10-Q 1 llen10q7-312010v2.htm FORM 10Q llen10q7-312010v2.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 FIRST QUARTER ENDED ON JULY 31, 2010

 

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 small Business Issuer 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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]

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of September 8, 2010 there were 29,918,550 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.

Financial Statements - Unaudited

Consolidated Balance Sheets

As of July 31, 2010 (Unaudited) and April 30, 2010

3

Consolidated Statements of Income and Comprehensive Income

For the Three Months Ended July 31, 2010 and 2009 (Unaudited)

4

Consolidated Statements of Cash Flow

For the Three Months Ended July 31, 2010 and 2009 (Unaudited)

5

Notes to the Consolidated Financial Statements (Unaudited)                    

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

Item 4.

Controls and Procedures

24

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 1B.

Unresolved Staff Comments

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults upon Senior Securities

33

Item 4.

Submission of Matters to a Vote of Security Holders

34

Item 5.

Other Information

34

Item 6.  

Exhibits

34

Signatures

34

 

 

 

 

 

 

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 (unaudited)

 

L & L ENERGY,  INC.

CONSOLIDATED BALANCE SHEETS

AS OF July 31, 2010 and April 30, 2010

(Unaudited)

 

 

 

July 31, 2010

 

April 30, 2010

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

$

                   9,476,634

$

                      7,327,369

 

Accounts receivable

 

16,113,257

 

17,304,949

 

Prepaid and other current assets

 

15,865,361

 

22,670,529

 

Other receivables

 

7,893,019

 

7,956,069

 

Inventories

 

11,758,019

 

9,605,103

 

     Total current assets

 

61,106,290

 

64,864,019

 

 

 

 

 

 

 

Property, plant, equipment, and mine development, net

 

                 35,236,597

 

                    33,657,410

 

Construction-in-progress

 

                 31,201,530

 

                    17,211,093

 

Intangible assets, net

 

                   5,221,766

 

                      5,028,253

 

Long term receivable

 

                   1,259,370

 

                      1,259,151

 

Related party notes receivable

 

                   7,082,039

 

                      7,141,800

 

     Total non-current assets 

 

80,001,302

 

64,297,707

 

 

 

 

 

 

TOTAL ASSETS

$

               141,107,592

$

                  129,161,726

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

$

                   5,234,722

$

                      1,995,513

 

Accrued and other liabilities

 

755,330

 

1,225,294

 

Other payables

 

6,966,193

 

15,344,920

 

Taxes payable

 

11,822,698

 

10,387,265

 

Customer deposits

 

4,770,432

 

3,937,770

 

     Total current liabilities

 

29,549,375

 

32,890,762

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Bank loans

 

3,407,080

 

                      4,146,950

 

Long-term payable

 

                      800,000

 

                         800,000

 

Asset retirement obligation

 

                   1,225,312

 

507,279

 

     Total long-term liabilities

 

5,432,392

 

5,454,229

 

 

 

 

 

 

 

           Total Liabilities

 

34,981,767

 

38,344,991

 

 

 

 

 

 

 

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: 29,660,449 and 28,791,735 shares issued and outstanding at July 31, 2010 and April 30, 2010, respectively

 

29,661

 

28,792

 

Additional paid-in capital

 

34,718,042

 

32,781,365

 

Accumulated other comprehensive income

 

1,738,587

 

699,755

 

Retained Earnings

 

56,047,044

 

45,108,530

 

Treasury stock (400,000 shares)

 

                    (396,000)

 

                       (396,000)

 

     Total stockholders' equity

 

92,137,334

 

78,222,442

 

Non-controlling interest

 

13,988,491

 

12,594,293

 

     Total equity

 

106,125,825

 

90,816,735

TOTAL LIABILITIES AND  EQUITY

$

               141,107,592

$

                  129,161,726

 

 

 

 

 

 

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

 

3


 

 

 

L & L ENERGY, INC.

 

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

 

FOR THE PERIODS ENDED JULY 31, 2010 and 2009

 

(Unaudited)

 

 

 

For the Three Months Periods Ended July 31,

 

 

 

2010

 

2009

 

 

NET REVENUES

$

           55,329,939

$

         11,185,753

 

 

COST OF REVENUES

 

36,724,263

 

5,312,458

 

 

GROSS PROFIT

 

18,605,676

 

5,873,295

 

 

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

Salaries & wages

 

780,672

 

325,237

 

 

Selling, general and administrative expenses, excluding salaries and wages

 

3,225,609

 

815,475

 

 

     Total operating expenses

 

4,006,281

 

1,140,712

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

14,599,395

 

4,732,583

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

   Interest expense

 

(70,540)

 

(3,600)

 

 

   Other (expense) income

 

(12,843)

 

(3,163)

 

 

     Total other (expense) income

 

(83,383)

 

(6,763)

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISON FOR INCOME TAXES

 

14,516,012

 

4,725,820

 

 

LESS PROVISION FOR INCOME TAXES

 

2,183,300

 

338,761

 

 

INCOME FROM CONTINUED OPERATIONS BEFORE NON-CONTROLLING INTEREST

 

12,332,712

 

4,387,059

 

 

LESS: NONCONTROLLING INTEREST

 

1,394,198

 

1,864,265

 

 

NET INCOME  FROM CONTINUED OPERATIONS

 

10,938,514

 

2,522,794

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS

 

 

 

 

 

 

GAIN/(LOSS) FROM SUBSIDIARY DISPOSED OF

 

                           -

 

171,335

 

 

TOTAL INCOME/(LOSS) FROM DISCOUNTED OPERATIONS

 

                           -

 

171,335

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

10,938,514

 

2,694,129

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

Foreign currency translation gain( loss)

 

(1,038,832)

 

(38,105)

 

 

COMPREHENSIVE INCOME

$

             9,899,682

$

           2,656,024

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE – basic from continued operation  

 $

 0.38

$

                    0.12

 

 

INCOME PER COMMON SHARE – basic from discontinued operation  

 $

-  

$

         0.01

 

 

INCOME PER COMMON SHARE – basic  

 $

          0.38

$

    0.13

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE – diluted from continued operation

 $

             0.36

$

                    0.12

 

 

INCOME PER COMMON SHARE – diluted from discontinued operation  

 $

-  

$

                    0.01

 

 

INCOME PER COMMON SHARE – diluted

 $

                      0.36

$

                    0.13

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – basic

 

29,037,451

 

21,167,409

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - diluted

 

30,407,090

 

21,307,409

 

 

 

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

 

 

 

4


 

 

L & L ENERGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIODS ENDED JULY 31, 2010 and 2009

(Unaudited)

 

 

 

 

For the Three Months Periods Ended July 31,

 

 

2010

 

2009

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income including non-controlling interest

$

10,938,514

$

2,522,794

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

 

 

 

 

 

Income from non-controlling interest

 

1,394,198

 

1,864,265

 

Depreciation and amortization

 

           3,111,736

 

768,114

 

Amortization for deferred compensation

 

                          -

 

10,500

 

Issuance of common stock for services

 

              430,546

 

619,262

Changes in assets and liabilities, net of businesses acquisitions:

 

 

 

 

 

Accounts receivable

 

           1,191,692

 

1,090,178

 

Prepaid and other current assets

 

           6,945,169

 

1,169,610

 

Inventories

 

         (2,152,916)

 

(1,176,975)

 

Deferred tax asset

 

                          -

 

154

 

Other receivable

 

                63,050

 

0

 

Accounts payable

 

           3,239,209

 

24,347

 

Accrued and other liabilities

 

            (469,964)

 

278,106

 

Customer deposit

 

              832,662

 

194,271

 

Loan to associate

 

                          -

 

(204,660)

 

Taxes payable

 

           1,435,432

 

(569,906)

 

Other payable

 

         (8,378,727)

 

0

 

Net cash provided by(used in) discontinued operation

 

                          -

 

485,608

Net cash provided by operating activities

 

18,580,601

 

7,075,668

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property and equipment

 

         (3,582,067)

 

            (2,909,227)

 

Acquisition of intangible assets

 

            (429,298)

 

                             -

 

Change in intangible assets

 

                          -

 

                     3,671

 

Change in fixed assets

 

                          -

 

                 (20,018)

 

Construction-in-progress

 

       (13,990,438)

 

            (4,200,333)

 

Change in non-controlling interest due to acquisition and disposal

 

                          -

 

                 760,906

 

Loan to related party

 

              (80,239)

 

                             -

 

Increase in investments

 

                          -

 

                 (12,437)

Net cash (used in) provided by investing activities

 

       (18,082,042)

 

            (6,377,438)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payment on bank loans

 

            (739,870)

 

                             -

 

Proceeds from issuance of common stock

 

                          -

 

                 201,313

 

Proceeds from warrant extension

 

                50,000

 

                             -

 

Warrants converted to common stock

 

           1,457,000

 

                 475,000

Net cash provided by financing activities

 

              767,130

 

                 676,313

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

              883,576

 

                 (38,105)

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

           2,149,265

 

              1,336,438

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

           7,327,369

 

              5,098,711

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

           9,476,634

$

              6,435,149

 

 

 

 

 

 

SUPPLEMENTAL NON CASH FLOW INFORMATION:

 

 

 

 

INTEREST PAID

$

                59,200

$

                     3,598

INCOME TAX PAID

$

              747,848

$

                 352,634

 

 

 

 

 

 

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

5


 

 

 

 

L & L ENERGY, INC.

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JULY 31, 2010 AND 2009

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

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, coking and coal wholesales operations.  At the present time, the Company conducts its coal (energy) operations in Yunnan and Guizhou provinces, southwest China.  As of July 31, 2010, the Company has three operating subsidiaries; KMC, which has coal wholesale operations and Ping Yi Coal Mine (mining operations “PYC”); two coal mining operations (DaPuAn Mine and SuTsong Mine) including DaPuAn’s coal washing operations (the “2 Mines” or “LLC”); and L&L Yunnan Tianneng Industry Co. Ltd. (including Hong Xing coal washing and ZoneLin coking operations) (“TNI”).  On August 1, 2009, the Company increased its ownership of the two coal mining operations (the “2 Mines”), from 60% to 80%.

 

KMC acquired 100% equity of PYC on January 18, 2010 with an effective acquisition date of November 1, 2009.  L&L formed a new subsidiary TNI in the Yunnan province, China, which owns 98% of controlling interest of TNI.  Through TNI, L&L acquired 100% equity of ZoneLin Coal Coking Factory in China (“ZoneLin”) on February 3, 2010 with an effective acquisition date of November 1, 2009; and acquired 100% equity of SeZone County Hong Xing Coal Washing Factory (“Hong Xing”) on January 1, 2010 with an effective acquisition date of November 30, 2009.

6


 

 

 

The Company acquired 93% equity interest in Hon Shen Coal Co., Ltd. (“HSC”) in July 2009 and October 2009, then disposed of HSC to Guangxi Luzhou Lifu Machinery Co. Limited in April 2010. 

 

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim financial information - The consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended July 31, 2010 may not necessarily indicative of the results of operations which might be expected for the entire year.  

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, 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, 2010.

 

Principles of Consolidation - The fully consolidated financial statements include the accounts of the Company, and its 100% ownership of KMC subsidiary including coal wholesale and PYC coal mine, 80% of operations of LLC “2 Mines” including both coal mining and coal washing, and 98% of TNI (coal washing and coking operations).  All significant inter-company accounts and transactions were eliminated in consolidation.

 

Cash and Cash Equivalents - Cash and cash equivalent consist of cash on deposit with banks and cash on hand.  The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents, for cash flow statement purposes.  Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China (“PRC”) and with banks in the United States. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States.

 

Balances at financial institutions or state owned banks within the PRC are not insured and amounted to $7,647,587 and $2,428,509 at July 31, 2010 and April 30, 2010, respectively. As of July 31, 2010 and April 30, 2010, the Company had deposits in excess of federally insured limits totaling $1,166,956 and $2,529,565, respectively, in the U.S. Banks. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

Revenue Recognition - In accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 13, “Revenue Recognition,” the Company recognizes revenue when it is realized or realizable and earned. The Company must meet all of the following four criteria under SAB 104 to recognize revenue:

 

  • Persuasive evidence of an arrangement exists
  • Delivery has occurred
  • The sales price is fixed or determinable
  • Collection is reasonably assured

 

Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.

 

Accounts receivable - The Company’s policy is to maintain reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  As of July 31, 2010 and April 30, 2010, the Company determined that no reserve for accounts receivable was necessary. 

7


 

 

 

Inventories - Inventories are stated at the lower of cost and net realizable value, as determined on moving average basis.

 

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. In regards to Asset Retirement Obligations (AROs,) 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 base 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.

 

Noncontrolling Interest - In 2009, the Company purchased 60% interests in 2 Mines and subsequently increased the ownership to 80% during 2010.  Certain amounts presented for prior periods previously designated as minority interest have been reclassified to conform to the current year presentation. Effective January 1, 2009, the Company adopted Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which established new standards governing the accounting for and reporting of noncontrolling interests (“NCI”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case), that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all NCI prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, the Company retroactively reclassified the “Minority interest” balance previously included in the “Other liabilities” section of the consolidated balance sheets to a new component of equity with respect to NCI in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statements of income and other comprehensive income, largely identifying net income including NCI and net income attributable to the Company. 

 

The net income (loss) attributed to the NCI has been separately designated in the accompanying statements of income and other comprehensive income. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.

 

Foreign Currency Translation - The accounts of the Company’s Chinese subsidiaries are maintained in the RMB and the accounts of the U.S. parent company are maintained in the USD.   The accounts of the Chinese subsidiaries were translated into USD in accordance with ASC Topic 830, Foreign Currency Matters, with the RMB as the functional currency for the Chinese subsidiaries.  According to ASC 830, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income.  Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.

 

Asset Retirement Cost and Obligation - Asset retirement costs are accounted for in accordance with ASC Topic 410-20, Asset Retirement Obligations.  Pursuant to ASC 410-20, the Company recognizes the fair value of the liability for an asset retirement obligation, which is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The fair value of the liability is estimated using projected discounted cash flows. In subsequent periods, the retirement obligation is accreted to its future value, which is the estimate of the obligation at the asset retirement date. The liability is accreted to its present value each period, and the capitalized cost is depreciated or depleted over the useful lives of the respective assets.  If the liability is settled for an amount other than the recorded amount, a gain or loss would be recognized at such time.

 

8


 

 

Property, Plant, Equipment, and Mine Development - Property, plant equipment and mine development are stated at cost, less accumulated depreciation. Costs of mine development, expansion of the capacity of or extending the life of the Company’s mine are capitalized and principally amortized using the units-of-production method over the actual tons of coals produced directly. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over their estimated useful lives.  Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.  Building, mining structure, and plant are related to our coal mining related operations. The mining structure includes the main and auxiliary mine shafts, underground tunnels, and other integrant mining infrastructure. Depreciation for the mine shafts is provided to write off the cost of the mining structure using the units of production method based on salable reserves.

 

                The estimated useful lives for each category of the fixed assets are as follows:  

 

 

Building, Mining Structure and Plant

20 to 25 Years

Motor Vehicles and  Equipment    

5 Years

Machinery

10 to 12.5 Years

 

Construction-in-progress - Construction-in-progress consists of amounts expended for mine construction. Once building construction is completed, the cost accumulated in construction-in-progress is transferred to property, plant, equipment and mine development.

 

 

Impairment of Long-Lived Assets - The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company evaluates the recoverability of its long-lived assets if circumstances indicate impairment may have occurred.  This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of July 31, 2010 and April 30, 2010, there was no impairment of its long-lived assets.

 

Intangibles - The Company applies Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other Intangible Assets, to record goodwill and intangible assets.  In accordance with ASC 350, certain intangible assets are to be assessed periodically for impairment using fair value measurement techniques. Goodwill is tested for impairment on an annual basis as of the end of the Company's fiscal year, or more frequently when impairment indicators arise. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances which indicate that impairment exists. The Company believes that as of July 31, 2010 and April 30, 2010, there was no impairment of its goodwill.

 

Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.  GAAP also requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. As of July 31, 2010, income tax positions must meet a more-likely-than-not recognition threshold to be recognized.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

9


 

 

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  No material deferred tax amounts were recorded at July 31, 2010 and April 30, 2010, respectively.  GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

The charge for taxation is based on the results for the reporting period as adjusted for items, which are non-assessable or disallowed.  It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

The Company’s operating subsidiaries located in PRC are subject to PRC income tax. The new Chinese Enterprise Income Tax (“EIT”) law was effective on January 1, 2008. Under the new Income Tax Laws of PRC, a company is generally subject to income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriated tax adjustments.

 

Stock-Based Compensation - The Company records stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation.  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of warrants granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the warrants. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee warrants, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee warrants. Although the fair value of employee warrants is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

 

Fair Value Measurements - For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivable, accounts payable and other payables, the carrying amounts approximate their fair values due to their short maturities. In addition, the Company has long-term debt with financial institutions. The carrying amounts of the line of credit and other long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics.

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the consolidated balance sheets for receivables, certain other current assets and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

  • Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

  • Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

  • Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

10


 

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.

 

Earnings Per Common Share - Earnings per share is calculated in accordance with the ASC Topic 260, Earnings Per Share.  Basic earnings per share is calculated dividing income available to common stockholders by the weighted average number of common shares outstanding.  Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

Concentration of Risk - For the three months ended July 31, 2010, we had one major customer who purchased 13% of the Company’s total sales and represented $6,923,993 or 42% of accounts receivable.  In addition, we had one major supplier provided 11% of our total purchases.  This supplier represents $733, 342 or 14% of the accounts payable.

 

For the period ended July 31, 2009, we had five major customers who purchased over 10% of the Company’s total sales. They collectively accounted for approximately 83% (approximate $12.7 million) of our total sales and approximately 74% (approximate $9.2 million) of accountant receivables. In addition, there are three major suppliers each provided over 10% of our total purchases. These suppliers collectively supplied approximately 48% (approximately $3.8 million) of the Company’s purchases and 35% (approximate $0.8 million) of total accounts payable.

 

Advertising Costs - The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs for the three months ended July 31, 2010, 2009 were not significant.

 

Statement of Cash Flows - In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 

Reclassification - Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements to conform to the 2010 consolidated financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

New accounting pronouncements

 

In October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU 2009-15") regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. The Company will provide the required disclosures beginning with the Company’s Annual Report on Form 10-K for the year ending April 30, 2011. Based on the initial evaluation, the Company does not anticipate a material impact to the Company’s financial position, results of operations or cash flows as a result of this change.

 

On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

11


 

 

 

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on August 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

 

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on May 1, 2011.

NOTE 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

         Prepaid expenses and other current as of July 31, 2010 and April 30, 2010 consist of:

 

Description

July 31, 2010

April 30, 2010

Advances to suppliers

$ 12,946,847

$ 11,327,289

Bill receivable                                                                    

-

8,713,763

Advanced to employees

2,897,863

2,580,222

Other

20,651

49,255

Total

$ 15,865,361

$ 22,670,529

 

 

 

 

 

NOTE 4.  OTHER RECEIVABLES

 

        Other receivables consist of the following:

 

Description

July 31, 201010

April 30, 2010

Short term loans to business associates

$ 6,633,868

$ 6,608,247

HSC receivable

1,259,151

1,259,151

Other

-

88,671

Total

$ 7,893,019

$ 7,956,069

 

 

 

 

 

 

 

 

 

 

 

12


 

 

NOTE 5. INVENTORIES  

 

Inventories are primarily related to coal located at KMC, 2 Mines, PYC and TNI. Inventories consist of the following:

 

Description

July 31, 2010

April 30, 2010

Raw Coal

$  6,713,700

 $  9,054,714

Washed Coal

       3,182,513 

155,156

Coke Coal

       1,861,806

 395,233

Total 

 $  11,758,019

 $ 9,605,103

 

 

 

NOTE 6. PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

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

 

 

 

 

 

Description

July 31, 2010

 

 

April 30, 2010

 

Mine development

$     21,453,640

 

 

  $       21,098,410

 

Building and improvements

  4,703,190

 

 

            2,025,661

 

Machinery and equipment

  14,219,368

 

 

          12,872,896

 

  Total

  40,376,198

 

 

          35,996,967

 

Accumulated depreciation 

  (5,139,601)

 

 

           (2,339,557)

 

Property, Plant and Equipment, net

$     35,236,597

 

 

$       33,657,41

 

Depreciation expense was $2,800,044, and $768,114 for the three months ended July 31, 2010 and 2009, respectively. 

 

 

NOTE 7. CONSTRUCTION IN PROGRESS

 

Construction in progress includes mine development, ventilation and electrical system improvements for the PYC mine, building of staff quarters, and beginning construction of a sewage treatment system and road expansion for the washing facilities.  During the quarter ended July 31, 2010, HongXing washing facility construction took place for its capacity expansion.  Construction in progress was $ 31,201,530 and $ 17,211,093 as of July 31, 2010 and April 30, 2010, respectively. 

 

NOTE 8.  INTANGIBLE ASSETS

 

Mineral rights represent the exclusive right, granted by the Chinese government, to operate the 2 Mines and PYC.  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, respectively.  The Company has elected to use units of production method to amortize its mineral rights.

 

Amortization expense was $235,785 and zero for the three months ended July 31, 2010 and 2009, respectively.  

 

 

 

 

 

 

 

 

 

13


 

 

Intangible assets consist of the following:

 

Description

 

July  31, 2010

 

April 30, 2010

 

 

Mining rights

$

4,251,707

$

3,832,288

 

 

Customer relationship

 

837,560

 

831,428

 

 

Technology

 

261,919

 

260,002

 

 

Goodwill

 

250,077

 

248,247

 

 

 

 

5,601,263

 

5,171,965

 

 

Accumulated amortization

 

(379,497)

 

(143,712)

 

 

 

$

5,221,766

$

5,028,253

 

 

 

 

 

NOTE 9. ASSET RETIREMENT OBLIGATION

               

The Company accounts for asset retirement obligations in accordance with, ASC 410-20-25, Accounting for Asset Retirement Obligations.  This statement generally requires that the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred.  Obligations normally are incurred at the time development of a mine commences for underground mines or construction begins for support facilities and refuses areas.  The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value.  Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset.  Amortization of the related asset is calculated on a unit-of-production method.  The Company reviews the asset retirement obligation at least annually and makes necessary adjustments for permitted changes as granted by government authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset.

 

With respect to the 2 mines, Yunnan Province government authority established 3 RMB per extracted ton for natural resource surcharge for mine clean up.  The Company expects to extract approximately ten million tons of coal over the remaining forty years of mining rights.  The interest rate used in the net present value calculation is 8%.  As for the Ping Yi Mine, Gui Zhou Province government established 2 RMB per extracted ton for natural resource surcharge for mine clean up.  The Company expects to extract approximately 13.5 million tons of coal over the remaining fifty years of mining rights.  The interest rate used in the net present value calculation is 8%.

 

The following is a summary of the change in the carrying amount of the asset retirement obligation during the three months ended July, 31, 2010 and the year ended April 30, 2010.

 

 

 

July 31, 2010

 

April 30, 2010

 

 

 

 

 

Beginning balance at May 1

$

            507,279

 $ 

-

Liabilities incurred during the period

 

              -

   

285,380

Increase in estimated costs

 

              693,982

 

-

Liabilities settled during the period

 

                         -

   

-

Accretion of interest

 

24,051

 

221,899

 

$

1,225,312

 $ 

507,279

 

 

NOTE 10 – OTHER PAYABLES

 

Other Payables consist of the following:

 

 

 

14


 

 

Description

July 31, 2010

April 30, 2010

Payable to previous owners of ZoneLin (less non-current)

$                   200,000

 $                   200,000

Payable to previous owners of Ping Ying Coal Mine

433,670

                      433,670

Payable to business associates (1)

3,505,129

                   9,098,023

Others (1)

2,027,394

                   5,613,227

Total current other payables

6,166,193

                 15,344,920

Payable to previous owners of ZoneLin (non-current) (2)

800,000

                      800,000

Other non-current

-

                      -

 

$           6,966,193

 $              16,144,920

(1)     Payments are short-term, it will be settled before 12/2010. 

(2)     Four annual installments will be paid. 

 

 

 

NOTE 11 – TAXES PAYABLE

                

Taxes payable consist of the following:

 

Description

 

July 31, 2010

 

April 30, 2010

VAT payable

$

4,224,574

$

   5,109,967

Income tax payable

 

6,282,877

 

   3,878,426

Other taxes payable

 

1,315,247

 

   1,398,872

 

$

11,822,698

$

 10,387,265

 

 

 

NOTE 12. BANK LOANS

 

During the third quarter of 2009, as part of the acquisitions of TNI and PYC, the Company assumed two loan agreements with banks in China.  The first loan with TNI was for RMB 14,300,000 or approximately $1,951,000.  This loan carried an interest rate of 5.4% per annum and matures on December 23, 2011.  The second loan with PYC was for RMB 15,000,000 or approximately $2,196,000.  The loan carries an interest rate of 9.7% per annum and matures on February 26, 2011.  Both loans are unsecured.

 

Total bank loan balance is $3,407,080 and $4,146,950 as of July 31, 2010 and April 30,2010 respectively. Interest expense recognized on the loan was $ 59,200 and $ 0 for the three months ended July 31, 2010 and 2009, respectively. 

 

 

NOTE 13.  RELATED PARTY TRANSACTIONS

 

The Company loaned money to various entities who have non-controlling interests with the Company.  Those loans are notes receivables, secured by assets and machinery of the various mines or businesses indicated below.  Because the borrowers under the notes have business in which the Company has an interest, the Company believes the borrowers are considered as related parties. 

 

Total amount of the relation party transaction is approximately $7 million as of July 31, 2010 which is tabled below.  While in the prior year, as of July 31, 2009, total related party transaction amounts to approximately $6.0 million including approximately $4.3 million is a loan to a non controlling interest shareholders of 2 Mines, approximately $1.9 million for an advance to a KMC manager for the development of the Tian-Ri Coal Mine, and approximately $911,000 owed to CEO of the Company. 

 

15


 

 

 

 

Borrowers

 

        

 

USD

 

Maturity

 

Collateralized by

Associates to DaPuAn Coal Mine

 

$     924,877

May 1, 2015

Mine Assets

Lieurkong Machinery

 

460,393

May 1, 2015

Machinery

Kunming Kemandi Technology Dev. Co LTD

 

254,517

May 1, 2015

Machinery

Associates to Tian Ri Coal Mine

 

1,474,926

May 1, 2015

Machinery

Associates to SuTsong Coal Mine

 

     2,492,400

May 1, 2015

Mining Equipment

Yunnan Tinnan Co. Ltd.

 

1,474,926

May 1, 2015

Mine Assets

 

 

$   7,082,039

 

 

 

 

NOTE 14. STOCKHOLDERS’ EQUITY

 

During the quarter ended July 31, 2010, the Company issue 44,813 shares of common stock for services with a value of $430,546

 

During the quarter ended July 31, 2010, 650,000 warrants were exercised at an average exercise price of $2.26 for cash proceeds of $1,456,350.

 

During the quarter ended July 31, 2010, 359,555 warrants were exercised in accordance with the cashless exercise provisions resulting in the issuance of 173,901 shares.

 

 

 

 

 

 

 

 

NOTE 15. 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 (2 coal mining operations) and TNI.  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 July 31, 2010 represent 20% third party interest in L&L Coal Partners and 2% third party interests in TNI.

 

Included below is a schedule of changes in ownerships interest as of July 31, 2010 and April 30, 2010:

 

 

 

July 30, 2010

 

April 30, 2010

 

 

 

 

 

Beginning balance

$

         12,594,293

 $ 

         12,731,987

Non-controlling interest related to acquisitions

 

-

   

              995,305

Net income related to non-controlling interest

 

1,394,198

 

           7,040,555

Increase in controlling interest

 

-

 

         (7,760,824)

Non-controlling interest related to disposal

 

-

 

            (412,730)

Ending balance

$

         13,988,491

 

         12,594,293

 

 

NOTE 16. EARNINGS PER SHARE

 

The Company only has common shares and warrants issued and outstanding as of July 31, 2010.  Under the treasury stock method of earnings per share, the Company computed the diluted earnings per share, as if all issued warrants were converted to common stock, and cash proceeds were used to buy back common stock.

 

 

 

 

 

 

 

16


 

 

 

For the Three Months Ended July 31,

2010

2009

Net income

$10,938,514

$2,694,129

Number of Shares

29,037,451

21,167,409

Per Share - Basic

$0.38

$0.13

Effect of dilutive shares

1,369,639

140,000

Number of dilutive shares

30,407,090

21,307,409

Per Share - Diluted

$0.36

$0.46

 

 

 

 

NOTE 17. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company has two operating leases for the Seattle office and GuangZhou office.  Both are non-cancelable leases, expiring in September of 2010 and November 2011, respectively.  The Company entered into a six-month lease agreement effective August 2010 in leasing office space in the Seattle office building.    The non-cancelable operating lease agreements require 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 $132,244 and $19,558, respectively. 

 

Commitments

 

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.

 

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.

 

The majority of the Company sales, purchases and expense transactions are denominated in RMB 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.

 

 

 

NOTE 18. SEGMENT INFORMATION

 

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


 

17

 

For the three months ended July 31,

Total Revenues (including intersegment sales)

2010

2009

Coal mining revenue

$18,625,582

$6,846,517

Coal wholesale revenue

5,051,603

         4,339,235

Coking revenue

7,018,405

                        -  

Coal washing revenue

28,962,725

                        - 

$59,658,315

$11,185,752

Intersegment revenues

2010

2009

Coal mining revenue

$4,328,376

                        -  

Coal wholesale revenue

                        -

                        -  

Coking revenue

                        -

                        -  

Coal washing revenue

                        -

                        -  

$4,328,376

                        -  

Net revenues

2010

2009

Coal mining revenue

$18,625,582

$6,846,517

Coal wholesale revenue

5,051,603

4,339,235

Coking revenue

7,018,405

-

Coal washing revenue

28,962,725

-

Less intersegment revenues

(4,328,376)

                        -  

$55,329,939

$11,185,752

Net income

2010

2009

Coal mining

$9,267,909

$2,796,395

Coal wholesale

540,456

                        280,389

Coking

806,181

                        -  

Coal washing

2,423,525

                       171,335

Parent Company

(2,099,557)

(553,990)

$10,938,514

$2,694,129

Depreciation expense

2010

2009

Coal mining

$1,752,775

$476,455

Coal wholesale

93,982

                        5,802

Coking

548,867

 -

Coal washing

228,750

 240,989

Parent Company

175,670

                44,868

$2,800,044

$768,114

2010

2009

 Total assets

Coal mining

$121,103,475

$41,727,782

Coal wholesale

1,595,425

         10,488,519

Coal coking

8,958,749

      - 

Coal washing

23,084,615

2,523,944

Parent company (intercompany)

(13,634,672)

           6,155,347

$141,107,592

$60,895,592

 

 

18


 

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 currently operate three mines, two coal washing facilities, one coking and one coal wholesale operation in China.  Although China has substantial coal resources, the industry is fragmented and inefficient including many small companies who lack economies of scale to maximize capacity. China’s mining companies have been unable to produce enough coal to meet China’s growing coal demand, and as a result the government has implemented a policy of consolidation to increase capacity and improve efficiency and safety. We acquire small mines that lack the capital and management expertise to expand to the 300,000 tons a year minimum production required.  We have successfully integrated and expanded three mines, all of which are well on their way to meeting the 300,000 tons a year minimum. We are confident that our acquisition strategy policy will continue and create more acquisition opportunities for us.

 

Currently 70% of China’s energy is produced from coal resulting in China consuming over 40% of the world’s coal. It is estimated that demand will continue to increase for several decades, thus producing a favorable business environment for ongoing operations. We plan to continue leveraging on our in-China experience, U.S. management skills, and U.S. accounting knowledge to become a leading coal energy company in the coal-rich Yunnan and Guizhou Provinces. 

 

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 acquisitions of operations that lack the capital and management skills to expand to meet the minimum capacity required by the government.

 

19


 

Our operations are located in inland China, which is being developed at a faster rate than the coastal areas that have historically received most of the government’s focus. We expect this development to expand the demand for our coal. 

 

We believe that China’s safety and environmental regulations will continue to become more onerous and will raise the barriers to entry in the coal industry.  We expect coal prices to continue to rise in calendar year 2010.

 

Plan of Operations

We engaged in and currently generate revenue from its coal mining, clean coal washing, coal consolidation, coking and wholesaling businesses in China, the world largest coal consuming nation.  Despite China having substantial coal resources, due to a lack of organizational skills of the coal industry among other factors, China’s mining companies cannot produce enough coal to meet China’s domestic demand for coal. As the Chinese economy continues with its GDP growth at an estimated 8% in 2010 focusing on domestic consumption, we plan to continue to leverage on our fifteen years of in-country experience, U.S. management skills, and U.S. accounting knowledge to become a leading coal energy company not only in Yunnan Province, but also in Guangdong Province. We plan to expand our coal business by expanding upon our existing operations, and by acquiring other existing profit making coal companies following China’s oligopoly policy that is aimed to eliminate small, inefficient coal mines and to favor efficient operations. We were able to continue increasing our operations during the current quarter ended on July 31, 2010.  We plan to invite qualified U.S. mining executives and strategic partners to join in our management team and to facilitate its vertical integration in the coal industry. When we reach a certain size, we plan to gradually leverage on the vast U.S. coal (energy) resources to diversify its operational risks and to increase revenue.

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,

 

 

2010

 

2009

 

  

Amount

% of Revenue

  

Amount

% of Revenue

 

Revenues

$

         55,329,939

100%

$

         11,185,753

100%

 

Cost of revenue

  

         36,724,263

66%

  

           5,312,458

47%

  

    Gross profit

 

         18,605,676

31%

 

5,873,295

53%

 

    Selling general & administrative

  

           4,006,281

7%

  

1,140,712

10%

 

Interest expense (income)

 

                70,540

0%

 

3,600

0%

  

Other expense (income)

  

                12,843

0%

  

3,163

0%

 

Provision for income taxes

  

           2,183,300

4%

  

338,761

3%

 

Non-controlling interest

 

           1,394,198

2%

 

1,864,265

17%

 

Net income

$

         10,938,514

20%

$

2,694,129

23%

 

  

 

 

 

 

 

 

Revenue

The following table presents revenues by operating segment:

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Three Months Ended

 

Increase (Decrease)

 

July 31,

 

to Revenues

 

2010

2009

 

$

%

 

 

 

 

Coal Mining

$

        14,297,206

$

  6,846,517

 

$

  7,450,689

 

109%

Coal Whole Sale

 

          5,051,603

 

  4,339,235

 

 

       712,368

 

16%

Coal Washing (1)

 

        28,962,725

 

-

 

 

28,962,725

 

100%

Coal Coking

 

          7,018,405

 

              -  

 

 

    7,018,405

 

 N/A

Total Revenues

 

$

55,329,939

$

11,185,753

 

$

44,144,186

 

395%

 

 

 

 

 

 

 

(1)     Due to disposal of subsidiary HSC, related prior year revenue is shown under discontinued operations in Consolidated Statements of Income and Other Comprehensive Income

 

In this quarter, our total revenue jumped from $11.2 million to $55.3 million compare to last year, approximately 395% growth. This is due to our acquisition decision.

During the three months ended July 31, 2010, our coal mining sales increased by $7,450,689, approximately 109% increase compared to the three months ended July 31, 2009. This sales increase was mainly due to higher coal demand in China market and new acquisition of Ping Ying Mine. Coal whole sale went up by 16% due to higher coal price and increase volume this year.

Coal washing revenue went up sharply in 2010 because we acquired 65% of HonShen Coal Washing unit in July 16, 2009. Thus, coal washing unit only generate half month of revenue in first quarter 2009. In addition, we purchased HongXing Coal Washing Facility in November 30, 2009.

 

Gross Profit

Our gross profit went down from 48% to 34% due to two factors. First, expansion into washing and coking are lower margin businesses, but vertical integration increases the overall value of the business and adds stability to the supply chain. Second, expansion of capacity and increases in safety standards on new acquisitions require up front investments.

 

Selling general & administrative

After many merger and acquisition in past quarters, we are able to cut cost and enable us to use resources much more efficiently, as result of these our selling general & administrative expense went down from 9% to 7% as a percentage of our revenues.

 

Provision for income taxes

 

Three Months Ended July 31,

 

2010

2009

Net income before income taxes

                      14,516,012

4,725,820

Provision for income taxes

                        2,183,300

                           338,761

Effective tax rate

15.04%

7.17%

               

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Our provision for income taxes increased from the three months ended July 31, 2010 to the three months ended July 31, 2009, primarily as a result of increases net income and increase effective tax rate.

Our effective tax rate increase from the three months ended July 31, 2009 to the three months ended July 31, 2010, primarily because our organization structure was operated under sole-proprietor that is subject to a lower tax rate, now our organization structure had been change to corporate level that is subject to a higher tax rate.

 

Net Income Attributable to Common Stockholders

 

 

 

 

The following table presents net income attributable to common stockholders:

 

 

Three Months Ended July 31,

 

 Increase (Decrease) to Income

 

2010

2009

 

 $

 %

Net income

  12,332,712

  4,387,059

 

    7,945,653

181.1%

Less: Net income attributable to non-controlling interests

    1,394,198

  1,864,265

 

      (470,067)

-25.2%

Net income attributable to Common shareholders

  10,938,514

  2,522,794

 

    8,415,720

333.6%

 

Our net income attributable to non-controlling interest was $565,324 lower than prior year due to increase controlling interest and disposition in prior year. We increased our DaPuAn & SuTsong Coal Mines’ ownership from 60% to 80% in August 1, 2009. In April 18, 2010, we disposed 93% controlling ownership of HonShen Washing and Honshen Coking units. 

 

Change in Liquidity and Capital Resources

 

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

 

Net cash provided by operating activities was $18,580,601 for the three months ended July 31, 2010.  For the three months ended July 31, 2009, net cash flow provided by operating activities was $7,075,668.  The cash improvement incurred during the current year is due to an increase in net income mainly due to the acquisition of the HongXing and ZoneLin operations under TNI and PYC under KMC.

 

Net cash used in investing activities was $18,082,042 during the three months ended July 31, 2010, compared to $ 6,377,438 used in investing activities during the same period in 2009. It shows an increase of cash used to the construction-in-progress and purchase of property and equipment. 

               

Net cash provided by financing activities was $767,130 during the three months ended July 31, 2010, compared to $676,313 was used during the same period in 2009.  It shows an increase of $90,817 which was mainly due to the proceeds from warrant conversion.  

 

Off-Balance Sheet Arrangements:

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

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Contractual Obligations

 

At July 31, 2010, we were contractually obligated to make injection of capital per our purchase agreements as follows: 

 

 

 

 

 Total

Less than 1 year

1-2 years

3-5 years

After 5 years

DaPuAn & SuTsong Mines

  $ 5,027,746

$               0

$               0

$5,027,746

$              0

L&L Yunnan Tianneng Industry

     4,000,000

4,000,000

0

0

0

Total

$9,027,746

$4,000,000

$               0

$5,027,746

$             0

 

 

 

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, 2010. Those critical accounting policies remained unchanged at July 31, 2010.

 

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

While our reporting currency is the U.S. Dollar, 100% of our consolidated revenues and 100% of consolidated costs and expenses are denominated in Renminbi (“RMB”), with the balance denominated in U.S. dollars.  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 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

 

Disclosure Controls and Procedures

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The Company with the participation of its Chief Executive Officer (“CEO”), and acting Chief Financial Officer (“CFO”), has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 15d-15e under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Company, its CEO, and its acting CFO, have concluded that the disclosure controls and procedures are ineffective as of July 31, 2010, covered by this report.   However, the Company is taking measures to improve and strengthen its internal controls over financial reporting on a going forward basis.

 

 Internal Control over Financial Reporting

 

(a)           Management’s quarterly report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

  -             Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  -             Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  -             Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

We are continuing our efforts to improve and strengthen our control processes to fully remedy our weaknesses in internal controls over financial reporting and to ensure that all of our controls and procedures are adequate and effective. Any failure to implement and maintain improvements in the controls over our financial reporting could cause us to fail to meet our reporting obligations under the Securities and Exchange Commission’s rules and regulations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24


 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently a party to any legal proceedings and we are not aware of any 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:

 

Bratek v. L&L Financial Holdings, et al. On or about November 13, 2009, Ronald F. Bratek (an individual) filed a Complaint in the Superior Court of New Jersey, Mercer County, against the Company (under its former name “L&L Financial Holdings, Inc.”) and Dickson V. Lee. The Complaint alleges claims for frauds and declaratory judgment in relation to Bratek’s past purchase of securities and warrants. The Company believes the implication of this proceeding is not material, and disputes all of Bratek’s claims pertaining to his alleged claims regarding the exercise of his warrant within a specified time period, and will assert appropriate counterclaims.

 

Item 1A. Risk Factors

 

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 Its Business

 

Our business and results of operations depend on the volatile People’s Republic of China (“PRC”) domestic coal markets.

 

                Our business and operating results depend on the PRC domestic supply and demand for coal and coal products. 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.  Difficult economic conditions have resulted in lower coal prices, which in turn negatively affect our operational and financial performance.  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.

 

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.

 

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

25


 

 

                The recoverable coal reserves in mines decline as coal is extracted from them. Our ability to significantly increase our production capacity at existing mines requires that we prove additional reserves and secure approvals from the government for increased production.  We will also depend on acquiring new mines.  Our existing mines are the DaPuAn, SuTsong and Ping Yi Coal Mines.

 

                The coal related business in China is heavily regulated by the PRC government. The Company’s acquisition of new mines of PRC coal companies and the procurement of related licenses and permits are subject to PRC Government approval.  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 expansion or investments will be successful.

 

                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 and coking facilities in the future.  Failure to successfully acquire suitable targets on competitive terms, develop new coal mines or expand our existing coal mines could have an adverse effect on our competitiveness and growth prospects.

 

 

 

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

 

                As we continue to grow quickly, we require capital infusions from the capital market.  Under our current business strategy, our ability to grow may 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. Despite our recent financings, we may need additional funds to make future acquisitions, continue improving our current coal mines and other coal processing facilities, and to obtain regulatory approvals for our operations.  Should such needs arise, 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.  Further, the benefits of an acquisition may take considerable time 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.

 

Coal reserve estimates may be materially different from reserves that we may 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.  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. In addition, 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 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 proved and probable 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.

 

Our business operations may be adversely affected by present or future environmental regulations, and coal industry standards.

 

26


 

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

 

                •impose fees for the discharge of waste substances, pollutants;

 

                •require provisions for reclamation and rehabilitation;

 

                •impose fines for serious environmental offenses; and

 

                •authorize the PRC Government to close down any facility that it determines has failed to comply with environmental regulations, operating standards, and suspend any coal operations that cause excessive environmental damage.

               

                Our coal mining, washing and coking operations meet all the existing China environmental and safety standards. Most 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 standards, and operational standards. Our budgeted amount for environmental 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 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, 2006, the PRC Government released the outline of the Eleventh Five-Year Plan for National Economic and Social Development, which sets goals to decrease the amount of energy consumed per unit of GDP by 20 percent and to reduce the emission of certain major pollutants by ten percent.  In addition, recent discussions between the Chinese government and U.S. government on clean energy initiatives, including the reduction of CO2 levels and the use low-carbon coal, which initiatives may be incorporated in the Twelfth Five-Year Plan for National Economic and Social Development, may have significant effects on our business operations.  If efforts to reduce energy consumption, to use low-carbon coal, and to control greenhouse gas emissions reducing coal consumption, our revenue would decrease and our business would be adversely affected.

 

We depend on key persons and the loss of any key person could adversely affect our operations.

 

                The future success of our investments in China is dependent on our management team, including Mr. Dickson V. Lee, our Chairman and Chief Executive Officer, Mr. Clayton Fong, our Executive Vice President of US operations, and managers who are multi-lingual, understand cultural differences, and are adept at doing business internationally.  If one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and we may incur additional expenses to recruit and train new personnel.  The loss of our key personnel 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 our investors that we will be able to attract or retain the key personnel needed to achieve our business objectives.  Currently, only Mr. Lee is covered by a one-year term accident insurance policy in China, which is paid for by the Company.  Although we currently do not maintain “key person” life insurance for any of its key personnel, we are in a process of obtaining a “key person” life insurance package for Mr. Lee and we expect to obtain such insurance policy in 2011.

 

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 the Company continuously reviews its existing operational standards, including insurance coverage, and it has 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 and earthquakes will not occur in the future.  The insurance industry in China is still in its developmental stage and the Chinese insurance companies offer only limited business insurance products.  We currently only have work-related injury insurance for our employees at the DaPuAn, SuTsong and Ping Yi Mines, and limited accident insurance for staff 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.

27


 

 

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.

 

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 Chinese government and is only leased to lessees such as the Company on a long-term basis, ranging from 40 to 70 years.

                Like land in China, coal reserves are owned by the Chinese government, which issues a mining license when the government leases exclusive mining rights 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 for approval of a coal mine’s mining rights by the Chinese 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.

 

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.

 

Our ownership structure is subject to regulatory controls, 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 new 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 its 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 starts to develop its legal system, additional legal, administrative, and regulatory rules and regulations may be enacted, and the Company may become subject to the additional rules and regulation applicable to the Company’s Chinese subsidiaries.

 

                Our subsidiaries KMC and TNI have been registered as American subsidiaries, and all required capital contributions have been made into them.  We are also in the process of registering our equity ownership interest in the DaPuAn and SuTsong Mines with the Chinese government, under the provisional name “L & L Coal Partners” through a nominee who is a Chinese citizen that holds our equity ownership in trust for the benefit of the Company under an agency agreement executed in April 2008.  Because this equity will be held by a nominee, no SAFE approval is necessary for it. The Company believes 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, failure by the Company to obtain the required PRC government approvals for the Company’s acquisitions or failure to remit all of the required payments for acquisitions may lead to such acquisitions being deemed void or the unwinding of such acquisitions.  Should this occur, we may seek to acquire the equity interest of our subsidiaries through other means, although we cannot guarantee that we will do so, nor can we guarantee that we will be successful if we do.

28


 

 

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 to 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.

 

 

Risks Related to Doing Business in China

 

Our Chinese operations pose certain risks because of the evolving state of the Chinese economy, political, and 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, 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 the Company and any party with whom the Company has entered into a material agreement in China, the Company may be unable to enforce such agreements under the Chinese legal system. Chinese law will govern almost all of the Company's acquisition agreements, many of which may also require the approval of Chinese government agencies. Thus, the Company cannot assure investors that the target business will be able to enforce any of the Company’s material agreements or that remedies will be available outside China.

29


 

 

                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 stock.

 

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 the Company's assets are located in China, outside of the United States.  Additionally, the Company plans 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 the Company or the Company's directors or officers, or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties on the Company or the Company's 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.

 

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. 

 

                The government regulation of our operations imposes additional costs on us, and future regulations could increase those costs or limit our ability to crush, clean and process coking 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.

30


 

 

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 January 4, 2010, Renminbi appreciated to approximately RMB 6.83 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 Chinese 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.

 

Risks Related To Corporate and Stock Matters

 

The market price for our stock may be volatile.

 

The market price for 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;

    intellectual property litigation; and

    general economic or political conditions in China.

 

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.

 

                Our management members and their affiliated entities own or have the beneficial ownership right to approximately 33 % of our outstanding common shares, representing approximately 33 % of our voting power.  These stockholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and 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.

31


 

 

If we issue additional shares in the future, this may result in dilution to our existing stockholders.

 

                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.

 

                The Company’s business strategy calls for strategic acquisitions of 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.

 

                The authorized preferred stock constitutes what is commonly referred to as "blank check" preferred stock.  This type of preferred stock allows the 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.  Preferred stock authorized in series 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.

 

Stockholders should have no expectation of any dividends.

 

                The holders of our common stock are entitled to receive dividends 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.  The 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.

 

        Payment of dividends in the PRC is subject to limitations. We may not be able to pay dividends to our stockholders. 

 

                We conduct all of our business through our consolidated subsidiaries incorporated in the PRC. We may rely on dividends paid by these consolidated subsidiaries for our cash needs, including funds necessary to pay any dividends and other cash distributions to our stockholders, and may serve debt we may incur and to pay our possible operating expenses. The payment of dividends by entities established in the PRC is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in the PRC. Each of our PRC subsidiaries, including wholly foreign-owned enterprises and joint venture enterprises is also required to set aside certain amount of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until possible, the aggregate amount of such reserves reaches 50% of its respective registered capital. Our statutory reserves are not distributable as loans, advances or cash dividends. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. As of April 30, 2010, our PRC subsidiaries had not allocated to these reserves. Any limitations on the ability of our PRC subsidiaries to transfer funds to us may materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

 

                In addition, under a new PRC tax law that became effective in January 2008 and the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement, which became effective on January 1, 2007, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary may also be subject to a withholding tax at a rate of 5%. The withholding tax on dividends may be exempted or reduced by the State Council of the PRC. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.

32


 

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

                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 our internal controls over financial reporting.  In addition, beginning with our Annual Report for the year ending April 30, 2010, an independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. 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 the Company to attract and retain additional members to the Board of Directors (both independent and non-independent), and additional executives.

 

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 through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states are considering various greenhouse gas registration and reduction programs. Certain of our manufacturing plants use significant amounts of energy, including electricity and gas, and emit amounts of greenhouse gas are likely to be affected by existing proposals. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, any one of which could significantly increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results. While future emission regulation appears likely, it is too early to predict how this regulation will affect our business, operations or financial results

 

 

Item 1B. Unresolved Staff Comments

 

Currently, we are in process of answering the S-1 reviewing comments.  The S-1 was submitted to the SEC for resale purposes for the prior fund raising activities.   As there were 63 SEC staff comments initially, it has been reduced to 31 questions which are in process of being answered. 

 

 

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

 

None.

 

 

Item 3.   Defaults Upon Senior Securities

33


 

 

None.

 

 

Item 4.   Submission of Matters to a Vote of Security Holders

 

None

 

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

 

 

 

 

 

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 8, 2010

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

 

 

Each person whose individual signature appears below hereby authorizes and appoints Dickson V. Lee with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

34


 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 

Signature

Title

Date

 

 

 

/s/  Dickson V. Lee

CEO & Chairman (Principal Executive Officer)

September 8, 2010

Dickson V. Lee

 

 

 

/s/  Jung Mei Wang

Acting Chief Financial Officer (Principal Accounting and Financial Officer)

September 8, 2010

Jung Mei Wang

 

 

 

/s/  Shirley Kiang

Director

September 8, 2010

Shirley Kiang

 

 

 

 

 

/s/  Joseph J. Borich

Director

September 8,  2010

Joseph J. Borich

 

 

 

 

 

/s/  Ian Robinson

Director

September 8, 2010

Ian Robinson

 

 

 

 

 

/s/  Dennis Bracy

Director

September 8, 2010

Dennis Bracy

 

 

 

/s/  Edward Dowd

Director

September 8, 2010

Edward Dowd

 

 

 

/s/  Robert Lee

Director

September 8, 2010

Robert Lee

 

 

 

 

 

 

 

 

 

 

 

 

 

35


 

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 8, 2010

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

36


 

EXHIBIT 31.2

CERTIFICATIONS OF ACTING CHIEF FINANCIAL OFFICER

I, Jung Mei (Rosemary) Wang 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 8, 2010

By:

/S/ Jung Mei Wang

 

Name:

Jung Mei (Rosemary) Wang, CPA

 

Title:

Acting CFO

 

37


 

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, 2010 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 8, 2010

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

38


 

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, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jung Mei (Rosemary) Wang, Acting 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 8, 2010

By:

/S/ Jung Mei Wang

 

Name:

Jung Mei (Rosemary) Wang, CPA

 

Title:

Acting CFO

 

 

39