10-Q 1 llen10q1fy2014.htm 10Q llen10q1fy2014.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 JULY 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 September 9, 2013 there were 42,064,769 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 July 31, 2013 and April 30, 2013

3

 

Statements of Income and Other Comprehensive Income for the three months

 
 

ended July 31, 2013 and 2012

4

 

Statements of Cash Flows for the three months ended July 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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

31

     
     

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

33

Item 1B.

Unresolved Staff Comments

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults upon Senior Securities

44

Item 4.

Reserved

44

Item 5.

Other Information

44

Item 6.

Exhibits

44

     

Signatures

 

45

Index to Exhibits

45

 

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 JULY 31, 2013 AND APRIL 30, 2013

(Unaudited)

 

     

July 31, 2013

 

April 30, 2013

 

 

ASSETS

       

 

 

 

CURRENT ASSETS:

       

 

 

 

Cash and cash equivalents

$

9,041,400

$

9,565,084

 

 

 

Accounts receivables

 

34,793,782

 

35,431,260

 

 

 

Prepaid and other current assets

 

22,255,894

 

23,139,756

 

 

 

Other receivables, net

 

6,449,967

 

12,895,304

 

 

 

Due from related parties

 

5,320,624

 

3,434,502

 

 

 

Related party notes receivable - current

 

4,185,598

 

4,237,715

 

 

 

Inventories

 

8,153,457

 

7,154,544

 

 

 

Total current assets

 

90,200,722

 

95,858,165

 

 

           

 

 

 

Property, plant, equipment, and mine development, net

 

188,240,373

 

173,409,488

 

 

 

Construction-in-progress

 

44,825,438

 

34,679,059

 

 

 

Intangible assets, net

 

836,096

 

214,883

 

 

 

Goodwill

 

2,772,307

 

2,753,439

 

 

 

Other assets

 

3,000,000

 

3,094,830

 

 

 

Deferred finance fee

 

123,731

 

146,072

 

 

 

Long term receivable, net

 

12,441,007

 

12,441,007

 

 

 

Total non-current assets

 

252,238,952

 

226,738,778

 

 

     

 

 

 

 

 

TOTAL ASSETS

$

342,439,674

$

322,596,943

 

 

           

 

 

LIABILITIES AND EQUITY

       

 

 

CURRENT LIABILITIES:

       

 

 

 

Accounts payable

$

3,479,068

$

3,794,840

 

 

 

Accrued expenses and other current liabilities

 

1,182,254

 

1,011,100

 

 

 

Other payables

 

21,455,016

 

21,373,835

 

 

 

Related party payables - current

 

8,141,475

 

6,808,798

 

 

 

Due to officers

 

2,214,432

 

1,304,431

 

 

 

Tax payable

 

19,703,878

 

17,792,612

 

 

 

Customer deposits

 

766,208

 

745,200

 

 

 

Bank loans

 

4,999,985

 

4,999,985

 

 

Total current liabilities

 

61,942,316

 

57,830,801

 

 

           

 

 

LONG-TERM LIABILITIES

       

 

 

 

Convertible note payable, net

 

710,415

 

543,367

 

 

 

Derivative liabilities

 

4,145,788

 

4,594,912

 

 

 

Asset retirement obligations

 

3,712,351

 

3,616,643

 

 

 

Total long-term liabilities

 

8,568,554

 

8,754,922

 

 

           

 

 

 

Total Liabilities

 

70,510,870

 

66,585,723

 

 

           

 

 

 

Commitments and contingencies

       

 

 

           

 

 

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: 38,549,283 and 38,385,050 shares issued and outstanding at July 31, 2013 and April 30, 2013 respectively)

 

38,549

 

38,385

 

 

 

Additional paid-in capital

 

70,211,536

 

69,588,550

 

 

 

Accumulated other comprehensive income

 

11,390,294

 

9,814,087

 

 

 

Retained Earnings

 

145,222,793

 

134,487,028

 

 

 

Treasury stock (286,595 shares and 286,595 shares at July 31, 2013 and April 30, 2013 respectively, including shared held by subsidiary)

 

(68,035)

 

(68,035)

 

 

Total L & L Energy stockholders' equity

 

226,795,137

 

213,860,015

 

 

 

Non-controlling interest

 

45,133,667

 

42,151,205

 

 

 

Total equity

 

271,928,804

 

256,011,220

 

 

TOTAL LIABILITIES AND EQUITY

$

342,439,674

$

322,596,943

 

 

           

 

 

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 MONTHS ENDED JULY 31,

(Unaudited)

         
         
   

2013

 

2012

NET REVENUES

$

51,181,370

$

39,448,098

COST OF REVENUES

 

32,126,563

 

29,548,014

GROSS PROFIT

 

19,054,807

 

9,900,084

         

OPERATING COSTS AND EXPENSES:

       

Salaries & wages-selling, general and administrative

 

1,163,294

 

1,037,713

Selling, general and administrative expenses, excluding salaries and wages

 

3,224,985

 

2,597,956

Total operating expenses

 

4,388,279

 

3,635,669

         

INCOME FROM OPERATIONS

 

14,666,528

 

6,264,415

OTHER INCOME (EXPENSE):

       

Interest income

 

5,132

 

107,266

Other income(expense), net

 

(1,336)

 

328,228

Derivative gain

 

449,124

 

-

Total other income

 

452,920

 

435,494

         

INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES

 

15,119,448

 

6,699,909

PROVISION FOR INCOME TAXES

 

1,692,451

 

692,440

INCOME FROM CONTINUING OPERATIONS

 

13,426,997

 

6,007,469

         

Income attributable to non-controlling interests

 

2,691,232

 

1,377,363

Income attributable to L & L

 

10,735,765

 

4,630,106

         

DISCONTINUED OPERATIONS, NET OF TAX

       

Net income from discontinued operations attributable to non-controlling interests

 

-

 

968,162

Net income from discontinued operations attributable to L & L

 

-

 

1,556,365

TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

 

-

 

2,524,527

         

NET INCOME

$

13,426,997

$

8,531,996

         

Net income attributable to non-controlling interests

$

2,691,232

$

2,345,525

Net income attributable to L & L

 

10,735,765

 

6,186,471

         

OTHER COMPREHENSIVE INCOME:

       

Foreign currency translation gain (loss)

 

1,867,437

 

(1,346,509)

COMPREHENSIVE INCOME

$

15,294,434

$

7,185,487

         

Comprehensive income attributable to non-controlling interests

$

2,982,462

$

2,094,286

Comprehensive income attributable to L & L

 

12,311,972

 

5,091,201

         
         

INCOME PER COMMON SHARE – basic from continuing operations

$

0.28

$

0.13

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

$

-

$

0.04

INCOME PER COMMON SHARE – basic

$

0.28

$

0.17

         

INCOME PER COMMON SHARE – diluted from continuing operations

$

0.27

$

0.13

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

$

-

$

0.04

INCOME PER COMMON SHARE – diluted

$

0.27

$

0.17

         

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – basic

 

37,846,470

 

36,839,324

         

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - diluted

 

40,138,137

 

36,839,324

         
         

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

4


 
 

 

L & L ENERGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 31,

(UNAUDITED)

     
     

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income

$

13,426,997

$

8,531,996

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

     
 

Depreciation and amortization

 

1,912,951

 

1,582,219

 

Stock compensation

 

623,150

 

566,111

 

Accretion of asset retirement obligation

 

95,708

 

27,714

Changes in assets and liabilities, net of businesses acquisitions:

       
 

Accounts receivable

 

637,478

 

(2,240,633)

 

Prepaid and other current assets

 

250,845

 

(5,116,801)

 

Inventories

 

(998,913)

 

(1,525,259)

 

Other receivable

 

4,611,332

 

1,277,909

 

Accounts payable and other payable

 

1,296,412

 

2,989,804

 

Customer deposit

 

21,008

 

(936,538)

 

Accrued and other liabilities

 

(110,922)

 

(225)

 

Taxes payable

 

1,911,266

 

668,942

Net cash provided by operating activities

 

23,677,312

 

5,825,239

           

CASH FLOWS FROM INVESTING ACTIVITIES:

       
 

Acquisition of property and equipment

 

(668,967)

 

(98,629)

 

Construction-in-progress

 

(24,994,276)

 

(5,661,986)

 

Proceeds from repayment of long term receivable

 

-

 

1,563,621

Net cash used in investing activities

 

(25,663,243)

 

(4,196,994)

           

CASH FLOWS FROM FINANCING ACTIVITIES:

       
 

Due to officers

 

910,001

 

6,666

Net cash provided by (used in) financing activities

 

910,001

 

6,666

           
           

Effect of exchange rate changes on cash and cash equivalents

 

552,246

 

1,015,359

           

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(523,684)

 

2,650,270

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

9,565,084

 

4,040,020

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

9,041,400

$

6,690,290

           

SUPPLEMENTAL INFORMATION

       

INTEREST PAID

$

405,677

$

80,862

INCOME TAX PAID

$

65,924

$

580,334

           
           

NON-CASH INVESTING AND FINANCING ACTIVITIES:

       

Payable to DaPing shareholders

$

-

$

15,388,508

           
           

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 July31, 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.

 

 

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, 2013 as filed with the Securities and Exchange Commission (“SEC”) on July 30, 2013.

 

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 TaiFung, 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.

 

Reclassification

 

Certain reclassifications have been made to current period consolidated financial statements and footnote to conform to the current period consolidated financial statement and footnote presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

New Accounting Pronouncements

 

In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) and the London Interbank Offered Rate (LIBOR) swap rate are considered as  Benchmark Interest Rate for Hedge Accounting Purposes.  Section 815-20-25-6, hedges involving the benchmark interest rate are addressed in paragraph 815-20-25-12(f) for fair value hedges) and paragraph 815-20-25-15(j) for cash flow hedges.  This amendment is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The Company adopted this guidance effective July 17, 2013 and we do not expect the implementation will have a material impact on our consolidated financial statements.

6


 
 

NOTE 3. BUSINESS COMBINATIONS

 

Acquisitions

 

For the period ended July 31, 2013 and April 30, 2013, the Company acquired two businesses in the mining industry.  The Company has been actively acquiring smaller coal companies who lack the capital and/or management expertise to maximize growth and safety. The Company will continue to seek opportunities to purchase other mining operations as well as coal washing and coal coking operations. The Company expects to realize operating synergies from each of the transactions, or the acquired operation has created, or will create, opportunities for the acquired entity to sell its services to our customers. Both of these factors resulted in a purchase price that contributed to the recognition of goodwill. The acquisitions are summarized as follows:

 

Business Acquired

Date of Closing

 

Net Assets Acquired (in million)

Form of Consideration

LaShu Coal Mine

November 18, 2012

$

15

Cash/Property

LuoZhou Coal Mine

November 18, 2012

$

22

Cash/Property

 

Each of the acquired businesses has been included in our results of operations since the date of closing. Accordingly, the operating results for the periods presented are not entirely comparable due to these acquisitions and related costs. In each acquisition, the excess of the purchase price over the fair value of the net identifiable assets acquired has been allocated to goodwill.

 

Purchase Price Allocations

 

The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the respective dates of acquisition for the above referenced transactions (in millions).

 

Category

 

LaShu

LuoZhou

Current assets

$

3.0

2.0

Property and equipment

 

6.2

8.4

Mining right  

 

6.9

11.5

Goodwill

 

0.4

1.4

Total assets acquired

 

16.5

23.3

Less liabilities assumed

 

(1.8)

(1.0)

Net assets acquired

$

14.7

22.3

Non-controlling interest

$

0.6

1.0

A brief description of each acquisition is as follows:

7


 
 
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 RMB $233.3 million (equivalent to US$37.1 million). The purchase price for 95% of the ownership interest in LuoZhou was about RMB $140.5 million (equivalent to US$22.3 million)and the purchase price for 95% of the ownership interest in LaShu Coal Mine was about RMB $92.9 million (equivalent to US$14.8 million), both of these two mines (LuoZhou and LaShu) will be paid together by a cash outlay of approximately US $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.

 

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 RMB $41,000,000 (equivalent to approximately US$6,000,000).  Guangxi Liuzhou Lifu Machinery Co, Ltd assumed the obligation of the Company to pay to HSC RMB $23,800,000 (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 RMB $17,200,000(equivalent to approximately US$2,514,700) to the Company in three installments, (1) RMB $3,440,000 (approximately US$502,940) within six months of the sale, (2) RMB $5,160,000 (approximately US$754,410) between six months and twelve months after the sale, and (3) RMB $8,600,000 (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 July 31, 2013, outstanding receivable from the sale of HSC was US$548,555, which is expected to be received before April 30, 2014.

8


 
 

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 US $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 July 31, 2013, the Company received total payment of $2,077,063  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).

 

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 LuoZhou 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. The Company has no continuing involvement in the disposed business.

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 Company has no continuing involvement in the disposed business.

Total Discontinued Operations

The operating results of the discontinued operations in total are summarized below:

   

July 31, 2013

 

July 31, 2012

Net sales

$

-

$

-

Income before income taxes

 

-

 

-

Income tax provision

 

-

 

-

TOTAL INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

$

-

$

2,524,527

         

Net income from discontinued operations attributable to non-controlling interests

$

-

$

968,162

Net income from discontinued operations attributable to L & L

$

-

$

1,556,365

 

9


 
 

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.

 

Prepaid expenses and other current assets consisted of the following:

 

Description

 

July 31, 2013

 

April 30, 2013

Advances to suppliers

$

21,179,340

$

22,128,001

Advances to employees

 

489,000

 

515,867

Other

 

587,554

 

495,888

Total

$

22,255,894

$

23,139,756

 

 

NOTE 5. OTHER RECEIVABLES

 

Other receivables consisted of the following:

 

Description

 

July 31, 2013

 

April 30, 2013

Short term loans to business associates

$

-

$

3,646,838

PYC receivable-current (note 3)

 

5,176,530

 

7,094,403

HSC receivable - current (note 3)

 

548,555

 

750,703

Other

 

724,882

 

1,403,360

Total

$

6,449,967

$

12,895,304

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 US $31,200,000on 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 July 31, 2013, the receivable related to the disposal of the Ping Yi Mine, net of discount of $17,617,537 with a current portion of $5,176,530.

10


 
 

NOTE 6.INVENTORIES

 

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

 

Description

 

July 31, 2013

 

April 30, 2013

Raw Coal

$

1,743,468

$

2,115,833

Fine Coal

 

4,997,944

 

4,010,302

Other (Raw materials, low value consumable)

 

1,412,045

 

1,028,409

Total

$

8,153,457

$

7,154,544

 

 

NOTE 7. PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

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

 

Description

 

July 31, 2013

 

April 30, 2013

Mine development

$

130,193,613

$

115,014,678

Mineral rights

 

43,969,494

 

43,677,912

Building and improvements

 

6,461,271

 

6,119,213

Machinery and equipment

 

25,407,918

 

24,232,999

Assets retirement cost, net

 

3,084,182

 

3,077,883

Property, Plant and Equipment, total

 

209,116,478

 

192,122,685

Accumulated depreciation and amortization

 

(20,876,105)

 

(18,713,197)

Property, Plant and Equipment, net

$

188,240,373

$

173,409,488

 

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 depreciation method used is based on two types of assets:

a. For fixed assets related to production, we use unit of production method

b. For all other assets, we use straight line method

 

Depreciation and amortization expense was $1,912,951 and $1,582,219 for the three months ended July 31, 2013 and July 31, 2012, respectively.

11


 
 
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 $44,825,438 and $34,679,059 as of July 31, 2013 and April 30, 2013, respectively.

 

 

NOTE9.  INTANGIBLE ASSETS

 

Intangible assets consist of customer relationship and technology assets are being amortized over a period of 7 years.  Amortization expense for these assets was $13,727 and $8,008 for the three months ended July 31, 2013 and 2012, respectively. 

 

Intangible assets consisted of the following:

 

Description

 

July 31, 2013

 

April 30, 2013

Technology

$

75,241

$

74,732

Land Right

 

794,271

 

160,165

Customer Relationship

 

48,128

 

47,803

Intangible assets, total

 

917,640

 

282,700

Accumulated amortization

 

(81,544)

 

(67,817)

Intangible assets, net

$

836,096

$

214,883

 

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 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

 

48

Fiscal 2018

 

69

Total

$

221

 

 

NOTE 10.OTHER ASSETS

 

Other assets represent the long-term restricted cash totaling amount of $3,000,000 in bank deposits required to be held as collateral for a convertible note payable (see note 17).

 

 

12


 
 

NOTE 11.  LONG TERM RECEIVABLE

 

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 July31, 2013, the total due is of $17,617,537, net of a present value discount of $3,183,786. The current portion of this balance is $5,176,530 which is included in other receivables on the accompanying Consolidated Balance Sheets.

 

 

NOTE 12.  RELATED PARTY TRANSACTIONS

 

Related Party Notes Receivable

 

The Company loaned money to various entities that have non-controlling interest with the Company.

 

In here, we define “Control” interest as effective management control of the business entity or minimum 50% ownership.  “Non-controlling interest”, sometimes refers to minority equity interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.

 

The associates normally refer to business partners such as suppliers, customers, or people or party associated with our business entity.  For the purpose of this disclosure, there is no distinction between having “non-controlling interests with the Company” and “the Company having an interest in that third party”.

 

Related party transactions consist of due from related party, related party note receivables, related party payables, and due to officers.

 

Due from related party consisted of the following balances at July 31, 2013 and April 30, 2013:

 

Borrowers

 

July 31, 2013

April 30, 2013

ShiZong HengTai

$

4,982,659

3,156,580

Kunming Kenandi Technology Development Co., Ltd

 

337,965

277,922

Total

$

5,320,624

3,434,502

 

Related party notes receivables consists of the following balances at July 31, 2013 and April 30, 2013:

 

Borrowers

 

July 31, 2013

April 30, 2013

Maturity

Collateralized by

Associates to SuTsong

$

2,915,675

2,895,990

Various dates

Mine Assets

Associates to DuPuAn

 

988,972

982,295

Various dates

Mine Assets

Associates to TaiFong

 

280,951

359,430

Various dates

Mine Assets

Total related party notes receivable (current)

$

4,185,598

4,237,715

   

 

Related Party Payable

 

Related party payable consisted of the following:

 

Description

 

July 31, 2013

 

April 30, 2013

Payable to previous owners of DaPing Coal Mine

$

-

$

507,973

Payable to Robert Lee

 

1,647,933

 

1,647,933

ShiZong Heng Tai

 

-

 

1,000,886

Kunming Kemandi Technology Development Co.

 

-

 

111,899

Payable to Union Energy (non-controlling interest holder of LuoZhou, LaShu and Weishe Mines)

 

6,493,542

 

3,540,107

Total Payable - Related Parties (current)

$

8,141,475

$

6,808,798

 

The payable to Union Energy (non-controlling interest holder of WeiShe, LuoZhou and LaShu mines), is not collateralized by any assets of the Company.

 

Due to Officers and Directors

 

Due to officers consisted of the following:

 

Due to officer

 

July 31, 2013

 

April 30, 2013

Dickson Lee

$

2,149,641

$

1,179,640

Clayton Fong

 

64,791

 

64,791

Shirley Kiang*

 

-

 

60,000

Total due to officers/directors

$

2,214,432

$

1,304,431

         

*No longer a director as of September 1, 2012

   

13


 
 
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 relocated 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 of LaShu and LuoZhou mines were 29.06% and 27.01%, respectively.

 

During the quarter ended July 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 July 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 July 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 July 31, 2013 and the year ended April 30, 2013.

 

Description

 

July 31, 2013

 

April 30, 2013

Beginning balance

$

3,616,643

$

2,459,352

Liabilities incurred during the period

 

-

 

1,619,386

Liabilities settle during the period

 

-

 

(686,519)

Accretion of interest

 

95,708

 

224,424

Ending balance

$

3,712,351

$

3,616,643

14


 
 

NOTE 14.  OTHER PAYABLES

 

Other payables consisted of the following:

 

 

Description

 

July 31, 2013

 

April 30, 2013*

Payable to business partners

$

3,085,947

$

3,578,082

Resource surcharge payable of WeiShe Coal Mine

 

13,578,688

 

13,487,011

Payable to business associates

 

4,790,381

 

4,308,742

Total other payable

$

21,455,016

$

21,373,835

 

None of these payables are collateralized by any assets of the Company.

 

*Reclassification

 

 

NOTE 15.  TAX PAYABLES

 

Taxes payable consisted of the following:

 

 

Description

 

July 31, 2013

 

April 30, 2013

VAT Payable

$

5,410,560

$

5,258,999

Income Tax Payable (1)

 

10,460,331

 

9,176,652

Other Taxes Payable (2)

 

3,832,987

 

3,356,961

Total Tax Payable

$

19,703,878

$

17,792,612

         

(1) For China

       

(2) Other Taxes Payables mainly include resources tax payable and business tax payable in China

 

 

NOTE 16.  BANK LOANS

 

On March 19, 2013, the Company entered a Business Loan Agreement with East West Bank of California, USA for a principal amount of $2,500,000, net of a bank fee of $15, at fixed rate of 1.545%. This is revolving line of credit loan to the Company for $2.5 million due on March 18, 2014. The collateral for the amount is a CD of $2,500,000 deposited with the lender. Mr. Dickson V. Lee, Chairman and CEO of the company, act as guarantor to the loan.

 

On March 22, 2013, the Company entered into a Business Loan Agreement with China Development Industrial Bank in Taiwan for a principal amount of $2,500,000 as revolving line of credit loan. The interest rate is adjusted every three month with the fixed rate determined by USD Libor rate plus 1.75% as shown in Reuters data source based in London at the beginning of every period. The loan expires in two years. The collateral for the amount is a CD of $2,500,000 deposited with the lender. There is no guarantor to this loan.

 

 

15


 
 

 

NOTE 17.  CONVERTIBLE DEBT

 

On December 10, 2012 (“Closing Date”), the Company issued a Senior Secured Convertible Note (the “Convertible Note”) and warrants (“Investor Warrants”) to Phoenician Limited (“Phoenician”), a Hong Kong company for $3,000,000. The number of warrants shares issued was 289,816 which equal to 15% of the number of common shares issuable under the Convertible Note. The Convertible Note carries an interest rate of 12% and matures in 24 months from the Closing Date.

 

The Convertible Note can be converted into common shares of the Company at a conversion price $1.55 which is 80% of the 10 days volume weighted average price on Closing date.

 

The Investor Warrants has exercise price of $1.94 which represents the 10 days volume weighted average price of the Company stock at the Closing date and expire three years from the date of issuance.

 

Both the Convertible Note and Investor Warrants contain a price protection feature. If the Company, at any time or from time to time while the Convertible Note and Investor Warrants are outstanding, raises capital at a price per share that is less than the current conversion price or strike price, then the current conversion price or strike price will be adjusted downward. The Company determined the embedded conversion feature for the Convertible Note and the Investor Warrants to be a derivative liability in accordance with ASC Topic 815, Derivatives and Hedging and estimated the fair value of the derivative using Lattice Model as of December 10, 2012. Such estimates are revalued at each balance sheet date, with changes in value recorded as unrealized gains or losses in non-operating income (expense) in the Company's consolidated statements of comprehensive income.

 

On December 10, 2012, the Company recorded a derivative liability of $2,643,191 for the embedded conversion feature of the Convertible Note which was valued at $2,355,390 and the Investor Warrants which was valued at $287,801 and offset to an unamortized debt discount totaled $2,643,191. The debt discount will be amortized using effective interest method over 24 months. As of July 31, 2013, the Company amortized debt discount $167,048 as interest expense in the consolidated statements of comprehensive income.

 

Pursuant to the Convertible Note, the Company agreed to establish an account with an agent designated by Phoenician and fund the account with payments from the note receivable from Bowie Resources LLC as collateral. (See Note 10) In addition, the Company agreed to file a registration statement to cover 100% of the common stock underlying the Investor Warrants to ensure Phoenician will have freely trading shares six months after shares issuance under the 144 Rule. The Company agreed to pay the one percent in common stock of the face amount of the Investor Warrants for every thirty day period, or portion thereof not declared effective within one hindered eighty days of closing, subject to a maximum of six percent if the Company shares cannot be freely traded after six months of shares issuance under the 144 Rule.

 

As of July 31, 2013, none of the Investor Warrant shares have been exercised and therefore no common shares have been issued under the 144 Rule.

 

In connection with the Convertible Note, the Company recorded $180,000 loan origination fee as deferred loan cost and amortized over 24 months using the effective interest method. In addition, the Company prepaid six months interest totaled $180,000 and recorded as prepaid interest. As of July 31, 2013, the Company amortized loan cost of $22,341 as interest expense.

 

During the quarter ended July 31, 2013, the fair value of the derivative instruments liability decreased by $449,124. This was recorded as unrealized gain on fair value of derivative instruments as non-cash expense in the accompanying consolidated statements of comprehensive income.

 

Activity for derivative instruments liability during the quarter ended July 31, 2013 was as follows:

 

   

April 30, 2013

 

Activity During quarter

 

Increase (Decrease) in Fair Value of Derivative Liability

 

July 31, 2013

Derivative instruments

$

4,594,912

$

0

$

(449,124)

$

4,145,788

 

The following is a summary of the assumptions used in the Lattice model of the derivative instruments issued during the quarter ended July 31, 2013 and the year ended April 30, 2013:

 

 

   

July 31, 2013

 

April 30, 2013

Common stock issuable upon exercise of warrants and conversion of notes

$

2,221,926

$

2,221,926

Market value of common stock on measurement date

 

3.13

 

2.07

Risk free interest rate

 

0.24-0.33%

 

0.24-0.33%

Warrant and convertibles lives in years

 

2-3

 

2-3

Expected volatility (3)

 

65-72%

 

68-72%

Expected dividend yields (4)

 

0%

 

0%

16


 
 

NOTE 18.  INCOME TAXES

 

Our effective tax rates were approximately 11% and 10% for the three months ended July31, 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.

 

 

NOTE 19.  STOCKHOLDERS’ EQUITY

 

Stock Issued for Compensation:

 

For the three months ended July 31, 2013, the Company issued 20,000 shares of common stock to officer with the share value of $72,800.

 

For the three months ended July 31, 2013, the Company issued 125,638 shares of common stock to employees with the share value of $478,450.

 

For the three months ended July 31, 2013, the Company issued 6,000 shares of common stock to advisor with the share value of $21,900.

 

Stock Issued for Donation:

 

For the three months ended July 31, 2013, the Company issued 12,595 shares of common stock with the share value of $50,000 to non-profit organization.

 

Treasury Stock:

 

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

 

 

NOTE 20.  WARRANTS

 

Warrants Issued for Compensation

 

During the three months ended July 31, 2013, the Company has no warrant issued or exercised for compensation.

 

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 warrants outstanding as of July 31, 2013:

 

 

 

July 31, 2013

Expected life (years)

 

5.0

Risk-free interest rate

 

3.34%

Expected volatility

 

65.01%

Expected dividend yield

 

0%

 

17


 
 

 

(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.

 

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

 

Type of Warrants

 

Range of Exercise Price

Total Warrants Outstanding

Weighted Average Remaining Life (Years)

 

Weighted Average Exercise Price

Directors - Class E

$

3.00

185,916

1.49

$

3.00

Non-employee

$

2.25 - 9.51

12,000

0.87

$

3.43

Total

   

197,916

1.45

$

3.03

               

 

Warrants Issued to Investors

 

During the first quarter ended July 31, 2013, the company has no warrant exercised to investors.

 

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

 

Warrants Roll-forward Summary

 

Units

Weighted Average Exercise Price

Weighted Average Remaining Life (in Years)

Outstanding at April 30, 2013

1,208,286

$3.77

2.02

Issued

-

-

-

Exercised

-

-

-

Expired

-

-

-

Outstanding at July 31, 2013

1,208,286

$3.77

1.78

Exercisable at July 31, 2013

1,208,286

$3.77

1.78

 

 

NOTE 21.  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 (2coal mining 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 July31, 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.

 

Below is a schedule of changes in ownerships interest as of July31, 2013 and April 30, 2013:

 

   

July 31, 2013

 

April 30, 2013

Beginning balance

$

42,151,205

$

43,431,399

Non-controlling interest related to acquisitions

 

-

 

1,598,799

Translation

 

291,230

 

418,542

Net income related to non-controlling interest

 

2,691,232

 

10,800,403

Non-controlling interest related to disposal

 

-

 

(14,097,938)

Ending balance

$

45,133,667

$

42,151,205

18


 
 

NOTE 22.  EARNINGS PER SHARE

 

The Company only had common shares, warrants and stock options issued and outstanding as of July 31, 2013.  Under the treasury stock method of earnings per share, the Company computed the diluted earnings per share as if all issued warrants, options and convertible debt 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 of the first quarter of fiscal year of 2014.

 

   

For the Three Months Ended July 31 

   

2013

2012

EPS numerator:

     

Net income from continuing operations, net of income taxes

$

13,426,997

6,007,469

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

 

2,691,232

1,377,363

Income from continuing operations attributable to common stockholders

 

10,735,765

4,630,106

(Loss) income from discontinued operations attributable to common stockholders, net of income taxes

 

-

1,556,365

Net income attributable to common stockholders

$

10,735,765

6,186,471

EPS denominator:

     

Weighted average shares outstanding — basic

 

37,846,470

36,839,324

Effect of dilutive shares

 

2,291,667

-

Weighted average shares outstanding — diluted

 

40,138,137

36,839,324

Basic EPS attributable to common stockholders:

     

Income from continuing operations

 

0.28

0.13

(Loss) income from discontinued operations

 

-

0.04

Net income attributable to common stockholders

$

0.28

0.17

Diluted EPS attributable to common stockholders:

     

Income from continuing operations

 

0.27

0.13

(Loss) income from discontinued operations

 

-

0.04

Net income attributable to common stockholders

$

0.27

0.17

 

 

 

NOTE 23.  COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

The Company held operating lease in the Seattle office, Beijing office, Guizhou office and Taiwan office. The leases of Seattle office and Beijing office expire in September 2013 and December 2014.  The leases of Guizhou office and Taiwan office both expire in February 2014. 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 $265,983 and $383,119respectively.

19


 
 

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.

 

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 was submitted on April 12, 2013.  The plaintiff filed response on June 19, 2013 and the Company did file its response to the plaintiff’s response on July 19, 2013.  Proceedings in the Derivative Suits continued to be stayed.

 

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

 

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 July 31, 2013, the Company has not accrued any liability in connection with potential losses from legal proceedings.

 

20


 
 

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 three months ended July 31, 2013, we had two major customers who purchased 13% of the Company’s total sales, and represented $14,891,085of accounts receivable balance in total as of July 31, 2013. In addition, we had one major supplier who provided 20% of our total purchases, and the relevant account payable had been paid off as of July 31, 2013.

 

 

NOTE 24.  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.

 

During the three months ended July 31, 2013, the Company has no stock option issued or exercised for compensation.

 

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 July 31, 2013:

 

 

July 31, 2013

Dividend yield

-

Risk-free interest rate

3.34%

Expected volatility

65.01%

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 July 31, 2013:

Type of Options

Exercise Prices

Total Options Outstanding

Weighted Average Remaining Life (Years)

Weighted Average Exercise Price

Director

$7.65

40,000

2.59

$7.60

Director

$2.00

240,000

4.09

$2.00

   

280,000

3.88

$2.81

As of July 31, 2013, 259,999 of 280,000 stock options outstanding for compensation were exercisable.

The following table is a summary of stock option activity under the Stock Incentive Plan as of July 31, 2013:

 

Incentive Stock Options

Weighted Average Exercise Price Per Shares

Weighted Average Remaining Life (Years)

Outstanding at April 30, 2013

280,000

$2.81

4.13

Granted

-

-

-

Exercised

-

-

-

Outstanding at July 31, 2013

280,000

$2.81

3.88

21


 
 
NOTE 25.  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 July 31,

Total Revenues (including intersegment sales)

 

2013

 

2012

Coal mining revenue

$

25,042,136

$

11,486,365

Coal wholesale revenue

 

12,953,131

 

12,294,981

Coal washing revenue

 

13,242,175

 

17,833,828

 

$

51,237,442

$

41,615,174

         

Total Discontinued Operation Revenues

       

Coal mining revenue

$

-

$

4,136,890

Coal coking revenue

 

-

 

1,720,948

 

$

-

$

5,857,838

         

Total Revenue

$

51,237,442

$

47,473,012

         

Intersegment revenues

 

2013

 

2012

Coal mining revenue

$

-

$

76,401

Coal washing revenue

 

56,071

 

2,090,675

 

$

56,071

$

2,167,076

         

Total Intersegment Revenue

$

56,071

$

2,167,076

         

Net Revenues

 

2013

 

2012

Coal mining revenue

$

25,042,136

$

11,486,365

Coal wholesale revenue

 

12,953,131

 

12,294,981

Coal washing revenue

 

13,242,175

 

17,833,828

Less intersegment revenues

 

(56,072)

 

(2,167,076)

 

$

51,181,370

$

39,448,098

         

Discontinued operations:

       

Coal mining revenue

$

-

$

4,136,890

Coal coking revenue

 

-

 

1,720,948

 

$

-

$

5,857,838

         

Total net revenue

$

51,181,370

$

45,305,936

         

Net income attributable to L&L

 

2013

 

2012

Coal mining

$

11,105,937

$

4,223,014

Coal wholesale

 

536,291

 

403,649

Coal washing

 

746,864

 

1,701,577

Parent Company

 

(1,653,327)

 

(1,698,135)

 

$

10,735,765

$

4,630,105

         

Discontinued operations:

       

Coal mining revenue

$

-

$

1,448,955

Coal coking revenue

 

-

 

107,411

Parent Company

 

-

 

-

 

$

-

$

1,556,366

         

Net income attributable to L&L

$

10,735,765

$

6,186,471

         

Depreciation expense

 

2013

 

2012

Coal mining

$

1,666,761

$

1,016,281

Coal wholesale

 

7,327

 

11,814

Coal washing

 

152,020

 

142,733

Parent Company

 

46,207

 

72,947

 

$

1,872,315

$

1,243,775

         
         

Discontinued operations:

 

2013

 

2012

Coal mining

$

-

$

36,633

Parent Company

 

-

 

88,798

 

$

-

$

125,431

         

Total depreciation expense

$

1,872,315

$

1,369,206

         
         
   

July 31, 2013

 

April 30, 2013

Coal mining

$

249,280,719

$

228,397,266

Coal wholesale

 

23,536,931

 

21,032,874

Coal washing

 

39,131,628

 

39,056,343

Parent Company (intercompany)

 

30,490,396

 

34,110,460

Total assets

$

342,439,674

$

322,596,943


 

22

 

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 July31, 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, State Owned Enterprises (SOE) and private companies 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.

 

23


 
 

Macroeconomic Factors

 

There were several relevant macro-economic factors directly impacting our operating environment in China during fiscal year 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 2.7% at the end of the Company’s first quarter ended July 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.  Prices over the fall and winter rose modestly.  During the summer of 2013, prices have adjusted downward as typically happens for the season.

  

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 fiscal year 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. 

24


 
 

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. With a strong operational base established in Guizhou and Yunnan, L&L's Board has decided to also target larger coal operations in the Shanxi and Inner Mongolia Provinces located in North China. Having already undergone a consolidation, the remaining mines in Shanxi and Inner Mongolia have larger production capacities and safer operating histories. L&L will be targeting mines with over one million tons of annual capacity. As part of our growth strategy to upgrade our portfolio, from time to time the Company may decide to spin off or dispose smaller assets that management and the Board of Directors determine not be in the best interest of LLEN shareholders in the long run. Additional plans for expanding our coal businesses includes expanding our coal wholesale operations in South China, pursuing strategic partnerships, exploring viable options for raising capital with an emphasis on debt and other non-dilutive instruments, and strengthening our professional team.

 

Organic Growth

 

All five  of our mines are producing at full capacity. We had a strong quarter of 228,000 tons of coal production. 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.

 

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.

25


 
 

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. SydPeng 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 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.

 

With a strong operational base established in Guizhou and Yunnan, L&L's Board has decided to also target larger coal operations in the Shanxi and Inner Mongolia Provinces located in North China. Having already undergone a consolidation, the remaining mines in Shanxi and Inner Mongolia have larger production capacities and safer operating histories. L&L will be targeting mines with over one million tons of annual capacity. As part of our growth strategy, from time to time the Company may decide to spin off or dispose smaller assets that management and the Board of Directors determine not be in the best interest of LLEN shareholders in the long run.

 

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.

26


 
 

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.  And through its sourcing of coal, it introduces potential mine acquisitions to the Company in a similar manner as KMC. DaXing is actively pursuing additional joint sales agreements with strategic partners to further 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, a former senior White House staffer.. 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 First Quarter Fiscal Year of 2014 Results

 

The coal sold by our mines was 219,000 tons, an increase of 62 from 135,000 tons same period last year. This was primarily due to the organic expansion of our existing operations and the acquisitions of new mines. Our net earnings attributable to L&L shareholders were $10.7 million, up 73 from first quarter $6.2 million of fiscal year 2013. Earnings per diluted share was $0.27 for the first quarter of fiscal year 2014, up 59% compare to $0.17 per diluted share of the first quarter of fiscal year 2013.

 

Our overall revenue, gross profit and Net income Attributable to L&L had increased to $51.2, $19.1, and $10.7 million respectively for the first quarter of fiscal year 2014 compared to $39.4, $9.9 and $6.2 million respectively for the same period in 2012. 

 

Results of Operations

 

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

 

 

Three Months Ended July 31,

 

2013

 

2012

 

Amount

% of Revenue

 

Amount

% of Revenue

Revenues

$51,181,370

100.00%

 

$39,448,098

100.00%

Cost of revenue

32,126,563

62.77%

 

29,548,014

74.90%

Gross profit

19,054,807

37.23%

 

9,900,084

25.10%

Selling general & administrative

4,388,279

8.57%

 

3,635,669

9.22%

Interest income

5,132

0.01%

 

107,266

0.27%

Other income (expense)

(1,336)

0.00%

 

328,228

0.83%

Derivative gain

449,124

0.88%

 

-

0.00%

Provision for income taxes

1,692,451

3.31%

 

692,440

1.76%

Income from Discontinued Operations, Net of Tax

-

0.00%

 

1,556,365

3.95%

Net Income Attributable to Non-controlling interest

2,691,232

5.26%

 

2,345,525

5.95%

Net income Attributable to L&L

$10,735,765

20.98%

 

$6,186,471

15.68%

27


 
 

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 (ExcludingDaPing Coal Mine and Zonelin Coking Plant)

 

On November 18, 2012, the Company finalized the acquisition of theLuoZhou 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 LaShuwere 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.

 

For continued operations, in this quarter, our net revenue increased to $51.2 million during the three months ended July 31, 2013 from $39.4 million during the three months ended July 31, 2012, representing approximately a 29% increase year over year. The increase was primarily due to 79,490tons increase incoal 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 provide the breakdown the contributions from continuing operations and discontinued operations for three month periods on a year over year basis.

 

   

Three Months Ended July 31,

 

Increase (Decrease) to Revenue

   

2013

 

2012

 

$

%

Coal Mining

$

25,042,136

$

11,486,365

$

13,555,771

118%

Coal Wholesale

 

12,953,131

 

12,294,981

 

658,150

5%

Coal Washing

 

13,242,175

 

17,833,828

 

(4,591,653)

(26%)

Total Revenues

$

51,237,442

$

41,615,174

$

9,622,268

23%

 

For Discontinued Operations (DaPing Coal Mine and Zonelin Coking Plant)

 

   

Three Months Ended July 31,

 

Increase (Decrease) to Revenue

   

2013

 

2012

 

$

%

Coal Mining

$

-

$

4,136,890

$

(4,136,890)

(100%)

Coal Coking

 

-

 

1,720,948

 

(1,720,948)

(100%)

Total Revenues

$

-

$

5,857,838

$

(5,857,838)

(100%)

 
Coal Mining
 
During the quarter all of our mines were operational and production was on target. For the three months ended July 31, 2013, our coal mining net revenues increased 118% to $25.0 million from $11.5 million compared to the same period in 2012. The sales increase year over year was due to the Company’s recovery from the previous year’s government mandated temporary idling and slowdowns, the acquisitions of the LaShu and LuoZhou Mine in November 2012, and organic growth of the WeiShe Mine. Coal production for the quarter increased 53% year over year from 228,000 tons during the three months ended July 31, 2012 to 148,000 tons during the three months ended July 31, 2013.

 

28


 
 

Coal Wholesale

 

Wholesale revenues increased by 5% during the three months ended July 31, 2013 to $13.0 million compared to $12.3 million in same period in 2012. The increase was represented in the overall increase in availability of coal as well as the Company’s ability to expand local market share and increasing long-term contracts with local clients and state-owned enterprises. Wholesale revenues increased due to the ramp up of wholesale activity in line with our increased sales contracts to a large end user.  We expect significant increase in wholesale with the execution of the one million ton per year Datang contract.

 

Coal Washing

 

Coal washing revenue decreased by 26% to $13.2 million during the three months ended July 31, 2013 compared with $17.8 million during the same period last year. Decrease in coal washing revenue mainly due to the idling pending on management evaluation.  

 

Gross Profit

 

Our gross profit percentage in this quarter increased to $19.1 million from $9.9 million of the same quarter last year representing a 92% increase which was mainly attributable to the increase in production and sales volume in our mining segment, revenue increase in our coal wholesaling and decrease in washing segment revenue. Coal mining has historically been the Company’s most profitable business segment. The corresponding change in product/segment mix and the reduction of fixed costs have accordingly increased the gross profit of the current period.

 

Selling general & administrative

 

Total sales, general, and administrative expense account for 8.57% of revenue, during the three months ended July 31, 2013 compared to the 9.22% the same period in 2012. This result is mostly due to our effective and sustainable management and stable operating mode.

 

Provision for income taxes

 

   

Three Months Ended July 31,

   

2013

 

2012

Net income before income taxes

$

15,119,448

$

6,699,909

Provision for income taxes

 

1,692,451

 

692,440

Effective tax rate

 

11%

 

10%

 

Our net income before tax increased 125% from $6.7 million three months ended July 31, 2012 to $15.1 million three months ended July 31, 2013, due to substantial increase of operating profit.

 

Our effective tax rate slightly increased from11% during the three months ended July 31, 2013 to10% during the three months ended July 31, 2012.

 

Net Income Attributable to Common Stockholders

 

The following table presents net income attributable to common stockholders:

 

   

Three Months Ended July 31,

 

Increase (Decrease) to Revenue

   

2013

 

2012

 

$

%

Net income

$

13,426,997

$

8,531,996

$

4,895,001

57.37%

Less: Net income attributable to non-controlling interests

 

2,691,232

 

2,345,525

 

345,707

14.74%

Net income attributable to common shareholders

$

10,735,765

$

6,186,471

$

4,549,294

73.54%

The increase of our net income from operations before non-controlling interests was due to acquisition of  two new mines and production expansion of our WeiShe mine, reducing of unit production cost  and streamlining our selling, general &administrative expenses. During the three months ended July 31, 2013, our coal mining segment coal wholesale segment and coal washing segment significantly improved our revenue performance this quarter compared to the same period last year, increasing 118%, 5% and decreasing of 26% respectively. Specifically our WeiShe Mine has ramped up production to its approved production capacity, and both LuoZhou and LaShu have ramped up their production ahead of schedule.

29


 
 

Liquidity and Capital Resources

 

The following factors affected the Company’s liquidity and capital resources:

 

Net Income was $13.4 million for the three months ended July 31, 2013 as compared with $8.5 million for the same period ended July 31, 2012. The net cash flow provided by operating activities was $23.8 million for three month ended July 31, 2013 as compared with $5.8 million for the same period in 2012. The increase of the net cash provided by operating activities was mainly caused by the decrease of other receivables by $4.6 million.

 

Net cash used in investing activities was $25.7 million during the three months ended July 31, 2013, compared to $4.2 million used in investing activities during the same period in 2012. The increase was mainly due to net effect of (i) purchase of property and equipment of $0.7 million, and (ii) increase of investment for construction- in-progress of $25.0 million. 

 

Net cash used in financing activities was $910,001 during the three months ended July 31, 2013, compared to $6,666 provided by financing activity during the same period in 2012. The increase of cash inflow was caused by the payment received from due to officers of $910,001.

 

We will need to raise additional capital to expand our operations, both to fund additional investments in capital equipment and technology to increase production and improve safety at our existing facilities and to acquire additional profit generating operations.

 

Off-Balance Sheet Arrangements:

 

The Company does not have any off-balance sheet financing arrangements.

 

Contractual Obligations

As of July 31, 2013, we were contractually obligated to inject capital per our purchase agreements as follows: 

 

   

Amount

 

Less than 1 year

 

1-2 years

 

3-5 years

 

After 5 years

DaPuAn & SuTsong Mines

$

5,027,746

$

-

$

-

$

5,027,746

$

-

Seattle Office

 

34,715

 

34,715

 

-

 

-

 

-

Beijing Office

 

248,860

 

149,316

 

99,544

 

-

 

-

Taiwan Office

 

22,070

 

22,070

           

GuiZhou Office

 

185,839

 

185,839

           

Tai Fung

 

5,119,187

 

-

 

5,119,187

 

-

 

-

Total

$

10,638,417

$

391,940

$

5,218,731

$

5,027,746

$

-

                                                                                                                                     

 

Contractual obligations

Payment due by period  

 

Total

Less than 1 year

1-2 years

2-5 years

More than 5 years

Long-term Debt Obligations

 -

 

 

 

 

Capital Lease Obligations

 

 

 

 

 

Operation Lease Obligations

491,484

391,940

99,544

 

 

Purchase Obligations

 

 

 

 

 

Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP

10,146,933 

 

5,119,187 

5,207,746 

 

Total

10,638,417

391,940 

5,218,731

5,027,746 

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any.  We have identified certain accounting policies that are significant to the preparation of our financial statements.  These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 

Our critical accounting policies are discussed in “Management's  Discussion and Analysis or Plan of Operation” in our Annual Report on Form 10-K for the year ended April 30, 2013 and Quarterly Report on Form 10-Q for the quarter ended July 31, 2013. Those critical accounting policies remained unchanged at July 31, 2013.

30


 
 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

While our reporting currency is the U.S. Dollar, most of our consolidated revenues and consolidated costs and expenses are denominated in Renminbi (“RMB”). Substantially all of our assets are denominated in RMB.  As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. Dollar and the RMB.  If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline.  We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

Despite there being at times a coal shortage due to the continued growth of the Chinese economy, which has in turn led to upward movement of coal prices, market risks do exist if the market demand situation in China changes.

 

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of January 31, 2013 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

The Company, with the assistance of our independent internal controls consultant, has for some time now proceeded to make specific changes to address the deficiencies of our internal controls. The company has continued to improve its internal controls that have materially affected our controls including those internal controls over financial reporting as follows:

 

1.         Improved the design and documentation related to multiple levels of review over financial statements included in our SEC forms 10-Q and 10-K;

2.         Expanded the design and assessment test work over the monitoring function of entity level controls;

3.         Enhanced documentation retention policies over test work related to our continuous management assessments of internal control effectiveness;

4.        Expanded documentation practices and policies related to various key controls to provide support and audit trails for both internal management assessment as well as external auditor testing; and

5.         Improved the design and documentation related to multiple levels of review over financial statements included in our quarterly SEC form 10-Q.

Since April 30, 2011, the Company has also completed the necessary improvements to our internal controls with the assistance of independent internal controls consulting firm and from comments received from our auditors while in the performance of their annual audit and reviews of our quarterly filings. Further, our internal control consultants conducted extensive internal controls testing in the following areas: equity grants and stock administration, financial reporting (including impairment testing, period end reconciliation, and financial reporting), IT general and application controls (security and access, capturing and processing information, end user computing, data backup and restoration), and each internal control tested effective.  Also the company employs a team of in-house internal control audit personnel. The Company believes that the deficiencies were remediated by the reporting period of January 31, 2013.

31


 
 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are not currently a party to any legal proceedings in material nature and we are not aware of any material pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us, other than the legal proceeding described below:

 

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 was submitted on April 12, 2013.  The plaintiff filed response on June 19, 2013 and the Company did file its response to the plaintiff’s response on July 19, 2013.  Proceedings in the Derivative Suits continued to be stayed.

 

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 July 31, 2013, the Company has not accrued any liability in connection with potential losses from legal proceedings.

 

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

 

32


 
 

Item 1A. Risk Factor

 

You should carefully consider the risks described below together with the other information set forth in this Form 10-Q, which could materially affect our business, financial condition or future results.  The risks described below are not the only risks facing our company.  The risks described below are not the only ones that we face.  Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results and financial condition.

 

Risks Relating to the Company and Our Business

 

Our business and results of operations depend on the volatile People’s Republic of China domestic coal and international markets.

 

Substantially all of our coal business is conducted in the People’s Republic of China (“PRC” or “China”), and as a result, our business and operating results depend on the domestic supply and demand for coal and coal products in China. The domestic coal markets are cyclical and have historically experienced pricing volatility, which reflects, among other factors, the conditions of the PRC and global economies and demand fluctuations in key industries that have high coal consumption, such as the power generation and steel industries. Difficult economic conditions in recent periods have resulted in lower coal prices, which in turn negatively affect our operational and financial performance. For example, after reaching record high levels in 2008, the price of domestic coal in China fell in 2009 due to weakening demand as a result of the global economic downturn. The domestic and international coal markets are affected by supply and demand. The demand for coal is primarily affected by the global economy and the performance of power generation, chemical, metallurgy and construction materials industries. The availability and prices of alternative sources of energy, such as natural gas, oil, hydropower, solar and nuclear power also affect the demand for coal. The supply of coal, on the other hand, is primarily affected by the geographical location of coal reserves, the transportation capacity of coal transportation railways, the volume of domestic and international coal supplies and the type, quality and price of competitors’ coal. A significant rise in global coal supply or a reduction in coal demand may have an adverse effect on coal prices, which in turn, may reduce our profitability and adversely affect our business and results of operations.

33


 
 

Our mining operations are inherently subject to changing conditions that could adversely affect our profitability.

 

Our coal operations are inherently subject to changing conditions that can adversely affect our levels of production and production costs for varying lengths of time and can result in decreases in profitability. We are exposed to commodity price risk related to the purchase of diesel fuel, wood, explosives and steel. In addition, weather and natural disasters (such as earthquakes, landslides, flooding, and other similar occurrences), unexpected maintenance problems, key equipment failures, fires, variations in thickness of the layer, or seam, of coal, amounts of overburden, rock and other natural materials, variations in rock and other natural materials and variations in geological conditions can be expected in the future to have, a significant impact on our operating results. Prolonged disruption of production at the mine would result in a decrease in our revenues and profitability, which could be material. Other factors affecting the production and sale of our coal and coke that could result in decreases in our profitability include:

·         sustained high pricing environment for raw materials, including, among other things, diesel fuel, explosives and steel;

·         changes in the laws and/or regulations that we are subject to, including permitting, safety, labor and environmental requirements;

·         labor shortages; and

·         changes in the coal markets and general economic conditions.

Our results of operations depend on our ability to acquire new coal mines and other coal-related businesses.

The recoverable coal reserves in mines decline as coal is extracted from them. In addition, the coal related business in China is heavily regulated by the PRC government, which, among other things, imposes limits on the amount of coal that may be extracted. As a result, our ability to significantly increase our production capacity at existing mines is limited, and our ability to increase our coal production will depend on acquiring new mines. Our existing mines are the DaPuAn, SuTsong, WeiShe, LuoZhou and LaShu coal mines as of now.

Our ability to acquire new coal mines and to expand production capacity in China and to procure related licenses and permits is subject to approval of the PRC government (including local governments.) Delays in securing or failure to secure relevant PRC government approvals, licenses or permits, as well as any adverse change in government policies, may hinder our expansion plans, which may materially and adversely affect our profitability and growth prospects. We cannot assure you that our future acquisitions, expansions, or investments will be successful. As part of our growth strategy, the Company may decide spin off or dispose smaller assets or operations that management and the Board of Directors determine not be in the best interest of LLEN shareholders in the long run.

Furthermore, we cannot assure you that we will be able to identify suitable acquisition targets or acquire these targets on competitive terms and in a timely manner. We may not be able to successfully develop new coal mines or expand our existing ones in accordance with our development plans or at all. We may also fail to acquire or develop additional coal washing facilities in the future. Failure to successfully acquire suitable targets on competitive terms, develop new coal mines or expand our existing coal mines and other coal related operations could have an adverse effect on our competitiveness and growth prospects. Further, the benefits of an acquisition may take considerable time and other resources to develop and we cannot assure investors that any particular acquisition or joint venture will produce the intended benefits. Moreover, the identification and completion of these transactions may require us to expend significant management time and effort and other resources.

34


 
 

If we fail to obtain additional financing we will be unable to execute our business plan.

 

As we continue to expand our business, we require capital infusions from the capital market. Under our current business strategy, our ability to grow will depend on the availability of additional funds, suitable acquisition targets at an acceptable cost, and working capital. Our ability to compete effectively, to reach agreements with acquisition targets on commercially reasonable terms, to secure critical financing and to attract professional managers is critical to our success. We will require additional funds to complete recent acquisitions, as well as to make future acquisitions, continue improving our current coal mines and other coal processing facilities, and to obtain regulatory approvals for our operations. We intend to seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources. However, there are no assurances that future funding will be available on favorable terms or at all. If additional funding is not obtained, we will need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary. The failure to fund our capital requirements would have a material adverse effect on our business, financial condition and results of operations.

 

Coal reserve estimates may not be indicative of reserves that we actually recover.

 

The coal reserves disclosed for the mines from which we have the right to extract coal are the estimated quantities (based on applicable reporting regulations) that under present and anticipated conditions have the potential to be economically mined and processed. However, the amount of coal that we may extract from a given mine is limited by the mining rights granted to us by local governmental authorities. In addition, there are numerous uncertainties inherent in estimating quantities of coal reserves and in projecting potential future rates of coal production including many factors beyond our control. Reserve engineering is a subjective process of estimating underground deposits of reserves that cannot be measured in an exact manner and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Estimates of different engineers may vary (e.g., in coal grade and reserve quantity) and results of our mining/drilling and production subsequent to the date of an estimate may justify revision of estimates. Reserve estimates may require revision based on actual production experience and other factors. In addition, several factors including the market price of coal reduced recovery rates or increased production costs due to inflation or other factors may render certain estimated coal reserves uneconomical to exploit and may ultimately result in a restatement of reserves. This may have a material adverse effect on our business, operating results, cash flows and financial condition.

 

U.S.-listed companies with substantial business operations in China have recently become subject to increased scrutiny, criticism and negative publicity.

 

Since 2010, a number of U.S. publicly-listed companies with substantial operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission (“SEC”) resulting in loss of share value. Much of the scrutiny and negative publicity has centered around accounting weaknesses, inadequate corporate governance and, in some cases, allegations of fraud. As a result of such scrutiny and negative publicity, the stock prices of most U.S. publicly-listed reverse merger companies and other public companies with operations in China have sharply decreased in recent years.   

 

Our industry is heavily regulated and we may not be able to remain in compliance with all such regulations and we may be required to incur substantial costs in complying with such regulation.

 

We are subject to extensive regulation by China’s Mining Ministry and by other provincial, county and local authorities in jurisdictions in which our products are processed or sold, regarding the processing, storage, and distribution of our product. Our processing facilities are subject to periodic inspection by national, province, county and local authorities. We may not be able to comply with current laws and regulations, or any future laws and regulations. To the extent that new regulations are adopted, we will be required to adjust our activities in order to comply with such regulations. We may be required to incur substantial costs in order to comply. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material and adverse effect on our business, operations and finances. Changes in applicable laws and regulations may also have a negative impact on our sales.

 

Government regulation of our operations imposes additional costs on us, and future regulations could increase those costs or limit our ability to mine, crush, clean, process and sell coal. China’s central, provincial and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. We are required to prepare and present to China’s central, provincial and local authorities data pertaining to the effect or impact that any proposed processing of coal may have upon the environment. The costs, liabilities and requirements associated with these regulations may be costly and time-consuming and may delay commencement, expansion or continuation of our coal processing operations. The possibility exists that new legislation and/or regulations and orders may be adopted that may materially and adversely affect our operations, our cost structure and/or our customers’ ability to use coal. New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us and our customers to change operations significantly or incur increased costs. Certain sales agreements contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in specified increases in the cost of coal or its use. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.

35


 
 

Our business operations and financial results may be adversely affected by present or future environmental regulations, coal industry standards and safety requirements, including mine shut downs in 2011

 

As a producer of coal products in China, we are subject to significant, extensive and increasingly stringent environmental protection laws, governmental regulations on coal standards and safety requirements. These laws and regulations, among other things:

 

·         impose fees for the discharge of waste substances and pollutants;

·         require the establishment of reserves for reclamation and rehabilitation;

·         impose fines for serious environmental offenses; and

·         authorize the PRC government, at its discretion, to close any facility that it determines has failed to comply with environmental regulations, operating standards, and suspend any coal operations that cause excessive environmental damage. 

Some of our operations are based on traditional, old coal extraction and processing techniques, which are popular in China, and which produce waste water, gas emissions and solid waste materials. The PRC government has tightened enforcement of applicable laws and regulations and adopted more stringent environmental and operational standards. We believe that our coal mining and washing operations comply in all material respects with existing Chinese environmental and safety standards. However, some of our mines were subject to what we believed county-wide shut downs and safety inspection of coal mines by the local governments in 2011. The temporary government mandated-shut down was slowing resumed during 2012. As a result, our results of operations were named in 2011 and 2012.

In addition, our budgeted amount for environmental and safety regulatory compliance may not be sufficient, and we may need to allocate additional funds for this purpose. If we fail to comply with current or future environmental and safety laws and regulations, we may be required to pay penalties or fines or take corrective actions, any of which may have a material adverse effect on our business operations and financial condition. China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1997 Kyoto Protocol, which are intended to limit greenhouse gas emissions. On March 14, 2011, the PRC government approved the Twelfth Five-Year Plan for National Economic and Social Development, which sets goals to decrease the amount of energy consumed per unit of GDP by 16% from 2010 levels, cap energy use at 4 billion tons of coal equivalents by 2015 and reduce the carbon emissions by 17% from 2010 levels by 2015. Efforts to reduce energy consumption use low-carbon coal, and control greenhouse gas emissions could materially reduce coal consumption, which would adversely affect our revenue and our business.

 

For example, in early 2013, China’s Capital City Beijing had experienced very serious air pollution problem which, was partly contributed by burning of coal for heating during the winter months. This had caused internationally attention and seriously damaged the reputation of China. As a result, it is possible that Chinese government may consider regulation and administrative actions that may negatively impact the entire coal business in China which may increase our cost of operation and profitability. 

 

We depend on Dickson V. Lee, Our Chairman and Chief Executive Officer, the loss of who could adversely affect our operations

 

The future success of our investments in China is dependent on Mr. Dickson V. Lee, our Chairman and Chief Executive Officer. If Mr. Lee is unable or unwilling to continue in his present positions, we may not be able to easily replace him, and we may incur additional expenses to recruit and train new personnel. The loss of Mr. Lee could severely disrupt our business and its financial condition and results of operations could be materially and adversely affected. Furthermore, since the industries we invest in are characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure investors that we will be able to attract or retain the key personnel needed to achieve our business objectives. While Mr. Dickson V. Lee is covered by a one-year term accident insurance policy in China, which is paid for by the Company, we currently do not maintain “key person” life insurance coverage for any of our officers.   

  

36


 
 

Our dependence on managerial, technical personal and mining workers   could adversely affect our operations.

 

We are currently operating five mines in GuiZhou and Yunnan Provinces. Although WeiShe, LuoZhou and LaShu are all located in GuiZhou Province within 5-10 hours drive from each other and thus provide the Company some shared resources on key management personnel. However, we still need to have dedicated management team in each mine to oversee the daily operation. Due to the remoteness of these mines (7-10 hours drive from major cities), it is difficult to attract qualified managers and technical staff to work at these mines for the long term. In addition, China is now expiring labor shortage due to the aging population and one child policy, the younger generation workers would like to work in cities and away from factories, farms and mines. As a result, it may be difficult for the Company to recruit new workers for our mines located in GuiZhou and Yunnan Provinces. The lack of qualified managers, technical personal and mining workers could adversely affect our operations.

 

Our business is highly competitive and increased competition could reduce our sales, earnings and profitability.

 

The coal business is highly competitive in China and we face substantial competition in connection with the marketing and sale of our products. Some of our competitors are well established, have greater financial, marketing, personnel and other resources, have been in business for longer periods of time than we have, and have products that have gained wide customer acceptance in the marketplace. The greater financial resources of our competitors will permit them to implement extensive marketing and promotional programs. We could fail to expand our market share, and could fail to maintain our current share. Increased competition could also result in overcapacity in the Chinese coal industry in general. The coal industry in China has experienced overcapacity in the past. During the mid-1970s and early 1980s, a growing coal market and increased demand for coal in China attracted new investors to the coal industry, spurred the development of new mines and resulted in added production capacity throughout the industry, all of which led to increased competition and lower coal prices. Similarly, an increase in future coal prices could encourage the development of expanded capacity by new or existing coal processors. Any overcapacity could reduce coal prices in the future and our profitability would be impaired.

 

We may suffer losses resulting from industry-related accidents and lack of insurance.

 

We operate coal mines and related facilities that may be affected by water, gas, fire or structural problems and earthquakes. As a result, we, like other companies operating coal mines, have experienced accidents that have caused property damage and personal injuries. Although we continuously reviews our existing operational standards, including insurance coverage and have implemented safety measures, fire training at our mining operations and provided on-the-job training for our employees and workers, there can be no assurance that industry-related accidents, earthquakes or other disasters will not occur in the future. The insurance industry in China is still in its development stage, and Chinese insurance companies offer only limited business insurance products. We currently only have work-related injury insurance for our employees at the DaPuAn, SuTsong, Weishe, LuoZhou and LaShu mines and limited accident insurance for staff and miners working in China. Any uninsured losses and liabilities incurred by us could have a material adverse effect on our financial condition and results of operations.

 

Disruptions to the Chinese railway transportation system and the other limited modes of transportation by which we deliver our products may adversely affect our ability to sell our coal products.

 

A substantial portion of the coal products we sell is transported to our customers by the Chinese national railway system. As the railway system has limited transportation capacity and cannot fully satisfy coal transportation requirements, discrepancies between capacity and demand for transportation exist in certain areas of the PRC. No assurance can be given that we will continue to be allocated adequate railway transport capacity or acquire adequate rail cars, or that we will not experience any material delay in transporting our coal as a result of insufficient railway transport capacity or rail cars.

 

Some of our business operations depend on a single transportation carrier or a single mode of transportation to deliver our coal products. Disruption of any of these transportation services due to weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks, and other events could temporarily impair our ability to supply coal to our customers. Our transportation providers may face difficulties in the future that may impair our ability to supply coal to our customers, resulting in decreased revenues.  

37


 
 

Our continued operations of coal mines are dependent on our ability to obtain and maintain mining licenses and other PRC government approvals for our mining operations.

 

Unlike land in the United States, much of which is owned by private individuals, the land and underlying minerals in China belongs to the PRC government and is only leased to lessees such as us on a long-term basis, ranging from 40 to 70 years. Further, coal reserves are owned by the PRC government, which issues mining licenses and exclusive mining rights for a particular mine to a mining operator on a long term basis (normally 50 years). This license allows the mining operators to operate and extract coal from the mine. Thus, coal mining licenses are the exclusive evidence of approval of a coal mine’s mining rights by the PRC government. The government charges all mining operators an upfront fee plus a surcharge ranging from 2%-3% of the value of the coal excavated from the ground. There can be no assurances that we will be able to obtain additional mining licenses (including licenses to expand our production capacity at our existing mines) and rights for additional mines or to maintain such licenses for our existing operations. The loss or failure to obtain or maintain these licenses in full force and effect will have a material adverse impact on our ability to conduct our business and on our financial condition. 

 

Furthermore, the coal industry in China is heavily regulated by the government for safety and operational reasons. Several licenses and permits are required in order to operate a coal mine. These licenses and permits, once issued, are reviewed typically once a year. Failure to comply with such regulations could result in fines or temporary or permanent shutdowns of our mining operations, which would adversely impact our business and results of operations.

 

Risks inherent to mining could increase the cost of operating our business.

 

Our coal mining operations are subject to conditions beyond our control that can delay coal deliveries or increase the cost of mining at particular mines for varying lengths of time. These conditions include weather and natural disasters, unexpected maintenance problems, key equipment failures, variations in coal seam thickness, variations in the amount of rock and soil overlying the coal deposit, variations in rock and other natural materials and variations in geologic conditions.

 

As with all underground coal mining companies, our operations are affected by mining conditions such as a deterioration in the quality or thickness of faults and/or coal seams, pressure in mine openings, presence of gas and/or water inflow and propensity for spontaneous combustion, as well as operational risks associated with industrial or engineering activity, such as mechanical breakdowns. Although we have conducted geological investigations to evaluate such mining conditions and adapt our mining plans to address them, there can be no assurance that the occurrence of any adverse mining conditions would not result in an increase in our costs of production, a reduction of our coal output or the temporary suspension of our operations.

Underground mining is also subject to certain risks such as methane outbursts and accidents caused by roof weakness and ground-falls. There can be no assurance that the occurrence of such events or conditions would not have a material adverse impact on our business and results of operations.

 

We have not maintained sufficient documentation of our internal control over financial reporting for the year ended April 30, 2010 and 2011, and have identified material weaknesses in our system of internal controls relating to the same.  

 

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its Annual Report, which contains management’s assessment of the effectiveness of its internal controls over financial reporting. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of April 30, 2010 and 2011 and concluded that we did not maintain effective controls over the process of ensuring timely preparation of our financial reporting as of and for the fiscal years ended April 30, 2010 and 2011. In addition, our auditor, Kabani & Co. Inc., identified material weaknesses in our system of internal controls relating to the same. During the last two fiscal years, we have taken several steps to improve our internal control procedures, including adding additional internal and external resources. Until we are able to ensure the effectiveness of our internal controls, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in a timely and reliable manner. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act. We also expect these developments will make it more difficult and more expensive for us to attract and retain additional members to the board of directors (both independent and non-independent), and additional executives. 

38


 
 

Risks Related to Doing Business in China

 

Our Chinese operations pose certain risks because of the evolving state of the Chinese economy and Chinese political, legislative and regulatory systems. Changes in the interpretations of existing laws and the enactment of new laws may negatively impact our business and results of operation.

 

Although our principal executive office is located in Seattle, Washington, all of our current coal business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including its levels of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. Doing business in China involves various risks including internal and international political risks, evolving national economic policies, governmental policy on coal industry, as well as financial accounting standards, expropriation and the potential for a reversal in economic conditions. Since the late 1970s, the Chinese government has been reforming its economic system. These policies and measures may from time to time be modified or revised. While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. Furthermore, while the Chinese government has implemented various measures to encourage economic development and guide the allocation of resources, some of these measures may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Also, since early 2004, the Chinese government has implemented certain measures to control the pace of economic growth including certain levels of price controls on raw coking coal. Such controls could cause our margins to be decreased. In addition, such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition. Adverse changes in economic policies of the Chinese government or in the laws and regulations, if any, could have a material and adverse effect on the overall economic growth of China, and could adversely affect our business operations.

 

There are substantial uncertainties regarding the application of Chinese laws, especially with respect to existing and future foreign investments in China. Despite China having its own securities laws and regulators, the Chinese legal system is in a developmental stage and has historically not enforced its Chinese securities law as rigidly as their U.S. counterparts. The interpretation and application of existing Chinese laws, regulations and policies, and the stated positions of the Chinese authorities may change and possible new laws, regulations or policies will impact our business and operations. Because of the evolving nature of the law, it will be difficult for us to manage and plan for changes that may arise. China’s judiciary is relatively inexperienced in enforcing corporate and commercial law, resulting in significant uncertainty as to the outcome of any litigation in China. Consequently, there is a risk that should a dispute arise between us and any party with whom we have entered into a material agreement in China, we may be unable to enforce such agreements under the Chinese legal system. Chinese law will govern almost all of our acquisition agreements, many of which may also require the approval of Chinese government agencies. Thus, we cannot assure investors that we will be able to enforce any of our material agreements or that remedies will be available outside China.

Our business is and will continue to be subject to central, provincial, local and municipal regulation and licensing in China. Compliance with such regulations and licensing can be expected to be a time-consuming, expensive process. Compliance with foreign country laws and regulations affecting foreign investment, business operations, currency exchange, repatriation of profits and taxation will increase the risk of investing in our securities.

On January 31, 2013, the Guizhou province of China, in which the Company operates three of its five  coal mines, issued a provincial-level notice/order (the “Guizhou Consolidation Policy”) that set forth the following key requirements, among others—by the end of 2013: (i) the total number of coal-mine related business enterprises in the Guizhou province (“Guizhou Coal Enterprise”) shall be limited to no more than 200; (ii) each Guizhou Coal Enterprise in Gui Yang City of Guizhou province shall reach at least the capacity to produce One Million (1,000,000) tons of coal per year; (iii) each Guizhou Coal Enterprise in Liu Pan Shui City of Guizhou province shall reach at least the capacity to produce Two Million (2,000,000) tons of coal per year; (iv) for certain coal mines, the mechanization level for coal-mine development and coal mining shall reach, respectively, 70% and 45% (by the end of 2015, 80% and 55% respectively.)  While the Guizhou Consolidation Policy has opened the door for the Company to acquire/consolidate additional smaller coal mines in the Guizhou province at faster speed and at attractive prices, the Company is also aware that the Company’s current coal-production capacity and mechanization level have not met the requirements set forth in the Guizhou Consolidation Policy, but we intend to work diligently to meet the requirements in the policy by the end of 2013. 

39


 
 

Restrictions on Chinese currency may limit our ability to obtain operating capital and could restrict our ability to move funds out of China.

 

The Chinese currency, the Renminbi (RMB), is not a freely convertible currency, which could limit our ability to obtain sufficient foreign currency to support our business operations and could impair the ability of our Chinese subsidiaries to pay dividends or other distributions to us. We rely on the Chinese government’s foreign currency conversion policies, which may change at any time, in regard to our currency exchange needs. We currently receive all of our revenues in Renminbi, which is not freely convertible into other foreign currencies. In China, the government has control over Renminbi reserves through, among other things, direct regulation of the conversion of Renminbi into other foreign currencies and restrictions on foreign imports. Although foreign currencies which are required for “current account” transactions can be bought freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. Current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the Chinese State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the Chinese government. This type of heavy regulation by the Chinese government of foreign currency exchange restricts certain of our business operations and a change in any of these government policies, or any other, could further negatively impact our operations.

 

Our ownership structure is subject to regulatory controls by the PRC government, including approvals and timely payments in connection with our acquisitions. Failure to obtain such approvals or to timely remit required payments may cause the unwinding of our acquisitions.

 

On October 21, 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a circular (“Circular 75”), effective November 1, 2005, which repealed Circular 11 and Circular 29, which previously required Chinese residents to seek approval from SAFE before establishing any control of a foreign company or transfer of China-based assets or equity for the shares of the foreign company. SAFE also issued a news release about the issuance of Circular 75 to make it clear that China’s national policies encourage the efforts by Chinese private companies and high technology companies to obtain offshore financing. Circular 75 confirmed that the uses of offshore special purpose vehicles (“SPV”) as holding companies for PRC investments are permitted as long as proper foreign exchange registrations are made with SAFE. As China continues to develop its legal system, additional legal, administrative, and regulatory rules and regulations may be enacted, and we may become subject to the additional rules and regulation applicable to the our Chinese subsidiaries.

 

Our Chinese subsidiaries, Kunming Biaoyu Industrial Boiler Co., Ltd. (“KMC”) have been registered as American subsidiaries, and all required capital contributions have been made into them. We own our equity ownership interest in the DaPuAn and SuTsong Mines through a nominee who is a Chinese citizen that holds our equity ownership in trust for our benefit under an agency agreement executed in April 2008, and we refer to the operations as “L & L Coal Partners” Because this equity will be held by a nominee, no SAFE approval is necessary for it. We believe that Circular 75 and other related Circulars or regulations may likely be further clarified by SAFE, in writing or through oral comments by officials from SAFE, or through implementation by SAFE in connection with actual transactions. However, if we fail to obtain the required PRC government approvals for our acquisitions or fail to remit all of the required payments for acquisitions, such acquisitions may be deemed void or unwound. Should this occur, we may seek to acquire the equity interest of our subsidiaries through other means, although no assurance can be given that we will be able to do so, nor can we assure that we will be successful if we do.

40


 
 

We may have to incur unanticipated costs because of the unpredictability of the Chinese legal system.

 

The Chinese legal system has many uncertainties. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, Chinese legislation and regulations have enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the Chinese legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.  

 

It will be difficult for any shareholder to commence a legal action against our executives. Most of our assets are located in China.

 

Because our directors and officer(s) reside both within and outside of the United States, it may be difficult for an investor to enforce his or her rights against them or to enforce United States court judgments against them if they live outside the United States. Most of our assets are located outside of the United States in China. Additionally, we plan to continue acquiring other energy-related entities in China in the future. It may therefore be difficult for investors in the United States to enforce their legal rights, to effect service of process upon us or our directors or officers, or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties on us or our directors and officers under federal securities laws. Moreover, China currently does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgments of courts.

 

We are subject to currency fluctuations from our Chinese operations and fluctuations in the exchange rate may negatively affect our expenses and results of operations, as well as the value of our assets and liabilities.

Effective July 21, 2005, The People’s Bank of China announced that the Renminbi (RMB) exchange rate regime changed from a fixed rate of exchange based upon the U.S. dollar to a managed floating exchange rate regime based upon market supply and demand of a basket of currencies. On July 26, 2005, the exchange rate against the Renminbi was adjusted to 8.11 Renminbi per U.S. dollar from 8.28 Renminbi per U.S. dollar, which represents an adjustment of approximately two percent. As of January31, 2012, the Renminbi appreciated to approximately RMB 6.31 per U.S. Dollar. It is expected that the revaluation of the Renminbi and the exchange rate of the Renminbi may continue to change in the future. Fluctuations in the exchange rate between the RMB and the United States dollar could adversely affect our operating results. Results of our business operations are translated at average exchange rates into United States Dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. We do not use hedging techniques to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock prices.

 

New governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.

 

Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. There are bills pending in Congress that would regulate greenhouse gas emissions. While US regulations are not applicable in China, China has agreed to reduce greenhouse gas emissions per unit of GDP which may reduce the rate of growth in coal consumption in China. Additionally as China begins to implement more stringent environmental and safety regulations our mining and operational costs may increase.   

 

In the middle of November 2012, China completed its 18th National Congress for it is once a decade leadership transition. The new leaders have shown to willingness to take necessary step to boost the economic growth in the orderly manner in China for the coming years. However, it is very difficult to predict the government policies and direction under the new leadership for the next decade. Certain new government policies may negatively impact our business in China in the future and thus our shareholders values.

41


 
 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Common Stock

 

The market price of our stock may be volatile.

 

The market price of our stock may be volatile and subject to wide fluctuations in response to factors including the following:

·         actual or anticipated fluctuations in our quarterly operating results;

·         changes in financial estimates by securities research analysts;

·         conditions in coal energy markets;

·         changes in the economic performance or market valuations of other coal energy companies;

·         announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

·         addition or departure of key personnel;

·         fluctuations of exchange rates between RMB and the U.S. dollar; and

·         general economic or political conditions in China and USA.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.   

 

Our corporate actions are substantially influenced by our principal stockholders and affiliated entities.

 

Members of our management and their affiliated entities own or have the beneficial ownership right to approximately 18% of our outstanding common shares, representing approximately 17% of our voting power. These stockholders, acting individually or as a group, could exert substantial influence over matters such as approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal stockholders and their affiliated entities, elections of our board of directors will generally be within the control of these stockholders and their affiliated entities. While all of our stockholders are entitled to vote on matters submitted to our stockholders for approval, the concentration of shares and voting control presently lies with these principal stockholders and their affiliated entities. As such, it would be difficult for stockholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of the company.

 

42


 
 

We have the right to issue additional common stock and preferred stock without the consent of our stockholders. If we issue additional shares in the future, this may result in dilution to our existing stockholders and could decrease the value of your shares.

Our articles of incorporation, as amended, authorize the issuance of 120,000,000 shares of common stock and 2,500,000 shares of preferred stock. Our board of directors has the authority to issue additional shares up to the authorized capital stated in the articles of incorporation. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change of control of our company.

Our business strategy calls for strategic acquisitions of additional coal mines and other coal-related businesses. It is anticipated that future acquisitions will require cash and issuances of our capital stock, including our common stock, warrants, preferred shares or convertible bonds in the future. To the extent we are required to pay cash for any acquisition, we anticipate that we would be required to obtain additional equity and/or debt financing from either the public sector, or private financing. Equity financing would result in dilution for our stockholders. Stock issuances and equity financing, if obtained, may not be on terms favorable to us, and could result in dilution to our stockholders at the time(s) of these stock issuances and equity financings.

Our authorized preferred stock constitutes what is commonly referred to as “blank check” preferred stock. This type of preferred stock allows our board of directors to divide the preferred stock into series, to designate each series, to fix and determine separately for each series any one or more relative rights and preferences and to issue shares of any series without further stockholder approval. This authorized preferred stock allows our board of directors to hinder or discourage an attempt to gain control of us by a merger, tender offer at a control premium price, proxy contest or otherwise. Consequently, the preferred stock could entrench our management. In addition, the market price of our common stock could be materially and adversely affected by the existence of the preferred stock.

 

Certain SEC rules and FINRA sales practices may limit a stockholder’s ability to buy and sell and our stock, which could adversely affect the price of our common stock.

 

The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. If the trading price of our common stock falls below $5.00 per share, the open-market trading of our common stock is subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.  

 

Stockholders should have no expectation of any dividends.

The holders of our common stock are entitled to receive dividends only when, as and if declared by the board of directors out of funds legally available therefore. To date, we have not declared nor paid any cash dividends. Our board of directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in our business operations.

43


 
 

Item 1B. Unresolved Staff Comments

 

The Company has outstanding unresolved comments from the SEC from a letter it received on January 12, 2012 relating to its Registration Statement on Form S-1 filed with the SEC on December 8, 2011, its Form 10-Q for the fiscal quarter ended October 31, 2011.  As of November 29, 2012, we have engaged a very experienced SEC lawyer to assist us in resolving the SEC letter and related issues. On July 3, 2013, we submitted our response to SEC on the S1 letter. As of September 9, 2013, we are still waiting for the response from SEC.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.   Defaults upon Senior Securities

 

None.

 

Item 4.   Reserved

 

This item was removed and reserved pursuant to SEC Release No. 33-9089A issued on February 23, 2010.

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

Exhibit number

Description

31.1

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)

31.2

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)

32.1

Certification of the Chief Executive Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

44


 
 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

L & L ENERGY, INC.

 

 

 

Date: September 9, 2013

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

 

 

 
 

 

EXHIBIT 31.1

 

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

I, Dickson V Lee, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of L&L Energy, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: 

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

L&L ENERGY, INC.

Date: September 9, 2013

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

45


 
 

 

 

EXHIBIT 31.2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER

 

I, Ian G. Robinson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of L&L Energy, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

L&L ENERGY, INC.

Date: September 9, 2013

By:

/S/ Ian G. Robinson

 

Name:

Ian G. Robinson

 

Title:

CFO

 

 

46


 
 

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report on Form 10-Q of L&L Energy, Inc. (the “Registrant”) for the period ended July 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dickson V. Lee, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge based upon the review of the Report:

 

1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended, and

 

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

 

 

L&L ENERGY, INC.

 

 

 

Date: September 9, 2013

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

47


 
 

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report on Form 10-Q of L&L Energy, Inc. (the “Registrant”) for the period ended July 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ian G. Robinson, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge based upon a review of the Report:

 

1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended, and

 

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

 

 

L&L ENERGY, INC.

 

 

 

Date: September 9, 2013

By:

/S/ Ian G. Robinson

 

Name:

Ian G. Robinson

 

Title:

CFO

 

 

48