair value at the acquisition date, with a discount rate 16% which reflected the factor of lack of marketability. The non-controlling interest in LuoZhou and LaShu are measured at fair value at the acquisition date, with a discount rate 20% which reflected the factor of lack of marketability.

 

Below is a schedule of changes in ownerships interest as of January 31, 2013 and April 30, 2012:

 

   

January 31, 2013

 

April 30, 2012

Beginning balance

$

43,431,399

$

29,530,133

Non-controlling interest related to acquisitions

 

1,934,998

 

7,822,636

Translation

 

16,988

 

1,083,961

Non-controlling interest related to disposal

 

(14,097,938)

 

-

Net income related to non-controlling interest

 

8,571,201

 

4,994,669

Ending balance

$

39,856,648

$

43,431,399

 

 

NOTE 20.  EARNINGS PER SHARE

 

The Company only had common shares, warrants and stock options issued and outstanding as of January 31, 2013.  Under the treasury stock method of earnings per share, the Company computed the diluted earnings per share as if all issued warrants or options were converted to common stock and cash proceeds were used to buy back common stock. The exercised prices of warrants and options are greater than fair market price. The securities are anti dilutive and can be ignored in the diluted Earnings Per Share calculation.

 

   

For the Three Months Ended January 31 

 

For the Nine Months Ended January 31 

   

2013

2012

 

2013

2012

EPS numerator:

           

Net income from continuing operations, net of income taxes

$

15,008,701

2,169,994

$

28,607,547

8,247,600

Less: Net (loss) income attributable to non-controlling interests

 

3,007,604

510,282

 

6,334,799

2,217,152

Income from continuing operations attributable to common stockholders

 

12,001,097

1,659,712

 

22,272,748

6,030,448

(Loss) income from discontinued operations, net of income taxes

 

3,595,701

2,199,758

 

7,253,463

4,004,851

Net income attributable to common stockholders

$

15,596,798

3,859,472

$

29,526,211

10,035,299

EPS denominator:

           

Weighted average shares outstanding — basic

 

37,318,789

32,723,159

 

37,562,695

32,093,512

Effect of dilutive shares

 

-

816,769

 

-

910,681

Weighted average shares outstanding — diluted

 

37,318,789

33,539,928

 

37,562,695

33,004,193

Basic EPS attributable to common stockholders:

           

Income from continuing operations

 

0.32

0.05

 

0.60

0.19

(Loss) income from discontinued operations

 

0.10

0.07

 

0.19

0.12

Net income attributable to common stockholders

$

0.42

0.12

$

0.79

0.31

Diluted EPS attributable to common stockholders:

           

Income from continuing operations

 

0.32

0.05

 

0.60

0.18

(Loss) income from discontinued operations

 

0.10

0.07

 

0.19

0.12

Net income attributable to common stockholders

$

0.42

0.12

$

0.79

0.30

26


 
 

 

NOTE 21.  COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

The Company held operating lease in the Seattle office and Beijing office. The lease will expire in July 2013 and December 2014, respectively. The non-cancelable operating lease agreement requires that the Company pays certain operating expenses, including management fees to the leased premises. The future minimum rental payments in less than a year and in greater than a year are $190,152 and $136,873 respectively.

 

Legal Matters

 

On August 26, 2011, a federal securities law class action complaint was filed against the Company, certain officers and directors (i.e., Dickson V. Lee and Ian G. Robinson) and a former officer (i.e., Jung Mei (Rosemary) Wang) in the United States District Court, Western District of Washington at Seattle on behalf of a proposed class of all persons who purchased the common stock of the Company during the period August 13, 2009 through August 2, 2011, inclusive, and who were damaged thereby (the “Securities Class Action”), alleging that the defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934  by filing materially  false and misleading reports and financial statements with the SEC from August 2009 to July  2011. On December 15, 2011, the court appointed Gregg Irvin as lead plaintiff, and plaintiff filed an amended complaint and a second amended complaint on February 8 and March 2, 2012, respectively, naming four other current and former directors as defendants (i.e., Shirley Kiang, Robert Lee, Dennis Bracy and Robert Okun).

 

On November 4, 2011, a complaint was filed by Larew P. Stouffer, in a shareholder derivative suit on behalf of the Company, which is a  nominal defendant, against certain its officers and/or directors (i.e., Dickson V. Lee, Norman Mineta, Ian G. Robinson, Robert W. Lee, Shirley Kiang, Dennis Bracy, Syd S. Peng) and certain former officers and/or directors (i.e., Edward L. Dowd, Andrew M. Leitch, Robert Okun, Joseph J. Borich, Jung Mei Wang and David Lin) in the First Judicial District Court of the State of Nevada for Carson City (the “Stouffer Derivative Suit”),  alleging that the defendants breached fiduciary duties to the Company and its shareholders, wasted corporate assets, were unjustly enriched , and committed other wrongful acts.

 

On November 15, 2011, a complaint was filed by Russell L. Bush,  in a shareholder derivative suit on behalf of the Company, which is a  nominal defendant, against its existing directors (i.e., Dickson V. Lee, Norman Mineta, Ian G. Robinson, Robert W. Lee, Shirley Kiang, Dennis Bracy, Syd S. Peng) in the United States District Court, Western District of Washington at Seattle (the “Bush Derivative Suit”, with the Stouffer Derivative Suit, the “Derivative Suits”), alleging that the defendants breached fiduciary duties and were unjustly enriched.

 

The Company has notified our insurance carrier of the Potential Class Action and the Derivative Suits. The Company has retained outside legal counsel.

 

The Company is unable to estimate the amount or range of any potential loss in the event of an unfavorable outcome. As such, as of January 31, 2013, the Company has not accrued any liability in connection with potential losses from legal proceedings.

 

On April 23, 2012, the Company and Dickson V. Lee and Ian G. Robinson filed a motion to dismiss the Securities Class Action.  Proceedings in the Derivative Suits were stayed pending the court’s ruling on the motion to dismiss.

 

On December 3, 2012, the United States District Court, Western District of Washington at Seattle granted the Company’s motion to dismiss the Securities Class Action lawsuit, and   gave plaintiff thirty days in which to seek the court’s permission to file another  amended complaint.

 

On January 2, 2013, plaintiff filed a motion for leave to file an amended complaint.  Pursuant to a stipulation of the parties, the court granted such leave, and on February 4, 2013, plaintiff filed a third amended complaint on behalf of a proposed class of all persons who purchased the common stock of the Company during the period August 13, 2009 through August 2, 2011, inclusive, and who were damaged thereby, against the Company, certain officers and/or directors (i.e., Dickson V. Lee and Ian G. Robinson) and a former officer (i.e., Jung Mei (Rosemary) Wang), alleging that the defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 by filing materially false and misleading reports and financial statements with the SEC from August 2009 to July 2011.

 

Pursuant to a stipulation of the parties and an order entered by the court, the Company’s motion to dismiss plaintiff’s third amended complaint is due April 12, 2013.  Proceedings in the Derivative Suits continue to be stayed.

 

The Company believes that these suits are without merit and intends to defend them vigorously.

27


 
 

 

Foreign Currency

 

The majority of the Company sales, purchases and expense transactions are denominated in RMB (Chinese currency) and most of the Company’s assets and liabilities are also denominated in RMB.  The RMB is not freely convertible into foreign currencies under the current law.  In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions.  Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

 

Environmental Remediation

 

The PRC adopted extensive environmental laws and regulations that affect the operations of the coal mining industry.  The outcome of environmental liabilities under proposed or future environmental legislation cannot be reasonably estimated at present, and could be material.  Under existing legislation, however, Company management believes that there are no probable liabilities that will have a material adverse effect on the financial position of the Company.

 

Chinese Government

 

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America.  These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange.  The Company’s results may be adversely affected by changes in the governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions and remittance abroad, and rates and methods of taxation, among other things.

 

Concentrations

 

For the nine months ended January 31, 2013, we had one major customer who purchased 19% of the Company’s total sales, and represented $11,059,781 of accounts receivable balance in total as of January 31, 2013.  In addition, we had one major supplier who provided 18% of our total purchases, and the relevant account payable had been paid off as at January 31, 2013

 

28


 
 

 

NOTE 22.  STOCK INCENTIVE PLAN

 

On September 9, 2010, our Board of Directors adopted the 2010 Stock Incentive Plan (the “2010 Plan”), which was approved by our shareholders at our annual meeting of the shareholders held on the same date. On February 17, 2011, the company filed S-8 Registration Statement. The Stock Incentive Plan authorizes the Board of Directors or one or more of its members to grant options to eligible individuals to purchase shares of common stock our Company to eligible individuals.  Eligible individuals may be employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary, and consultants who provide valuable service to us or our Parent or Subsidiary. Options to purchase Common Stock may be incentive stock options, stock units, stock appreciation rights or non-statutory stock options as determined by the Board of Directors or its delegate 4,200,000 shares of Common Stock were reserved for issuance.

 

Each option agreement specifies the term as to when the option is to become exercisable. Standard options vest at a rate of at least 20% of the underlying shares per year over five years and have a maximum term of 10 years. However, in no event shall an incentive stock option granted to a 10% or greater stockholder be granted at an exercise price less than 110% of the fair market value of the stock on the date of grant.

 

On March 5, 2011, the Company granted 40,000 stock options to its Independent Director Dennis Bracy at an exercise price of $7.65. The stock options were fully vested as of April 30, 2011 and expire five years after issuance.  The grant date fair value for this stock option was $7.06.

 

On August 31, 2012, the Company granted 80,000 stock options in lieu of cash to each of Directors of Dickson Lee, Syd Peng and Clayton Fong at an exercise price of $2.00. The stock options will be vested quarterly as board compensation of Fiscal year 2013, and expired five years after vested. The grant date fair value for the stock options was $1.06.

 

For the three months ended January 31, 2013, 99,999 stock options above mentioned of board compensation has been vested.  No stock option has been exercised.

 

29


 
 

 

The following table displays the weighted average assumptions that have been applied to estimate the fair value of stock option awards on the date of grant for the three months ended January 31, 2013:

 

 

January 31, 2013

Dividend yield

-

Risk-free interest rate

2.29%

Expected volatility

68.93%

Expected lives

5 years

                                       

(1)     Expected Life: The expected life was determined based on the option’s contractual term and employees’ expected early exercise and post-vesting employment termination behavior.

(2)     Risk Free Rate: The risk-free interest rate was based on U.S. Treasury yields with a remaining term that corresponds to the expected term of the option calculated on the granted date.

(3)     Expected Volatility: Expected volatility is computed base on the standard deviation of the continuously compounded rate of return of days when the stock price changed over the historical period of the expected life of the options.

(4)     Dividend Yield: The expected dividend yield is zero. The Company has not paid a dividend and does not anticipate paying dividends in there foreseeable future.

 

Stock compensation expense was recognized based on awards expected to vest. FASB ASC Topic 718 requires forfeiture to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

 

The following summarizes pricing and term information for options outstanding as of January 31, 2013:

 

   

Options Outstanding

       

Weighted

   

Range of

 

Total Options

 

Average Remaining Life

 

Weighted

Exercise Prices

 

Outstanding

 

(Years)

 

Average Exercise Price

$2.00 - $7.65

 

280,000

 

4.37

 

$2.81

 
As of January 31, 2013, 139,999 of 280,000 stock options outstanding for compensation were exercisable.

30


 
 

 

The following table is a summary of stock option activity under the Stock Incentive Plan as of January 31, 2013 and changes for the year then ended:

 

 

Incentive Stock

 

Weighted Average

 

Weighted Average

 

Options

 

Exercise Price Per Share

 

Remaining Life (Years)

Outstanding at May 1, 2012

40,000

 

$7.65

 

3.84

Granted

-

 

-

 

-

Exercised

-

 

-

 

-

Canceled

-

 

-

 

-

Outstanding at July 31, 2012

40,000

 

$7.65

 

3.59

Exercisable at July 31, 2012

40,000

 

$7.65

 

3.59

Granted

240,000

 

$2.00

 

4.84

Exercised

-

 

-

 

-

Canceled

-

 

-

 

-

Outstanding at October 31, 2012

280,000

 

$2.81

 

4.62

Exercisable at October 31, 2012

40,000

 

$2.81

 

4.62

Granted

-

 

-

 

-

Exercised

-

 

-

 

-

Canceled

-

 

-

 

-

Outstanding at January 31, 2013

280,000

 

$2.81

 

4.37

Exercisable at January 31, 2013

139,999

 

$2.81

 

4.37

31


 
 

NOTE 23.  SEGMENT INFORMATION

 

The Company reports its operations primarily through the following reportable operating segments: coal mining, coal wholesaling, coking and coal washing revenue.   The Company’s chief operating decision maker uses operating income as the primary measure of segment profit and loss.

 

 

For the three months ended January 31,

 

For the nine months ended January 31,

Total Revenues (including intersegment sales)

 

2013

 

2012

   

2013

 

2012

Coal mining revenue

$

26,176,495

$

4,868,952

 

$

51,414,026

$

19,977,896

Coal wholesale revenue

 

11,560,671

 

5,282,647

   

33,912,725

 

14,597,277

Coal coking revenue

 

-

 

-

   

-

 

-

Coal washing revenue

 

22,115,195

 

10,576,251

   

61,645,062

 

46,086,986

 

$

59,852,361

$

20,727,850

 

$

146,971,813

$

80,662,159

                   
                   

Discontinued operations:

                 

Coal mining revenue

$

932,813

$

4,384,262

 

$

10,184,306

 

9,400,900

Coal washing revenue

 

-

 

3,210,873

   

-

 

5,421,212

Coal coking revenue

 

695,005

 

4,468,356

   

6,742,757

 

18,502,143

 

$

1,627,818

$

12,063,491

 

$

16,927,063

$

33,324,255

Total revenue

$

61,480,179

$

32,791,341

 

$

163,898,876

$

113,986,414

                   
                   
                   

Intersegment revenues

 

2013

 

2012

   

2013

 

2012

Coal mining revenue

$

-

$

-

 

$

-

$

712,919

Coal wholesale revenue

 

-

 

-

   

-

 

-

Coal coking revenue

 

-

 

-

   

-

 

-

Coal washing revenue

 

-

 

1,343,284

   

2,167,076

 

1,612,613

 

$

-

$

1,343,284

 

$

2,167,076

$

2,325,532

                   

Discontinued operations:

                 

Coal mining revenue- PYC

$

-

$

-

 

$

-

$

-

Coal washing revenue - PYC

 

-

 

1,255,369

   

-

 

2,961,048

 

$

-

$

1,255,369

 

$

-

$

2,961,048

                   

Total intersegment revenue

$

-

$

2,598,653

 

$

2,167,076

$

5,286,580

                   
                   
                   

Net revenues

 

2013

 

2012

   

2013

 

2012

Coal mining revenue

$

26,176,495

$

4,868,952

 

$

51,414,028

$

19,977,897

Coal wholesale revenue

 

11,560,671

 

5,282,647

   

33,912,725

 

14,597,277

Coal coking revenue

 

-

 

-

   

-

 

-

Coal washing revenue

 

22,115,195

 

10,576,251

   

61,645,062

 

46,086,986

Less intersegment revenues

 

-

 

(1,343,284)

   

(2,167,076)

 

(2,325,532)

 

$

59,852,361

$

19,384,566

 

$

144,804,739

$

78,336,628

                   

Discontinued operations:

                 

Coal mining revenue

$

932,813

$

4,384,262

 

$

10,184,306

$

9,400,900

Coal washing revenue

 

-

 

1,955,504

   

-

 

2,460,164

Coal coking revenue

 

695,005

 

4,468,356

   

6,742,757

 

18,502,143

 

$

1,627,818

$

10,808,122

 

$

16,927,063

$

30,363,206

                   

Total net revenue

$

61,480,179

$

30,192,688

 

$

161,731,802

$

108,699,834

                   
                   
                   

Net income attributable to L&L

 

2013

 

2012

   

2013

 

2012

Coal mining

$

11,066,113

$

1,938,556

 

$

19,875,508

$

8,408,213

Coal wholesale

 

610,386

 

313,765

   

1,535,903

 

1,064,802

Coal coking

 

-

 

-

   

-

 

-

Coal washing

 

1,933,315

 

1,258,063

   

6,018,046

 

5,284,285

Parent Company

 

1,651,371

 

(1,867,424)

   

(1,896,625)

 

(8,743,604)

 

$

15,261,185

$

1,642,961

 

$

25,532,832

$

6,013,696

                   

Discontinued operations:

                 

Coal mining revenue

$

262,318

$

1,176,251

 

$

3,334,431

$

1,676,575

Coal washing revenue

 

-

 

291,817

   

-

 

103,138

Coal coking revenue

 

73,297

 

748,443

   

658,947

 

2,241,891

 

$

335,615

$

2,216,510

 

$

3,993,378

$

4,021,604

                   

Net income attributable to L&L

$

15,596,800

$

3,859,471

 

$

29,526,210

$

10,035,300

                   
                   
                   

Depreciation expense

 

2013

 

2012

   

2013

 

2012

Coal mining

$

2,002,804

$

412,422

 

$

4,396,210

$

2,020,247

Coal wholesale

 

12,227

 

14,935

   

35,748

 

45,309

Coal coking

 

-

 

-

   

-

 

-

Coal washing

 

143,829

 

142,628

   

429,657

 

421,764

Parent Company

 

72,914

 

74,367

   

217,184

 

209,997

 

$

2,231,774

$

644,353

 

$

5,078,799

$

2,697,318

                   

Discontinued operations:

                 

Coal mining depreciation

$

-

$

307,812

 

$

435,178

$

1,226,942

Coal washing depreciation

 

-

 

151,661

   

-

 

479,734

Coal coking depreciation

 

-

 

85,670

   

177,820

 

240,387

 

$

-

$

545,143

 

$

612,999

$

1,947,063

                   

Total depreciation expense

$

2,231,774

$

1,189,496

 

$

5,691,798

$

4,644,381

                   
                   
                   

Total assets

 

2013

 

2012

         

Coal mining

$

209,447,611

$

172,732,033

         

Coal wholesale

 

22,450,168

 

19,375,449

         

Coal coking

 

-

 

11,615,194

         

Coal washing

 

37,067,869

 

33,011,004

         

Parent Company (intercompany)

 

34,384,005

 

39,823,859

         
 

$

303,349,652

$

276,557,539

         
                   

32


 
 

 

NOTE 24.   EQUITY FINANCING

 

In January 2013, the Company entered an agreement with a private, accredited investor in January 2013 to sell 505,780 shares of its restricted common stock, with warrants, for $875,000 in cash.  The warrants are exercisable for three years to purchase 111,271 shares of its restricted common stock with a $2.10 exercise price. The agreement pursuant to which the investment was made gives the investor piggyback registration rights on any registration statement declared effective within six months.  It also gives the investor the option to participate in up to 10% of certain future PIPE transactions for three years.

 

 

NOTE 25.  SUBSEQUENT EVENT

 

In fiscal year of 2011, the Company entered into several agreements with Colorado-based Bowie Resources, LLC and have loaned a total of approximately $7 million.  The loan originally carried an interest rate of 9%.  The secured loan was co-senior lender with another lender.  The total owing to the Company as of January 31, 2013 was $5,358,796 including previously accrued interest of $312,783.   On February 28, 2013, the Company received payment of US$5,545,056 from Bowie as the full and final payment for the settlement of the outstanding loan.

 

In December 2012, China’s National Policy changed to allows sole proprietorship of mines to be changed to special limited company.   The Company made these changes on March 1, 2013.  The name of DaPuAn Coal Mine (“DaPuAn”) has been changed to Shizong HengTai Coal Mining Co., Ltd. DaPuAn Mine (“HengTaiDaPuAn”).  Similarly, SuTsong Coal Mine (“SuTsong”) has been changed to limited partnership structure.  Under the agreements, the Company still has 80% of the equity in both of HengTai DaPuAn and SuTsong. The transactions do not impact the existing ownership of both mines by the Company.

 

Additionally, the current 20% minority owner of DaPuAn has 100% ownership of Shizong HengTai Coal Mining Co. Ltd. Washing Plant (HengTai Washing Plant). Subject to the fair market valuation assessment, the Company is in the process of swapping the 80% ownership of HengTai Washing Plant with its 98% ownership at Hong Xing Washing Plant.  Effectively, after the proposed swap transaction, HengTai DaPuAn and HengTai Washing Plant will then be under a holding company named Shizong HengTai Coal Mining Co. Ltd. with 80% equity owned by the Company and 20% owned by the existing shareholder.

 

 

33


 
 

 

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  Forward-looking statements usually contain the words “estimate,” “anticipate,” “believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties.  In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this Report, including the matters set forth under the captions “Risk Factors” and in the Company’s other filings with the U.S. Securities and Exchange Commission (“SEC”).  These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements.  The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us.  Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.  Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risk Factors” in Item 1A, as well as those discussed elsewhere in this Quarterly Report.  Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report.  We file reports with the SEC.  You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m.  You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

When we use the terms "we," "us," "our," "L & L," and "the Company," we mean L & L ENERGY, INC. a Nevada corporation, and its subsidiaries.

 

Overview

   

We produce, process, and sell coal in the People’s Republic of China (“China” or “PRC”).  As of January 31, 2013 our vertically integrated coal operations include five coal mines, two coal washing plants, and coal wholesale and distribution networks in the southwest region of China. Currently, substantially all of our coal mining operations are located in the Guizhou and Yunnan provinces. Our operations are located in inland and rural areas of China, which are being developed at a faster rate than the coastal areas that have historically received most of the PRC’s government focus. We sell the coal we produce, or acquire through wholesalers; both though direct sales to end users in China and through other wholesalers.

 

We were initially founded in 1995 by an American citizen and current Chairman and CEO Dickson Lee and originally focused on consulting services.  In 2001 we became a public reporting company and in 2004 acquired a majority interest in a coal related air compressor equipment company (“LEK”) located in China, we disposed of LEK in 2009 in order to focus on growing our coal businesses. In 2006 we commenced our coal operations which now constitute our principal operating business. We have funded our business to date primarily through investments from our founder and Chairman, from private placements, from cash flows from operations and from certain debt financings and arrangements.

 

We conduct our operations through both wholly-owned subsidiaries and majority interests in other entities. We derive our revenues from selling coal to customers, mainly State Owned Enterprises (SOE) and private enterprises in Yunnan, Guizhou and Guangxi Provinces.  Most of our thermal or steam coal is sold to SOEs utilities companies that generate power, mainly electricity.  Most of our metallurgical coal and coking coal is sold to SOEs that make steel, though some steelmaker customers also purchase thermal coal to generate power for the steel factories.  

 

We are a United States company incorporated in Nevada and headquartered in Seattle, WA. We have our China headquarter in Beijing and have China operations centers in Kunming City in Yunnan Province and in Guiyang in Guizhou Province. The majority of our management team and board of directors are American citizens and many are bilingual. As a public reporting company since 2001, we commenced trading on the NASDAQ Global Market in February 2010.

 

34


 

 

Macroeconomic Factors

There were several relevant macro-economic factors directly impacting our operating environment in China during FY 2013, including GDP growth and inflation. In 2012, China’s GDP growth was 7.8%, down from 9.2% and 10.4% in 2011 and 2010 respectively.  This was largely attributable to a turbulent world economic climate and China’s efforts to tame inflation.  

 

In the middle of November 2012, China completed its 18th National Congress for it’s once a decade leadership transition. The new leaders have conveyed plans to boost the economic growth in an orderly manner for the coming years.   

 

At the start of the Company’s prior fiscal year in May 2012, inflation in China was 3.0%, down from a recent high of 6.5% in July 2011.  After the PRC tightened its fiscal policies, which included letting interest rates rise and capping prices of certain domestically-produced commodities like coal, inflation fell to 2.0% at the end of the Company’s third quarter ended January 31, 2013.

 

Coal prices in China declined in the summer of 2012 primarily due to lower priced coal throughout the US and Europe. Prices have stabilized and risen modestly in China this winter. Coal prices in the United States declined because there is lower demand for coal due to increased competition from ample and low price natural gas, one of the warmest winters in recorded history and certain government policies.  Combined with a sluggish market for coal in Europe, coal exporters took advantage of the arbitrage opportunities between Chinese domestic coal prices and international coal prices.  This created a temporary oversupply of coal last summer.

  

Coal will continue to be a key component of the PRC’s energy policy. According to the U.S. Energy Information Administration, coal makes up 70% of China’s total primary energy consumption.  China is both the largest consumer and producer of coal in the world.  In 2009, China accounted for over 46% of the world’s coal consumption. It is estimated that demand for coal in China will continue to increase for several decades, thus producing a favorable business environment for coal producers and wholesalers. Although China has substantial natural coal resources, the coal mining industry in China is fragmented and inefficient, and includes many small companies who lack the economies of scale and resources needed to maximize production capacity. The past few years, mining companies in China have been unable to produce enough coal to meet China’s growing coal demands. As a result the PRC has allowed China to become a net importer of coal. A national policy of consolidation to increase production capacity, improve efficiency and safety in coal mines in China was announced years ago and continues today. Beginning with the 11th 5 year plan in 2006, the policy of government-mandated consolidation has continued with the current 12th 5 year plan from 2011-2015, which expands and accelerates the consolidation to new provinces including Guizhou.

 

In summary, China began our last fiscal year with excessive supply of cheaper coal imported resulting in pricing pressure for the entire coal industry.  This pricing pressure was evidence in Q1 and Q2 of our FY 2013 as our average selling price per ton decreased 7.7% and 5.0% respectively from previous quarter but the price started to stabilize in Q3 2013 with average selling price per ton increased 6.4% from previous quarter.

 

The Twelfth Five-Year Plan Impact on the Chinese Coal Industry

 

The National People’s Congress ratified the 12th Five-Year Plan in March 2011 for the period 2011-2015.  Three sectors received major boost: health care, technology, and energy.  With its emphasis on “inclusive growth,” the Chinese government is encouraging foreign business participation in these Strategic Emerging Industries.  In the energy sector, the PRC announced guidelines for a government-mandated consolidation of the fragmented and inefficient coal industry in Guizhou Province, similar to earlier consolidation efforts in northern China.

 

On April 15, 2011, the General Office of the Government of Guizhou Province issued Document (2011) Number 47 notifying the Guizhou Province Energy Department of guidelines related to accelerating the pace of consolidation through 2013. There are three main components to the guidelines: production, safety, and efficiency. 

 

·         First, in addition to increasing individual mine production, the provincial government is mandating that individual mines be consolidated into coal holding companies responsible for a minimum production between 800,000 and 2,000,000 tons per year, thus reducing the number of coal holding companies from over 1,600 to 200 or less. 

 

·         Second, safety standards will continue to rise as well as increased safety enforcement activity. For example, a mine accident in a county will often result in a temporary shutdown of all mines operating in that county so that safety inspectors can review the safety of each mine.

 

·         Third, to improve efficiency, the level of mechanization will increase significantly, both in shaft drilling and coal production. 

35


 
 

 

Overall Strategy and Plan of Operations

 

The Company is a vertically integrated coal operator participating in the consolidation of a fragmented coal industry in Yunnan and Guizhou Provinces of southwest China. We plan to expand our coal business two ways: first, through expansion of existing operations in accordance with the consolidation policy, and second, through continued acquisition of operations that lack the capital and management skills to expand to meet the minimum capacity required by the government. Additional plan for expanding our coal business includes expanding our coal wholesale operations into Guizhou, pursuing strategic partnerships, exploring viable options for raising capital with an emphasis on debt and other non-dilutive instruments, and strengthening our team.

 

Organic Growth

 

All five of our mines are producing at full capacity. We had a record quarter of 233,000 tons of coals produced. We expect to double that number once all five mines have been expanded.

 

WeiShe mine was acquired in February of 2012 and took 8 months to ramp up to its approved capacity of 150,000 tons per year. We have already begun expansion to 400,000 tons capacity. Luozhou and Lashu were acquired in November 2012 and have ramped up much faster. They are already running at approved capacities of 200,000 and 150,000 tons respectively. We expect to expand all three of these Guizhou mines to over 1.2 million tons in the next few years, well ahead of the 2015 deadline for consolidation in the province. In Yunnan, we have 2 mines DaPuAn and SuTsong which we expect to expand to 300,000 tons.

 

We acquired producing mines that lack capital and/or management expertise to expand to meet the minimum government-mandated production requirement, and then we provide the resources to expand production capacity and improve safety. Most coal mines in Southwest China, including our mines, use the conventional/traditional mining method. Since the acquisition of our mines, the Company has invested substantially in mine infrastructure, which allows us to increase the productivity of our mines. The Company had invested in tunnel construction, shafts, transportation system and roads, pumps, ventilation system, walls, storage facilities, dorms and other types of infrastructure.  The investment in tunnel construction and shaft allow the Company to dig coal from new areas in safer environment to increase the production capacity. The investment in conveyor belts allows the Company to get coal from ground with shorter turnaround time and bigger capacity. We also drill additional shafts in some of our mines to increase safety, operational efficiency, and improve the working environment. Two of our mines continue to use timber to reinforce mine shafts. We have improved safety by using steel and hydraulic braces to reinforce the support the roof of the mine. Our newest mines use roof bolts which are safer and will allow greater mechanization in the future. We have also invested in monitoring equipment for hazardous gases like methane, better electrical equipment and communication systems, GPS locators for each underground miner, and blowers and better ventilation systems to ensure safe air quality. The Company also seeks to acquire larger mines as mines designed to scale up to large production have become available on the market recently because the consolidation policy requires that all mines come under a holding company that controls one to two million tons of production per year.

 

In addition to simple infrastructure improvement, we improve our production and safety through introducing basic management practices by expanding from single shift to multiple-shift operating teams, and including production incentives and bonuses in our team’s compensation package. Our mine operations have instituted regular safety training for both mine management and workers, regular sharing of safety information, and individual shift safety briefings and debriefings at the start and end of each shift.  Because slogans are effective in impacting Chinese behavior, safety banners are posted for easy viewing. We comply with and try to exceed all the safety standards and cooperate fully with local, provincial, and national government safety regulators and safety supervision teams. There have been no fatal accidents in any of our mines.

 

This has resulted in the successful integration and safe expansion of the five mines we have acquired and expansion of production capacity to meet the current government-mandated minimum annual production requirement of 300,000 tons a year.

 

Coal washing increases the value and revenue of some of our mined coal. The Company constructed the DaPuAn coal washing plant to enhance the value of the coal mined at DaPuAn mine. In addition, the Company expanded the capacity of our coal washing facilities, in particular Hong Xing, which washed other mines’ coal. L&L is exploring partnerships to jointly develop coal preparation facilities in South China.

 

The Company continues to expand the capacity and improve the safety of our mines. According to Chinese government regulation, a coal mine can produce up to the production capacity set forth in the mining production permit. However, depending on the market demand for coal, especially during the high demand season in the winter, the local government does allow coal mines to produce more than the production capacity that year or use the unused quote from previous years without giving specific written approval.  It has become a common practice that the actual production can vary from the authorized production limit. The situation may change from month to month or year to year. A new permit must be obtained if the total mine production exceed the total approved tonnage for the life of the mine.

 

36


 
 

 

Acquisitive Growth

 

In addition to an organic growth of over 100% in the next several years, we expect continued opportunities to acquire mines and other operations. We believe that the current government-mandated consolidation policy in China will continue and thus create more acquisition opportunities for us. Strategically, the Company will accelerate the rate of acquisition and increase the size of acquiring mines. 

 

Our acquisition and inspection team consists of business, operational, financial, and renowned coal experts. Two of the members are Dr. Syd Peng and Mr. Jingcai Yang who are both independent directors of the Company. Dr. Peng is a distinguished professor of mining engineering at the West Virginia University (WVU), specializing in underground mining technologies. After earning his PhD in Mining Engineering from Stanford University in 1970, Dr. Peng spent his entire career in mining including work for the U.S. Bureau of Mines, the faculty of WVU where he served as Chairman of the Department of Mining Engineering. He is a member of the National Academy of Engineering and is the recipient of numerous professional awards.  Mr. Yang is a well known leader in the coal industry of China. He has over 30 years of experience, 16 of those spent with Shenhua, the largest coal company in the world. Mr. Yang was formerly the Chief Engineer of Shenhua before being promoted to Chairman  & CEO of Shandong Coal Corporation, the largest and most profitable Shenhua subsidiary, where he held full P&L responsibility.

 

Originally our standard criteria include existing mines in production with good infrastructure and sufficient reserves but lacking the capital and management to expand to or beyond the current minimum of 300,000 tons per year. Because the consolidation policy requires that all mines must also join a holding company that controls coal production between 800,000 to 2,000,000 tons. We are now targeting larger mines with production near 300,000 tons or more, and have considerable proven coal reserves, better geology, and strong management teams already in place. When these well-designed mines are executed effectively, they require less capital expenditure to expand capacity. Strong management teams are integral to better safety and allow for scaling up operations more quickly. Mines with these characteristics are on the market more frequently than in the past because of the government consolidation policy.

 

We acquired 3 mines from Union Energy that met those criteria, Weishe, Luozhou and Lashu mines. They are currently operating at 150,000, 150,000 and 200,000 tons per year and will be expanding to over 1.2 million collectively. We expect other opportunities will arise in Guizhou as the deadline nears. We will also look at opportunities to buy mines in Shanxi and Inner Mongolia which have already undergone consolidation and are running at the capacity of one million tons per year.

37


 
 

Other

 

In addition to acquiring mines, the Company established a new coal wholesale operation DaXing L&L Coal Company. With approval from the government, DaXing has begun developing additional coal storage space and growing its distribution network.  Our DaXing subsidiary had handled over 55,000 tons of raw coal sales during the first three quarters in FY2013.  And through its sourcing of coal, it introduces potential mine acquisitions to the Company in a similar manner as KMC.  DaXing is actively looking for and entering into joint sales agreements with strategic partners to expand our distribution.  

 

The Company will continue to recruit talented professionals to strengthen our team at the board, officer, and management level. Our board is composed mostly of independent directors who are predominately U.S. citizens.  We successfully recruited a world-renowned expert in coal mining who had chaired the Department of Mine Engineering at West Virginia University and a former senior executive with the largest coal company in the world. Officers include the founder of the Company, a Chief Financial Officer who was a partner with Ernst & Young, two former senior White House staffers. One of whom is also the former Director of the United States Mint. We have recruited key managers to augment our legal, accounting, and operations departments in both the United States and China, of whom many were trained in the United States and have advanced degrees in business. 

 

The Company’s immediate mission is to become a leading coal energy company in coal-rich Yunnan and Guizhou Provinces. To meet the government-mandated production targets for each holding company in Guizhou, we believe that the Company’s production capacity will be increased to between 1,000,000 and 2,000,000 tons per year by the end of 2013.  Production could be much higher with additional acquisitions.

 

General Discussion and Analysis of Third Quarter FY2013 Results

 

Mining production, revenues, earnings, and earnings per share were all up 5 quarters in a row. The third quarter results continued the momentum created by the growing recovery of our mining segment in the first quarter of FY2013. The coal production by our mines was 233,000 tons, an increase of 25.9% from 185,000 tons last quarter and an increase of 247.8% from same period last year. This was primarily due to the organic expansion of our existing operations and the acquisitions of new mines. Due to the increased production volume, our overall unit cost per ton had reduced by 20.2%.  Our net earnings attributable to L&L shareholders were $15.6 million, up 102.5% from last quarter $7.7 million and up 304.2% year over year from $3.9 million in the third quarter of FY2012. Earnings per diluted share was $0.42, up 100% from last quarter $0.21 per diluted share. This does include onetime increase of $0.02 per diluted share for discontinued operations and a $0.08 gain on the sale of those discontinued operations.  

 

As a result, our overall revenue, gross profit and Net income Attributable to L&L had increased to $59.9, $20.5, and $15.6 million respectively for the third quarter of FY 2003 against $19.4, $5.1 and $3.9 million respectively for the same period in 2012.  The overall revenue, gross profit and Net income Attributable to L&L had increased to $144.8, $42.2 and $29.5 million respectively for first nine months in FY 2003 against $78.3, $21.1and $10.0 million respectively for the same period in 2012.

 

In addition, the Company fully integrated GuangYeh Coal Sales Company, an acquisition announced on September 5, 2012. Since receiving the official production permit on October 23, 2012, Weishe Coal mine has ramped up to its approved rate of 150,000 tons per year by the 3rd quarter in FY2013. At the same time, Weishe has begun to expand it’s the annual production to 450,000 tons. As announced on October 15, 2012, L&L has started to supply coal to Datang International Power Generation Co. On November 18, 2012, L&L completed the acquisition of the two new mines, LuoZhou Coal Mine and LaShu Coal Mine, expanding our coal production. This transaction involved the transfer of the Company's interests in ZoneLin Coking Plant (98%) and the DaPing Mine (60%) as majority of the payment for the acquisition. The production for LuoZhou and LaShu were coming online ahead of schedule.

38


 
 

 

Results of Operations

 

The following table presents our operating results as a percentage of our revenues for the periods indicated:

 

 

Three Months Ended January 31,

 

Nine Months Ended January 31,

 

2013

 

2012

 

2013

 

2012

 

Amount

% of Revenue

 

Amount

% of Revenue

 

Amount

% of Revenue

 

Amount

% of Revenue

Revenues

$59,852,361

100.00%

 

$19,384,566

100.00%

 

$144,804,738

100.00%

 

$78,336,628

100.00%

Cost of revenue

39,396,382

65.80%

 

14,238,311

73.50%

 

102,569,810

70.80%

 

57,271,928

73.10%

Gross profit

20,455,979

34.20%

 

5,146,255

26.50%

 

42,234,928

29.20%

 

21,064,700

26.90%

Selling general & administrative

4,061,233

6.80%

 

2,516,287

13.00%

 

11,858,119

8.20%

 

10,525,572

13.40%

Interest expense (income)

116,926

0.20%

 

85,078

0.40%

 

341,261

0.20%

 

461,451

0.60%

Other expense (income)

71,828

0.10%

 

(208,967)

(1.1%)

 

962,243

0.70%

 

(1,326,566)

(1.7%)

Provision for income taxes

1,574,799

2.60%

 

336,085

1.70%

 

3,072,766

2.10%

 

1,426,412

1.80%

Income from Discontinued Operations, Net of Tax

3,772,076

6.30%

 

2,727,001

14.10%

 

9,489,865

6.60%

 

4,987,979

6.40%

Net Income Attributable to Non-controlling interest

3,183,979

5.30%

 

1,037,525

5.40%

 

8,571,201

5.90%

 

3,200,279

4.10%

Net income Attributable to L&L

$15,596,798

26.10%

 

$3,859,471

19.90%

 

$29,526,211

20.40%

 

$10,035,300

12.80%

 

Revenue

 

The Revenue under this section is the total revenue of the Company and its subsidiaries including intercompany sales which are eliminated during the consolidation process.  The following table presents revenues by operating segment:

 

For Continued Operations (Excluding DaPing Mine and ZoneLin Coking Plant)

 

On November 18, 2012, the Company finalized the acquisition of the LuoZhou Coal Mine and LaShu Coal Mine. This transaction involved the transfer of the Company's interests in its ZoneLin Coking Plant (98%) and the DaPing Mine (60%) to satisfy majority of the payment for acquisition of Luozhou and Lashu. According to the FASB ASC 360 Rule, since the intention to swap DaPing and Zonelin for LuoZhou and LaShu were known during the second quarter ending October 31, 2012, the presentation of DaPing and ZoneLin for balance sheet was classified as “asset/liabilities of discontinued operation”, and “discontinued operation” in Profit and Loss and Cash Flow Statements were reported on the second quarter for the period ending October 31, 2012.

 

As of the period ending January 31, 2013, we reported $335,615 of the Net Income from discontinued operations attributable to L&L for DaPing and ZoneLin reflecting the period from November 1 to 17, 2012. 

 

39


 
 

For continued operations, in this quarter, our net revenue increased to $59.9 million during the three months ended January 31, 2013 from $19.4 million during the three months ended January 31, 2012, representing approximately a 208.8% increase year over year. The increase was primarily due to 166,000 tons increase in coal production volume. This increase in production was driven by the addition of the LuoZhou and LaShu mines as well as the increasing production levels at the Company’s WeiShe Mine. The Company’s DaPuAn and SuTsong mines also continued its recovery after seeing lower production levels in the previous year due to temporary government mandated idling.

 

The tables below, breakdown the contributions from continuing operations and discontinued operations for three and nine month periods on a year over year basis.

 

   

Three Months Ended January 31,

   

Increase (Decrease) to Revenue

   

2013

 

2012

   

$

%

Coal Mining

$

26,176,495

$

4,868,952

 

$

21,307,543

438%

Coal Wholesale

 

11,560,671

 

5,282,647

   

6,278,024

119%

Coal Washing

 

22,115,195

 

10,576,251

   

11,538,944

109%

Total Revenues

$

59,852,361

$

20,727,850

 

$

39,124,511

189%

 

 

   

Nine Months Ended January 31,

   

Increase (Decrease) to Revenue

   

2013

 

2012

   

$

%

Coal Mining

$

51,414,026

$

19,977,896

 

$

31,436,130

157%

Coal Wholesale

 

33,912,725

 

14,597,277

   

19,315,448

132%

Coal Washing

 

61,645,062

 

46,086,986

 

 

15,558,076

34%

Total Revenues

$