Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - L & L ENERGY, INC.Financial_Report.xls

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

——————————

FORM 10-Q

 

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ON JULY 31, 2011

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number: 000-32505 

 

 

L & L ENERGY, INC.

 (Exact name of Registrant as specified in its charter)

 

 

NEVADA

91-2103949

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

130 Andover Park East, Suite 200, Seattle, WA

 

98188

(Address of Principal Executive Offices)

 

(Zip Code)

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X] No [   ] 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [  ] 

 

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

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

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of September 8, 2011 there were 32,394,431shares 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

 
 

Unaudited Consolidated Balance Sheets as of July 31, 2011and April 30, 2011

3

 

Unaudited Consolidated Statements of Income and Comprehensive Income

 
 

for the Three Months ended July 31, 2011 and 2010

4

 

Unaudited Consolidated Statements of Cash Flow

 
 

for the Three Months ended July 31, 2011 and 2010

5

 

Unaudited Notes to the Consolidated Financial Statements

6

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

Controls and Procedures

30

     
     

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 1B.

Unresolved Staff Comments

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults upon Senior Securities

41

Item 4.

Reserved

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

     

Signatures

 

42

Index to Exhibits

42

 

 

 

 

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

 

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

 

 

 

 

 

 

 

2


 

                                                                                                                             PART I – FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

L & L ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

AS OF July 31, 2011 and April 30, 2011

(Unaudited)

     

July 31, 2011

 

April 30, 2011

ASSETS

       
 

CURRENT ASSETS:

       
 

Cash and cash equivalents

$

6,097,089

$

4,914,425

 

Accounts receivable

 

28,078,835

 

24,017,391

 

Prepaid and other current assets

 

18,264,351

 

28,641,462

 

Other receivables

 

1,036,287

 

2,586,147

 

Inventories

 

7,862,711

 

6,633,019

 

Total current assets

 

61,339,273

 

66,792,444

           
 

Property, plant, equipment, and mine development, net

 

97,016,961

 

96,479,552

 

Construction-in-progress

 

55,189,117

 

44,943,609

 

Intangible assets, net

 

868,987

 

902,555

 

Goodwill

 

3,013,817

 

2,988,175

 

Restricted Cash

 

563,718

 

544,588

 

Long term receivable

 

7,468,634

 

7,272,828

 

Related party notes receivable

 

5,758,149

 

7,428,574

 

Total non-current assets

 

169,879,383

 

160,559,881

     

 

 

 

TOTAL ASSETS

$

231,218,656

$

227,352,325

           

LIABILITIES AND EQUITY

       

CURRENT LIABILITIES:

       
 

Accounts payable

$

4,594,028

$

3,439,460

 

Accrued and other liabilities

 

824,814

 

717,298

 

Other payables

 

5,164,351

 

7,546,391

 

Payables-related party

 

15,588,508

 

17,264,815

 

Due to officer

 

1,070,000

 

1,070,000

 

Taxes payable

 

18,815,388

 

18,835,276

 

Customer deposits

 

3,676,682

 

4,338,424

 

Bank loans

 

5,431,240

 

5,385,030

 

Total current liabilities

 

55,165,011

 

58,596,694

           

LONG-TERM LIABILITIES

       
 

Long-term payable

 

800,000

 

800,000

 

Asset retirement obligation

 

2,035,776

 

1,978,877

 

Total long-term liabilities

 

2,835,776

 

2,778,877

           
 

Total Liabilities

 

58,000,787

 

61,375,571

           
 

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; 32,365,467 shares issued and outstanding, and 32,277,579 shares issued and outstanding at July 31 and April 30, 2011, respectively)

 

32,366

 

 

 

 

 

32,278

 

Shares to be issued (13,104 shares)

 

13

 

0

 

Additional paid-in capital

 

51,124,610

 

48,420,321

 

Deferred stock compensation

 

-

 

-

 

Accumulated other comprehensive income

 

7,715,122

 

6,502,542

 

Retained Earnings

 

84,274,227

 

81,888,339

 

Treasury stock (459,000 shares and 1,259,00 shares at July 31 and April 30, respectively)

 

(396,059)

 

(396,859)

 

Total L & L Energy stockholders' equity

 

142,750,279

 

136,446,621

 

Non-controlling interest

 

30,467,590

 

29,530,133

 

Total equity

 

173,217,869

 

165,976,754

TOTAL LIABILITIES AND EQUITY

$

231,218,656

$

227,352,325

             
 
                                                                                                 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 THREE MONTHS ENDED July 31, 2011 and 2010

(Unaudited)

 

For The Three Months Periods Ended July 31,

   

2011

 

2010

NET REVENUES

$

36,633,306

$

55,329,939

COST OF REVENUES

 

28,443,975

 

36,724,263

GROSS PROFIT

 

8,189,331

 

18,605,676

         

OPERATING COSTS AND EXPENSES:

       

Salaries & wages-selling, general and administrative

 

933,000

 

780,672

Selling, general and administrative expenses, excluding salaries and wages

 

3,018,049

 

3,225,609

Total operating expenses

 

3,951,049

 

4,006,281

         

INCOME FROM OPERATIONS

 

4,238,282

 

14,599,395

OTHER EXPENSE:

       

Interest income (expense)

 

198,348

 

(70,540)

Other income (expense)

 

(767,561)

 

(12,843)

Total other income (expense)

 

(569,213)

 

(83,383)

         

INCOME BEFORE PROVISION FOR INCOME TAXES

 

3,669,069

 

14,516,012

LESS PROVISION FOR INCOME TAXES

 

585,867

 

2,183,300

INCOME BEFORE

NON-CONTROLLING INTEREST

 

3,083,202

 

12,332,712

         

Income attributable to non-controlling interests

 

697,314

 

1,394,198

Income attributable to L & L

 

2,385,888

 

10,938,514

         

NET INCOME

$

3,083,202

$

12,332,712

         

OTHER COMPREHENSIVE INCOME:

       

Foreign currency translation gain

 

1,212,580

 

1,038,832

COMPREHENSIVE INCOME

$

4,295,782

$

13,371,544

         

Comprehensive income attributable to non-controlling interests

$

1,740,794

$

1,454,763

Comprehensive income attributable to L & L

 

2,554,988

 

11,916,781

         

INCOME PER COMMON SHARE – basic

$

0.08

$

0.38

INCOME PER COMMON SHARE – diluted

$

0.08

$

0.36

         

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – basic

 

31,355,781

 

29,037,451

         

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - diluted

 

31,704,978

 

30,407,090

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

4


 

 

 

 

L & L ENERGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED July 31, 2011 and 2010

Unaudited) 

   

For The Three Months Periods Ended July 31,

   

2011

 

2010

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income

$

3,083,202

$

12,332,712

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

       
 

Depreciation and amortization

 

1,585,548

 

3,111,736

 

Stock compensation

 

262,190

 

430,546

 

Accretion of asset retirement obligation

 

56,899

   
 

Accounts receivable

 

(4,061,444)

 

1,191,692

 

Prepaid and other current assets

 

10,377,111

 

6,945,169

 

Inventories

 

(1,229,692)

 

(2,152,916)

 

Other receivable

 

49,533

 

63,050

 

Accounts payable and other payable

 

(1,280,853)

 

(5,139,518)

 

Customer deposit

 

(661,742)

 

832,662

 

Accrued and other liabilities

 

107,516

 

(469,964)

 

Taxes payable

 

(19,888)

 

1,435,432

 

Note receivable

 

(195,806)

 

-

Net cash provided by operating activities

 

8,072,574

 

18,580,601

           

CASH FLOWS FROM INVESTING ACTIVITIES:

       
 

Acquisition of property and equipment

 

(376,833)

 

(3,582,067)

 

Acquisition of intangible assets

 

-

 

(429,298)

 

Construction-in-progress

 

(10,696,954)

 

(13,990,438)

 

Increase in restricted cash

 

(19,130)

 

-

 

Cash received from sale of HSC

 

1,088,524

 

-

Net cash used in investing activities

 

(10,004,393)

 

(18,001,803)

           

CASH FLOWS FROM FINANCING ACTIVITIES:

       
 

Payment on bank loans

 

-

 

(739,870)

 

Proceeds from warrant extension

 

-

 

50,000

 

Proceeds from Treasury stock sold

 

2,443,000

 

-

 

Warrants converted to common stock

 

-

 

1,457,000

 

Payment to previous owner of acquired mine

 

(1,676,307)

 

 

 

Related party receivable

 

2,082,228

 

(80,239)

Net cash provided by financing activities

 

2,848,921

 

686,891

           

Effect of exchange rate changes on cash and cash equivalents

 

265,562

 

883,576

           

INCREASE IN CASH AND CASH EQUIVALENTS

 

1,182,664

 

2,149,265

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

4,914,425

 

7,327,369

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

6,097,089

$

9,476,634

           

SUPPLEMENTAL INFORMATION

       

INTEREST PAID

$

72,819

$

59,200

INCOME TAX PAID

$

400,668

$

747,848

5


 

 

L & L ENERGY, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

 

DESCRIPTION OF BUSINESS

 

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

 

As of July 31, 2011, the Company has the following subsidiaries or operations in China:

 

·         Kunming Biaoyu Industrial Boiler Co., Ltd (“KMC”), which owns/controls coal wholesale operations, Ping Yi Coal Mine ( “PYC”) and Ping Yi coal washing;

·         L&L Coal Partners (the “2 Mine” or “LLC”), which owns/controls two coal mining operations (DaPuAn Mine and SuTsong Mine) and DaPuAn Mine’s coal washing operations;

·         L&L Yunnan Tianneng Industry Co. Ltd. (“TNI”), which owns/controls ZoneLin Coal Coking Factory (“ZoneLin”);

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

·         Da Ping Coal Mine (“DaPing”).

 

BASIS OF PRESENTATION

 

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

 

 

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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, 2011 may not necessarily be 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 management’s opinion, are necessary for fair presentation of the information contained herein. These financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-K for the fiscal year ended April 30, 2011.

 

Principles of Consolidation -The fully consolidated financial statements include the accounts of the Company, and 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, 98% of TNI (coal washing and coking operations), 60% of DaPing, 98% of Tai Fung.  The Company fully consolidates 100% of the assets, liabilities of its subsidiaries and show the non-controlling interests owned by their respective owners as Non-Controlling Interests.  The results of operations of the Company’s subsidiaries less amounts attributable to non-controlling interest owners are net income attributable to the Company.  All significant inter-company accounts and transactions are eliminated.

 

6


 

 

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, 2011. 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.

 

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 $3,647,883and $4,350,383 at July 31, 2011 and April 30, 2011, respectively. As of July31, 2011 and April 30, 2011, the Company had deposits in excess of federally insured limits totaling $0 and $172,119, respectively, in 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 - The Company recognizes revenue when all of the following four criteria are met:

 

·         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 and recorded as advances from customers.

 

Accounts receivable - The Company’s maintains 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, 2011 and April 30, 2011, the Company determined that no reserve for accounts receivable was necessary.

 

Inventories - Materials, supplies and coal inventory are valued at the lower of average cost or market. Raw coal represents coal stockpiles that may be sold in current condition or may be further processed prior to shipment to a customer. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.

 

Non-controlling Interest - In 2009, the Company purchased 60% interests in 2 Mines and subsequently increased the ownership to 80% during the fiscal year-ended April 30, 2010.  The net income attributed to NCI has been separately designated in the accompanying consolidated statements of income and other comprehensive income.

 

Foreign Currency Translation - The accounts of the Company’s Chinese subsidiaries are maintained in RMB and the accounts of the U.S. parent company are maintained in USD.   The accounts of the Chinese subsidiaries were translated into USD, with the RMB designated as the functional currency for the Chinese subsidiaries.  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. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the consolidated statements of income and other comprehensive income as other comprehensive income.

 

Asset Retirement Cost and Obligation -In connection with mining operations, the Company generally incurs legal obligations associated with the retirement of long-lived assets, which are recorded 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 future obligation primarily relates to closure of mines, The future obligation

7


 

 

primarily relates to closure of mines, reclamation of surface land and support upon cessation of mining. The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value.  The credit-adjusted risk-free rate is deduced based on the yield curve for U.S. Treasury securities with corresponding maturity adjusted based on the company's credit standing.  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 over the life of the related mining assets. 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.

 

Each mine is required by the respective local province government authority to deposit money in an escrow account on an annual basis. The amount is calculated based on the number of tons specified in the mining rights. The Company can only utilize the funds in the escrow account for expenses related to retirement of the mines, such as land subsidence, restoration, rehabilitation and environment protection. Any unused funds will be returned to the Company upon the closure of the mines. The amount held in the escrow accounts is accounted for as restricted cash.

 

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 our mine are capitalized and principally amortized using the units-of-production method over the actual tons of coals produced directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the 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 in-place 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 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. Impairment losses are recorded on long-lived assets used in operations when 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, 2011 and April 30, 2011, there was no impairment of its long-lived assets.

 

Goodwill and Other Intangibles -The Company assesses annually whether there is an indication that goodwill is impaired, or more frequently if events and circumstances indicate that the asset might be impaired during the year.  The Company performs its annual impairment test in the fourth quarter of each year.  The Company has identified its operating segments as its reporting units for purposes of the impairment test.  The Company’s existing goodwill and intangible assets are associated with its mining, washing and coking segments.  The Company then determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit.  Calculating the fair value of the reporting units requires significant estimates and assumptions by management.  To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, there is an indication that the reporting unit goodwill may be impaired and a second step of the impairment test is performed to determine the amount of the impairment to be recognized, if any. The Company believes that as of July 31, 2011 and April 30, 2011, there was no impairment of its goodwill.

8


 

 

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, 2011, 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.

 

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 July31, 2011 and April 30, 2011, 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.

 

The Company is also subject to US federal and state tax jurisdictions.  The Company’s tax years for 2008 to present are subject to examination by the taxing authorities.  With a few exceptions, the Company is no longer subject to federal and state examinations by taxing authorities for years before 2008. 

 

Current authoritative guidance requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For a tax position meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At July 31, 2011, the Company did not have any unrecognized tax benefits that, if recognized, would affect the effective tax rate.

 

The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of provision for income tax. As of June 30, 2011, the Company had no material unrecognized tax benefits.

 

Stock-Based Compensation - The Company records stock-based compensation at fair value at the grant date and recognizes the expense over the employee’s requisite service period by using the Black-Scholes option pricing model. The estimated 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.

 

Capitalized Interest - The Company capitalizes interest on construction in progress related to specific mining projects. The methodology for capitalizing interest on general funds begins with a determination of the borrowings applicable to the qualifying assets. The basis of this approach is the assumption that the portion of the interest costs that are capitalized on expenditures during an asset’s acquisition period could have been avoided if the expenditures had not been made. This methodology takes the view that if funds are not required for construction then they would have been used to pay off debt. The primary debt instrument included in the rate calculation of capitalized interest incurred for the year-ended April 30, 2011 was the Company’s bank loans (as defined under Note 16, “Bank Loans”). The interest to be capitalized for any period is derived by multiplying the average rate of interest times the average qualifying assets during the period, not to exceed the total interest on the qualifying debt instruments. To qualify for interest capitalization, the Company must continue to make progress on the development of the assets.

9


 

 

Fair Value Measurements–The Company’s accounting policy for fair value of financial instruments defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement.  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.

 

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.

 

Earnings Per Common Share - Basic earnings per share is calculated by 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, 2011, we had three major customers who purchased 46% of the Company’s total sales.  In addition, we had four major suppliers who provided 58% of our total purchases. 

 

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, 2011and 2010 were not significant.

 

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.

 

New accounting pronouncements

 

Comprehensive Income: In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting update which amends current comprehensive income guidance. The update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, an entity will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance will become effective for interim and annual periods beginning after December 15, 2011, or on January 1, 2012 for the Company. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

Business Combinations: In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

10


 

 

Intangibles—Goodwill and Other: In December 2010, the FASB issued amended guidance related to Intangibles—Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Receivables: In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU No. 2010-20 amends the guidance with ASC Topic 310, “Receivables” to facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a roll forward schedule of the allowance for credit losses on a portfolio segment basis, credit quality indicators of financing receivables and the aging of past due financing receivables. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

 

NOTE 3  BUSINESS COMBINATIONS

 

The Company has been actively acquiring smaller coal companies who lack the capital and/or management expertise to maximize growth and safety. The Company will continue to seek opportunities to purchase other mining operations as well as coal washing and coal coking operations. 

 

DaPing Coal Mine

 

On March 25, 2011, the Company entered into an Acquisition Agreement to acquired 60% equity of the DaPing Coal Mine (“DaPing”), with an effective date of March 15, 2011, for a purchase price of 112,080,000 RMB (equivalent to approximately US$17,064,815).An initial installment of 10,000,000 RMB (equivalent to US$1,522,557) was payable in April 2011, but has not yet been paid by the Company.  After meeting five requirements, 30% of the total purchase price, RMB 33,624,000 (equivalent to US$5,119,445), should be paid within three months after the first 30 days of signing this agreement. The remaining balance of 68,456,000 RMB (equivalent to US$10,422,814) is payable after meeting another 3 requirements subsequent.

 

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

 

 Allocation of purchase price: 

 Current assets

$

528,914

 Property, plant and equipment

 

3,899,314

 Intangible assets*

 

26,673,895

 Fair value of assets

 

31,102,123

 Less: Fair value of liabilities 

 

14,037,308

Net assets acquired 

$

17,064,815

Noncontrolling interest 

$

9,626,043

 

*Includes goodwill $2,625,751

 

Tai Fung Energy Inc. (“Tai Fung”)

 

On March 8, 2011, the Company entered into an Operating Agreement to invest up to RMB 20,000,000 (equivalent to US$3,063,069) in a newly established entity, Tai Fung, a Chinese company established in SeZone Country, Yunnan Province, PRC on March 8, 2011. TaiFung is a marketing and distributing company of coal throughout China and has yet to begin operation as of April 30, 2011. The net assets on acquisition date comprise only cash contributed by the 2% noncontrolling interest.

11


 

 

The investment represent 98% control of Tai Fung and the investment is accounted for in accordance with ASC 805 and consolidated with the financial statements contained herein.   The Company has paid RMB 4,178,718 (equivalent to US$639,985) as of April 30, 2011. The Operation Agreement is subject to renew after six years from the execution date the agreement.

 

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company as they may have appeared if the acquisition of PYC, Zonelin, Hong Xing, Daping and Tai Fung, presented in the aggregate, collectively, had been completed on May 1, 2010.

 

   

For the period ended

   

31-Jul-11

 

31-Jul-10

         

Net revenue

$

36,633,306

$

55,638,387

Income from operation

 

4,238,282

 

14,876,126

Net income attributable to L&L

$

2,385,888

$

11,215,245

Basic proforma earnings per share

 

$0.08

 

$0.39

Diluted proforma earnings per share

 

$0.08

 

$0.37

 

 

NOTE 4  RESTRICTED CASH

 

Long-term restricted cash represents the bank deposits placed as guarantee for the future payments of costs related to land subsidence, restoration, rehabilitation and environment protections required by the local province government authority.

 

NOTE 5  PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

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

 

The Company provides advances to employees for them to handle incidentals in our mines, washing and coking expansion projects as these facilities are far away from our headquarters in Kunming.  There were no advances to officers or directors.

 

Prepaid expenses and other current assets consist of the following:

 

Description

July 31, 2011

April 30, 2011

Advances to suppliers

$16,292,328

$ 14,389,107

Bill receivable

46,553

12,345,103

Advanced to employees

1,791,346

1,518,454

Other

134,124

388,798

Total

$18,264,351

$ 28,641,462

 

 

 

 

 

12


 

NOTE 6  OTHER RECEIVABLES

Other receivables consist of the following:

 

Description

July 31, 2011

April 30, 2011

Short term loans to business associates

$ 515,933

$ 927,736

HSC receivable

170,627

1,259,151

Other

349,727

399,260

Total

$ 1,036,287

$ 2,586,147

 

 

NOTE 7  INVENTORIES

 

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

 

Description

July 31, 2011

April 30, 2011

Raw Coal

$ 2,899,444

$ 2,952,157

Coke Coal

411,153

537,072

Fine Coal

4,552,114

3,143,790

Total 

$ 7,862,711

$ 6,633,019

 

 

NOTE 8  PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

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

 

Description

 

July 31, 2011

 

April 30, 2011

Mine development

$

28,362,662

$

27,241,647

Mineral rights

 

45,695,126

 

45,306,336

Building and improvements

 

9,802,355

 

9,736,380

Machinery and equipment

 

24,917,468

 

24,329,509

 

 

108,777,611

 

106,613,872

Accumulated depreciation 

 

(11,760,650)

 

(10,134,320)

Property, Plant and Equipment, net

$

97,016,961

$

96,479,552

 

Mineral rights represent the exclusive right, granted by the Chinese government, to operate the 2 Mines, PYC and DaPing.  The rights were acquired in the first quarter of 2008 as a result of the acquisition of the “2 Mines” on May 1, 2008, on November 1, 2009, and on March 15, 2011 respectively.  The Company has elected to use unit-of-production method to depreciate its mineral rights.

 

Depreciation expense was $1,532,880 and $2,996,562 for the three months ended July 31, 2011 and July 31, 2010, respectively. 

 

 

NOTE 9  CONSTRUCTION IN PROGRESS

 

Construction in progress includes mine development, ventilation and electrical system improvements for the PYC mine and the two coal mines, building of staff quarters, and beginning construction of a sewage treatment system and road expansion for the washing facilities.  Construction in progress was $ 55,189,117and $ 44,943,609 as of July 31, 2011 and April 30, 2011, respectively. Capitalized interest costs were approximately $41,390 and $320,788 for July 31, 2011 and April 30, 2011, respectively.

 

 

13


 

 

 

NOTE 10  INTANGIBLE ASSETS

 

Customer relationship and technology assets are being amortized over a period of 7 years.  Amortization expenses was $41,090 and $39,267 for the three months ended July 31, 2011 and July 31, 2010, respectively.

 

Intangible assets consist of the following:

 

Description

 

July 31, 2011

 

April 30, 2011

Customer relationship

$

275,568

$

273,224

Technology

 

881,204

 

873,706

 

 

1,156,772

 

1,146,930

Accumulated amortization

 

(287,785)

 

(244,375)

 

$

868,987

$

902,555

 

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

 

 

NOTE 11  LONG TERM RECEIVABLE

 

As of July 31, 2011, the Company entered into several agreements with Colorado-based Bowie Resources, LLC and have loaned a total of approximately $7 million.  The loan originally carried an interest rate of approximately nine (9) percent which has since increased to approximately eleven (11) percent.  The loan is co-senior with another lender.  The total owing to the Company as of July 31, 2011 is $7,468,634 include interest of $426,622.  In additional to the loan, the Company has secured exclusive rights to market coal from Bowie to China, Taiwan, Japan and Korea.  The fair value of the marketing rights is not determinable at this time, and the Company believes that any value assignable to the respective intangible asset is immaterial.

 

NOTE 12  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 related party transactions are approximately $5.8 million as of July 31, 2011 which is tabled below.  While in the prior year, as of April 30, 2011, total related party transactions amounted transaction amounts to approximately $7.4 million including approximately $5.53 million is a loan to non controlling interest shareholders of 2 Mines, approximately $1.5 million for an advance to a KMC manager for the development of the Tian-Ri Coal Mine. 

 

 

Borrowers

USD

Maturity

Collateralized by

Associates to TianRi Coal Mine

$ 1,573,508

May 1, 2015

Mining equipment

Associates to SuTsong

2,795,595

May 1, 2015

Mine Assets

Associates to DuPuAn

1,108,007

May 1, 2015

Mine Assets

Yunnan Tinnan Co. Ltd.

240,878

May 1, 2015

Machinery

Others

40,161

Various dates

 

 

$5,758,149

 

 

 

 

As of July 31, 2011 and April 30, 2011, the Company had the following other payables to the related parties as listed below:

 

 

Payable-related party

 

July 31, 2011

 

April 30, 2011

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

$

200,000

$

200,000

Payable to previous owners of DaPing Coal Mine

 

15,388,508

 

17,064,815

Total current Payable-related party

 

15,588,508

 

17,264,815

Payable to previous owners of ZoneLin(non-current)

 

800,000

 

800,000

Total Payable-related party

$

16,388,508

$

18,064,815

14


 

 

 

 

Total Payable-related party was $16 million as of July 31, 2011. None of these payables bear interest and they are not collateralized by any assets of the Company. A balance of $15.4 million was part of the consideration payable to the owner of the acquisition of DaPing coal mine during the year ended April 30, 2011

 

 

Due to officer

 

July 31, 2011

 

April 30, 2011

Dickson Lee (See Note 25)

$

420,000

$

420,000

Robert Lee

 

650,000

 

650,000

Total due to officer

$

1,070,000

$

1,070,000

 

 

In 2011, Dickson Lee and Robert Lee granted $1.07 million temporary interest free loans to support funding of Bowie mine and other business purposes.

 

 

NOTE 13  ASSET RETIREMENT OBLIGATION

 

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

 

As for the Ping Yi Mine, the Company estimates the asset retirement obligation at a rate of 2 RMB per ton based on total reserves at the end of the useful lives of the mines. The Company expects to extract approximately 4.4 million tons of coal over the expected useful life of twelve years. The interest rate used in the net present value calculation is 7%.

 

The Da Ping Mine was acquired by the Company in March 2011. According to the mine reservation report, the management expects to extract approximately 15 million tons of coal over the remaining 26 years. Da Ping Mine is located in Guizhou Province and the management estimates the asset retirement obligation at a rate of 2 RMB per ton based on total reserves at the end of the useful lives of the mines. The interest rate used in the net present value calculation is 7%.

 

During the quarter ended July 31, 2010, the Company revised the forecasted cash flows used for the net present value calculations for the DaPuAn, SuTsong and PingYi mines. The revisions to estimated cash flows pertain to revisions in the estimated amount and timing of required reclamation activities throughout the lives of the respective mines and reflect changes in estimates of closure volumes, disturbed acreages and third-party unit costs as of July 31, 2010. We based these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates. We evaluated the forecasted cash flows as of July 31, 2011, and no revision was deemed necessary.

 

The following is a summary of the change in the carrying amount of the asset retirement obligation during the quarter ended July 31, 2011 and year ended April 30, 2011.

 

 

 

July 31, 2011

 

April 30, 2011

 

 

 

 

 

Beginning balance at May 1

$

1,978,877

 $ 

            507,279

Liabilities incurred during the period

 

-

   

614,071

Liabilities settled during the period

 

-

   

                         -

Accretion of interest

 

56,899

 

              98,165

Revisions in estimated cash flows

 

-

 

                         759,362

Ending balance

$

2,035,776

$

1,978,877

15


 

 

 

 

NOTE 14  OTHER PAYABLES

 

Other Payables consist of the following:

 

Description

 

July 31, 2011

 

April 30, 2011

Payable to business associates

$

1,912,568

$

4,747,155

Others

 

3,251,783

 

2,799,236

Total other payables

$

5,164,351

$

7,546,391

 

Total Other Payables was $5.2 million as of July 31, 2011. None of these payables bear interest and they are not collateralized by any assets of the Company. $1.9 million was a temporary interest free loan from a business partner. The other $3.3 million is for salary payable, miscellaneous payment of fees related to maintenance, safety, employee training for security and environmental matters.

 

 

NOTE 15  TAX PAYABLES

 

Taxes payable consist of the following:

 

Description

 

July 31, 2011

 

April 30, 2011

VAT Payable

$

5,171,969

$

5,546,296

Income Tax Payable

 

10,807,420

 

10,622,221

Other Taxes Payables*

 

2,835,999

 

2,666,759

Total Tax Payables

$

18,815,388

$

18,835,276

 

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

 

 

NOTE 16  BANK LOANS

 

During the third quarter of 2010, 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, 2010, which was paid off. The second loan with PYC was for RMB 15,000,000 or approximately $2,327,674.  The loan carries an interest rate of 9.7% per annum and matures on February 26, 2011, but has since been extended by mutual agreement to February 26, 2012.  During the fourth quarter of 2011, as part of acquisition of DaPing, the Company assumed RMB 20 million bank loan or approximately $3,103,566 with interest rate of 9.18% per annum and matures on October 29, 2011. All loans are unsecured.

 

 

NOTE 17  INCOME TAXES

 

The Company’s main operations are located in China.  The Company is subject to corporate income taxes primarily in two taxing jurisdictions, China, and the United States of America.  The income of the Company is mainly generated via its 2 Mines, KMC, TNI and TaiFung which are all located in China.  The Company incurs tax liability for the coal operations charged at 25% of net profit.  As the 2 Mines (DaPuAn Mine and SuTsong Mine) are in a heavily regulated resource business in China, and HongXing and ZoneLin are in a form of proprietorship, thus the tax rate of 3% and 5% of total revenue proceeds is applied to 2 Mines and TNI, respectively, subject to provisional adjustments when the coal sale changes.  As no cash or funds were repatriated from China to the U.S., the Company’s income was not subject to the U.S. federal taxation, under subpart F, income from controlled foreign company, of the U.S. Internal Revenue Code.

16


 

 

 

The Company’s income tax liability for the period ended July 31, 2011 and April 30, 2011 was $10,807,420 and 10,622,221, respectively.  These tax payables to Chinese local governments can be postponed temporarily as we are a U.S. company bringing in U.S. management skills and investing capital to increase coal production and safety standards, beneficial to the Chinese local communities.  According to Chinese law, a new joint venture located in the western part of China may benefit under the “Go-West” policy to enjoy a special Chinese tax rebates from the government, thus there is a high probability that the 2 Mines, KMC and TNI tax liability payments may be delayed or mitigated.

 

The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Income and Comprehensive Income:

 

The significant component for income taxes is described for both US and PRC operation as of July 31, 2011 and April 30, 2011 are described below.

 

United States of America

 

As of July 31, 2011, the Company in the United States had $21,355,188in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward twenty years.  The deferred tax assets at July 31, 2011 consist mainly of net operating loss carry forwards.  Due to the uncertainty of the realization of the related deferred tax assets of $7,533,797a reserve equal to the amount of deferred income taxes has been established at July 31, 2011.  The Company has provided 100% valuation allowance to the deferred tax assets as of July 31, 2011.

 

People’s Republic of China (PRC)

 

Pursuant to the PRC Income Tax Laws, the Company's subsidiaries are generally subject to Enterprise Income Taxes ("EIT") at a statutory rate of 25% for KMC and TaiFung.  The LLC, TNI and DaPing entities are owned in the form of partnerships, thus, the statutory rate is 5%.

 

The following table sets forth the significant components of the provision for income taxes for operation in PRC for the three months ended July 31, 2011 and July 31, 2010:

 

 

2011

 

2010

       

Consolidated pretax income

$ 3,637,436

 

$ 14,516,012

       

Expected income tax expense

1,236,728

 

4,935,444

       

Difference between statutory rate and foreign effective tax rate

(1,882,078)

 

(3,465,990)

       

Change in valuation allowance

1,231,216

 

713,847

       

Actual tax expense

$ 585,867

 

$ 2,183,300

       

Consolidated effective tax rate

16%

 

15%

 

 

NOTE 18  STOCKHOLDERS’ EQUITY

 

The following table summarizes common stock and treasury shares activity for the three months ended July 31, 2011:

 

   

For the three month period ended July 31, 2011

   

Shares

 

Amounts

Shares for compensation

100,992

$

262,190

Treasury stock for investors

600,000

 

1,443,000

Treasury stock to subsidiary

200,000

 

1,000,000

Total

 

900,992

$

2,705,190

17


 

 

 

 

Stock Issued for Compensation

 

For the three months ended July 31, 2011, the Company issued 27,739 shares of common stock with the share value of $229,833 for employees.

 

For the three months ended July 31, 2011, the Company issued 5,753 shares of common stock with the share value of $35,667 for the Board of Directors.

 

For the three months ended July 31, 2011, the Company issued 67,500 shares of common stock with the share value of $408,722 for the compensation of consultants.

 

Treasury Stock

 

During the first quarter ended July 31, 2011, the Company recovered zero shares of its common stock. During the first quarter ended July 31, 2011, the Company transferred 600,000 shares of treasury stock to investors and 200,000 shares of treasury stock to a subsidiary as an investment for a combined total value of $2,443,000. In accordance with US generally accepted accounting principles, the Company recorded an increase to additional paid-in-capital of $2,442,200, respectively, as a result of the sold and transferred treasury shares. At July 31, 2011, the Company owned a total of 459,000 of its own shares. 

 

Stock issued for Cash

 

For the three months ended July 31, 2011, no common stock was issued for cash.

 

 

NOTE 19  WARRANTS

 

Warrants Issued for Compensation

 

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

 

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

 

The fair value was estimated on the date of the grant using the Black-Scholes option-pricing model. The following table displays the weighted average assumptions that have been applied to estimate the fair value of warrants on the date of grant for the three months ended July 31, 2011:

 

Expected life (years)

 

5.0

Risk-free interest rate

 

1.95%

Expected volatility

 

178%

Expected dividend yield

 

0%

 

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

 

18


 

 

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

 

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

 

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

 

For the three months ended as July 31, 2011, no warrants were issued or exercised.

 

Following is a summary of the status of warrants outstanding at July 31, 2011:

 

Type of Warrants

 

Range of Exercise Prices

 

Total Warrants Outstanding

 

Weighted Average Remaining Life (Years)

 

Weighted Average Exercise Price

Executives-Class D

$

2.25

 

10,000

 

1.67

$

2.25

Directors-Class E

$

3.00 - 9.34

 

210,916

 

3.28

$

3.03

Non-employee

$

11.22

 

1,000

 

4.04

$

11.22

Total

 

 

 

221,916

 

3.61

$

3.03

 

 

As of July 31, 2011, all warrants outstanding for compensation were exercisable. The weighted-average grant-date fair value of warrants granted during the three months ended July 31, 2011 was $ 9.37

 

The table below is a summary of all warrants activity for the three months ended July 31, 2011:

 

 

Warrants Roll-forward Summary

 

 

     

Weighted

 

Weighted

     

Average

 

Average

     

Exercise

 

Remaining

 

Units

 

Price

 

Life (in Years)

Outstanding at April 30, 2011

1,024,474

 

$4.38

 

2.68

Issued

-

 

-

 

 

Exercised

-

 

-

 

 

Cancelled

-

 

-

 

 

Expired

-

 

-

 

 

Outstanding at July 31, 2011

1,024,474

 

$4.38

 

3.61

Exercisable at July 31, 2011

1,024,474

 

$4.38

 

3.61

               

 

 

NOTE 20  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, TNI, Tai Fung and DaPing.  During the fiscal year 2010, the Company increased its ownership interest in L&L Coal Partners to 80% from 60% on April 30, 2009.  The equity related to non-controlling interest as of April 30, 2011 represents 20% third party interest in L&L Coal Partners, 2% third party interest in TNI, 2% third party interest in Tai Fung, and 40% third party interest in DaPing.

 

Included below is a schedule of changes in ownerships interest as of July 31, 2011 and April 30, 2011:

19


 

 

 

 

 

July 31, 2011

 

April 30, 2011

Beginning balance

$

         29,530,133

 $ 

         12,594,293

Non-controlling interest related to acquisitions

 

-

   

10,391,810

Translation

 

240,143

 

923,351

Net income related to non-controlling interest

 

697,314

 

           5,620,679

Increase in controlling interest

 

-

 

       - 

Non-controlling interest related to disposal

 

-

 

        - 

Ending balance

$

         30,467,590

 $ 

         29,530,133

 

 

NOTE 21  EARNINGS PER SHARE

 

The Company only had common shares and warrants issued and outstanding as of July 31, 2011.  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.

 

   

For the Three Months Ended July 31,

   

2011

2010

       

Net income(from Continued Operations)

$

2,385,881

10,938,514

Number of Shares

 

31,355,781

29,037,451

Per Share – Basic

$

0.08

0.38

       

Effect of dilutive shares

$

1,064,474

1,369,639

Number of dilutive shares

 

31,704,978

30,407,090

Per Share – Diluted

$

0.08

0.36

 

 

NOTE 22  COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

The Company has four operating leases:  the Seattle office, GuangZhou office, Guizhou office and Beijing office.  All are non-cancelable leases, expiring in July 2012, November 2011, February 2012 and June 2012, respectively. The non-cancelable operating lease agreement requires that the Company pays certain operating expenses, including management fees to the leased premises. The future minimum rental payments in less than a year and in greater than a year are $ 266,559 and $ 85,533 respectively. 

 

Legal Matters

 

On August 26, 2011, a complaint was filed against the Company, certain officers and directors and a former officer in the United States District Court, Western District of Washington at Seattle (Case No. 11-cv-01423) on behalf of a single plaintiff (who holds based on the complaint/certification about 200 shares of common stock of the Company.)  The complaint (which has not been served upon the Company as of the 10-Q filing date) indicates that the plaintiff’s lawyers will seek to have it certified as a class action.  It alleges that the Company filed false and misleading reports with the SEC from August 13, 2009 to the present primarily based upon an amendment the Company filed to its 2010 Annual Report on Form 10-K on July 28, 2010 and a report published by the Glaucus Research Group on August 2, 2011.  We vehemently deny that we filed any false reports with the SEC, and we plan to defend this lawsuit vigorously.

 

 

 

20


 

Foreign Currency

 

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.

 

Environmental Remediation

 

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

 

Chinese Government

 

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

 

Concentrations

 

For the three months ended July 31, 2011, we had three major customers who purchased 46% of the Company’s total sales.  In addition, we had four major suppliers who provided 58% of our total purchases.

 

NOTE 23  STOCK INCENTIVE PLAN

 

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

 

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

 

For the three month ended July 31, 2011, no stock option has been granted or vested. No stock option has been exercised.

 

The following table displays the weighted average assumptions that have been applied to estimate the fair value of stock option awards on the date of grant for the three months ended July 31, 2011:

 

 

 

2011

Dividend yield

 

 

-

Risk-free interest rate

 

 

2.17%

Expected volatility

 

 

156.61%

Expected lives

 

5 years

 

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

 

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

 

 

21


 

 

 

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

 

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

 

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

 

The following summarizes pricing and term information for options outstanding as of July 31, 2011:

 

 

 

 

Options Outstanding

Range of

Exercise Prices

 

 

Total Options Outstanding

 

Weighted Average Remaining Life (Years)

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

$

$7.65

 

 

 

40,000

 

4.59

 

$

$7.65

                     

 

 

As of July 31, 2011, all stock options outstanding for compensation were exercisable. The weighted-average grant-date fair value of options granted during the year ended April 30, 2011 was $7.06.  For the three month ended July 31, 2011, no stock option has been granted or vested.

 

The following table is a summary of stock option activity under the Stock Incentive Plan as of July 31, 2011:

 

 

 

Incentive Stock Options

 

Weighted Average Exercise Price Per Share

 

Weighted Average Remaining Life (Years)

 

 

 

 

 

 

 

Outstanding at May 1, 2011

 

40,000

 

$

$7.65

 

-

Granted

 

-

 

$

-

 

-

Exercised

 

-

 

$

-

 

-

Canceled

 

-

 

$

-

 

-

Outstanding at July 31, 2011

 

40,000

 

$

$7.65

 

4.85

 

 

 

 

 

 

 

 

Exercisable at July 31, 2011

 

40,000

 

$

$7.65

 

4.85

 

 

NOTE 24  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.

 

     

For the Three Months Periods Ended July 31,

 

           

Total Revenues (including intersegment sales)

 

2011

 

2010

 

Coal mining revenue

 

$ 7,255,819

 

$ 18,625,528

 

Coal wholesale revenue

 

4,462,730

 

5,051,603

 

Coking revenue

 

6,644,119

 

7,018,405

 

Coal washing revenue

 

19,349,814

 

28,962,725

     

$ 37,712,482

 

$ 59,658,315

           
           

Intersegment revenues

 

2011

 

2010*

 

Coal mining revenue

 

$ 712,920

 

$ -

 

Coal wholesale revenue

 

-

 

-

 

Coking revenue

 

-

 

-

 

Coal washing revenue

 

366,258

 

4,328,376

     

$ 1,079,177

 

$ 4,328,376

           
           

Net revenues

 

2011

 

2010

 

Coal mining revenue

 

$ 7,255,819

 

$ 18,625,528

 

Coal wholesale revenue

 

4,462,730

 

5,051,603

 

Coking revenue

 

6,644,120

 

7,018,405

 

Coal washing revenue

 

19,349,814

 

28,962,725

 

Less intersegment revenues

 

(1,079,177)

 

(4,328,376)

     

$ 36,633,306

 

$ 55,329,939

           
           

Net income attributable to L&L

 

2011

 

2010

 

Coal mining

 

$ 2,186,617

 

$ 9,267,909

 

Coal wholesale

 

299,342

 

540,456

 

Coking

 

667,531

 

806,181

 

Coal washing

 

1,754,324

 

2,423,525

 

Parent Company

 

(2,521,936)

 

(2,099,577)

     

$ 2,385,888

 

$ 10,938,514

           
           

Depreciation expense

 

2011

 

2010

 

Coal mining

 

$ 989,613

 

$ 1,949,293

 

Coal wholesale

 

15,319

 

93,982

 

Coking

 

76,187

 

548,867

 

Coal washing

 

384,755

 

228,750

 

Parent Company

 

67,006

 

175,670

     

$ 1,532,880

 

$ 2,996,562

           
             

22


 

 

Total assets

 

July 31, 2011

 

April 30, 2010*

 

Coal mining

 

$ 148,932,364

 

$ 83,218,389

 

Coal wholesale

 

16,251,018

 

13,671,672

 

Coking

 

9,242,355

 

7,778,298

 

Coal washing

 

46,159,237

 

27,211,835

 

Parent Company (intercompany)

 

10,633,682

 

9,227,398

     

$ 231,218,656

 

$ 141,107,592

 

*Reclassification 

23


 

 

 

 

NOTE 25  SUBSEQUENT EVENT

 

On August 3, 2011, Mr. Lee loaned $180,000 to the company without interest for business purposes.

 

On August 26, 2011, a complaint was filed against the Company, certain officers and directors and a former officer in the United States District Court, Western District of Washington at Seattle (Case No. 11-cv-01423) on behalf of a single plaintiff (who holds based on the complaint/certification about 200 shares of common stock of the Company.)  The complaint (which has not been served upon the Company as of the 10-Q filing date) indicates that the plaintiff’s lawyers will seek to have it certified as a class action.  It alleges that the Company filed false and misleading reports with the SEC from August 13, 2009 to the present primarily based upon an amendment the Company filed to its 2010 Annual Report on Form 10-K on July 28, 2010 and a report published by the Glaucus Research Group on August 2, 2011.  We vehemently deny that we filed any false reports with the SEC, and we plan to defend this lawsuit vigorously.

 

On August 29, 2011, Mr. Lee (after receiving approval from the Board of Directors of the Company) converted $420,000 of his prior loan to the Company into common shares of the Company at the conversion price of $8.50/share.

 

 

 

24


 

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

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

Overview

 

We produce, process, and sell coal in the People’s Republic of China (“PRC”) and also have a financial interest in the Bowie Mine, a U.S. thermal coal mine located in Paonia, Colorado.  Our vertically integrated coal operations include four mines, three coal washing plants, one coking facility, and coal wholesale and distribution facilities in the southwest region of China.  Our operations are located in inland China (Yunnan and Guizhou Provinces), which is being developed at a faster rate than the coastal areas which have historically received most of the government’s focus.

 

We believe that China’s demand for coal will remain strong. Currently 70% of China’s electricity is generated from coal resulting in China consuming over 46% of the world’s coal production. It is estimated that China’s demand for coal will continue to increase for several decades, producing a favorable business environment for our ongoing operations. Although China has substantial coal reserves, the coal industry is fragmented and inefficient, and includes many small companies who lack economies of scale and resources 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 allowed China to become a net importer of coal and has implemented a policy of consolidation to increase capacity, and improve the efficiency, and improve safety of coal mines in China.

 

According to the most recent Guizhou policy documents, that Province’s consolidation plan has three elements: production, safety, and efficiency. Regarding production, the provincial government plans to consolidate over 1600 mines to 200 holding companies or fewer by the end of 2013, each of which will be responsible for minimum production between 800,000 and 2,000,000 tons per year (depending on locations). Regarding safety, safety standards will increase as well as safety enforcement activity. Finally, to improve efficiency, the level of mechanization will increase significantly, both in shaft drilling and coal production methods. To facilitate the consolidation, local governments are working with lending institutions to provide debt financing of up to 70% of the purchase price of each mine acquisition.

25


 

We believe that the accelerated government-mandated consolidation of the coal industry in Guizhou Province is an attractive opportunity for the Company. Coal consolidators will be limited to those now participating in Guizhou, which creates a proprietary opportunity for the Company. And as safety standards and enforcement increase, the Company believes that its dedication to safety through training, improving technology, transferring U.S. mine safety knowledge, and expending adequate capital will be a competitive advantage. (Note however that in the short term, as we make the necessary capital and safety improvements, there may be periodic disruptions of our mining operations from safety inspections due to accidents in other mines in the counties where we operate. This may have a corresponding negative impact on production volumes and revenues.)  We believe that being publicly traded gives the Company access to additional sources of capital not available to most competitors.  Finally, we believe that being publicly traded on NASDAQ may attract some potential strategic partners who may help to accelerate the Company’s acquisition and organic growth efforts.

 

Further, the Vice Governor of Guizhou Province with responsibility for natural resources and the Guizhou Energy Bureau Chief both provided encouragement and support to the Company to become a leader in Guizhou’s consolidation efforts, and have encouraged us to achieve five million tons of production per year within the next several years. We believe our relationship with the provincial and local governments will be a key competitive advantage for the Company.

 

We plan to continue leveraging on our in-China experience, U.S. technical and management skills, and U.S. accounting knowledge to become a leading coal energy company in the coal-rich Yunnan and Guizhou Provinces. 

 

In order to support on our Guizhou operations, we established a new branch office in Guiyang City, which is capital of Guizhou province, in July, 2011.

 

Plan of Operations

 

The Company is a vertically integrated coal operator participating in the business of consolidation of a fragmented coal industry in Yunnan and Guizhou Provinces of southwest China. We plan to expand our coal business two ways: first, through expansion of existing operations in accordance with the consolidation policy, and second, through continued acquisitions of operations that lack the capital and management skills to expand to meet the minimum capacity required by the government.

 

Organic Growth. We acquire small mines that lack the capital and management expertise to expand to meet the minimum government-mandated production requirement, and then we provide the management expertise and fund the needed capital expenditures for each acquisition. This has resulted in successfully integration and expansion of our four mines, all of which are on their way to meeting the current 300,000 tons a year minimum production requirement. The value and revenue of our mined coal is increased by coal washing, coking, distribution and wholesale operations.

 

Acquisitive Growth. Our focus in the short term will be taking advantage of unique opportunities for acquiring mines due to the accelerated government-mandated consolidation policy in Guizhou Province. The process includes negotiating and signing memorandums of understanding and letters of intent with mines that meet our criteria. Our preferred criteria includes existing mines in production with good infrastructure and sufficient reserves but lacking the capital and management to expand beyond the current minimum of 300,000 tons per year or mines that must now join a holding company that controls coal production between 800,000 tons and 2,000,000 tons depending on where in Guizhou they operate. We then send in an inspection team to see the mine, talk to the management, and perform due diligence. Based on the analysis of our inspection team, we target and negotiate to acquire the best mines. Thus far, our acquisition team has attained signed letters of intent with 14 producing mines in Guizhou Province and will continue to evaluate and target further mines for acquisition.  And our technical team, which will be led by Dr. Syd Peng, is planning on visiting China to inspect, assess, and supervise the acquisitions.

 

We will need to raise additional capital to expand our operations, both to fund additional investments in capital equipment and technology to increase production and improve safety at existing facilities and to acquire additional profit making operations.  We plan on recruiting additional executives and management and staff, especially with mining operations experience, to augment our team.  We also plan on exploring strategic partnerships that can accelerate our ability to grow organically and acquisitively.

26


 

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,

   

2011

 

 

2010

 

 

  

Amount

% of Revenue

  

Amount

% of Revenue

Revenues

$

36,633,306

100%

$

55,329,939

100%

Cost of revenue

  

28,443,975

78%

  

36,724,263

66%

Gross profit

 

8,189,331

22%

 

18,605,676

34%

Selling general & administrative

  

3,951,049

11%

  

4,006,281

7%

Interest expense (income)

 

(198,348)

-1%

 

70,540

0%

Other expense (income)

  

767,561

2%

  

12,843

0%

Provision for income taxes

  

585,867

2%

  

2,183,300

4%

Net Income Attributable to Non-controlling interest

 

697,314

2%

 

1,394,198

3%

Net income

$

2,385,888

7%

$

10,938,514

20%

 

Revenue

 

The following table presents revenues by operating segment:

 

 

Three Months Ended

 

Increase (Decrease)

 

July 31,

 

to Revenues

 

2011

2010*

 

$

%

       

Coal Mining

$

6,542,900

$

18,625,582

 

$

-12,082,682

 

-65%

Coal Wholesale

 

4,462,730

 

5,051,603

   

-588,873

 

-12%

Coal Washing

 

18,983,556

 

24,634,349

   

-5,650,793

 

-23%

Coal Coking

 

6,644,120

 

7,018,405

 

 

-374,285

 

-5%

Total Revenues

$

36,633,306

$

55,329,939

 

$

-18,696,633

 

-34%

 

*Reclassification

 

In this quarter, our net revenues decreased from $55 million during the three months ended July 31 2010 to $36.6 million during the three months ended July 31, 2011, representing approximately a 33% decrease. The decrease was primarily due to the government’s temporary slowdown and idling of all mines in our region including our mines, and the historical low season of summer.

27


 

 

Coal Mining. During the three months ended July 31, 2011, our coal mining net revenues decreased by $12,082,682 approximately a 65% decrease compared to the three months ended July 31, 2010. Similar to the fourth quarter of the fiscal year ended 2011, this sales decrease was due to lack of inventory caused mainly by the government mandated temporary slowdown and idling of all the mines in the regions we operate.  The government took action because of nearby fatal mine accidents (our mines had no accidents), and the subsequent visits by safety officials and regulators performing safety inspections from the middle of the fourth quarter of year ended April through June 2011.  In addition, on August 15, 2011 there was another fatal accident in Pan County in Guizhou Province near our mines.  Our Yunnan mines have resumed production and our Da Ping mine has been approved for resuming production and is currently expanding its production capacity.  However, our Ping Yi mine remains idle as of July 31, 2011.

 

Wholesale revenues decreased by 12% during the three months ended July 31, 2011 compared to the three months ended July, 31, 2010 because the volume of sales dropped due to decreased supplies of raw coal and fine coal in Yunnan and Guizhou area resulting from the government mandated temporary slowdowns and idling of coal mines in the regions we operate.

 

Coal washing revenue decreased in 2011 because government mandated temporary slowdowns and idling of coal mines in the regions we operate led to limited supply of raw coal to our washing facilities.

 

Coal Coking revenue decreased by 6% of revenue due to the government mandated temporary slowdowns and idling of coal mines in the county our coking facility operates, which resulted in limited supply of raw coal to our coking facility.

 

 

Gross Profit

 

Our gross profit percentage in this quarter decreased to 22% from 34% of the same quarter last fiscal year mainly as a result of the government-mandated temporary coal-mine slowdowns and idling that have significantly reduced our revenue from the coal mining segment, which has historically been the Company’s most profitable business segment.  The corresponding change in product/segment mix and the relatively stagnant fixed costs accordingly have reduced the gross profit of the current period.

 

Selling general & administrative

 

Total selling, general, and administrative expense were staying the same as 7% relatively to revenue during the three months ended July 31 2011 compare to the same period 2010.

 

Provision for income taxes

 

Three Months Ended July 31,

 

2011

2010

Net income before income taxes

$3,669,069

14,516,012

Provision for income taxes

585,867

2,183,300

Effective tax rate

15.97%

15.04%

Our provision for income taxes decreased from the three months ended July 31, 2010 to the three months ended July 31, 2011, primarily as a result of decreased in net income.

Our effective tax rate increased slightly from 15.04% during the three months ended July 31, 2010 to 15.97% during the three months ended July 31, 2011, primarily because our new established Tai Fung with effective tax rate of 25% slightly pulled up the total effective tax rate.

28


 

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

 

2011

2010

 

 $

 %

Net income from continued operations (before non-controlling

int.)

$3,083,202

12,332,712

 

-9,249,510

-75.00%

Less: Net income attributable to non-controlling interests

697,314

1,394,198

 

-696,884

-49.98%

Net income attributable to Common shareholders

$2,385,888

10,938,514

 

-8,552,626

-78.19%

 

 

Our net income attributable to non-controlling interest was $696,884 lower than prior year because we have a lower net income compared to last year.

 

Liquidity and Capital Resources

 

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

 

Net cash provided by operating activities was $8,072,574 for the three months ended July 31, 2011.  For the three months ended July 31, 2010, net cash flow provided by operating activities was $18,580,601.  The decrease in cash inflow during the current quarter is due to decrease in net income that mainly due to temporary shutdown of our mines in Guizhou and Yunnan Province.

 

Net cash used in investing activities was $10,004,393 during the three months ended July 31, 2011, compared to $18,001,803 used in investing activities during the same period in 2010. The decrease in cash outflow is mainly due to decrease of cash used for construction-in-progress and property and equipment purchase.

 

Net cash provided by financing activities was $2,848,921 during the three months ended July 31, 2011, compared to $686,891 during the same period in 2010.  The increase of cash inflow was mainly due to proceeds received from sale of treasury stock and cash received from related party.

 

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

 

Off-Balance Sheet Arrangements:

 

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

 

Contractual Obligations

 

As of July 31, 2011, we were contractually obligated to inject 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

$

-

$

-

$

5,027,746

$

-

L&L Yunnan Tianneng Industry

 

4,000,000

 

-

 

4,000,000

 

-

 

-

DaPing Coal Mine

 

15,388,508

 

15,388,508

 

-

 

-

 

-

Tai Fung

 

1,455,120

 

-

 

1,455,120

 

-

 

-

Total

$

25,871,374

$

-

$

20,843,628

$

5,027,746

$

-

 

 

29


 

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, 2011. Those critical accounting policies remained unchanged at July 31, 2011.

 

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

While our reporting currency is the U.S. Dollar, 100% of our consolidated revenues and consolidated costs and expenses are denominated in Renminbi (“RMB”). Substantially all of our assets are denominated in RMB.  As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. Dollar and the RMB.  If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline.  We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

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

 

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are in effective.

 

Changes in Internal Control Over Financial Reporting

 

We have been improving and strengthening our control processes to fully remedy weaknesses, if any, in internal controls over financial reporting and to ensure that all of our controls and procedures are adequate and effective. Based on the extensive efforts to date, the Company believes that all deficiencies will be fully remediated by the reporting period of October 31, 2011.

 

30


 

Except for the affirmative changes discussed above, there have been no changes in our internal controls over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

We will continue to monitor internal control over financial reporting and will modify or implement if necessary, any additional controls or procedures that may be required to ensure the continued integrity of our financial statements.

 

Because of the 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.

 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

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

 

On August 26, 2011, a complaint was filed against the Company, certain officers and directors and a former officer in the United States District Court, Western District of Washington at Seattle (Case No. 11-cv-01423) on behalf of a single plaintiff (who holds based on the complaint/certification about 200 shares of common stock of the Company.)  The complaint (which has not been served upon the Company as of the 10-Q filing date) indicates that the plaintiff’s lawyers will seek to have it certified as a class action.  It alleges that the Company filed false and misleading reports with the SEC from August 13, 2009 to the present primarily based upon an amendment the Company filed to its 2010 Annual Report on Form 10-K on July 28, 2010 and a report published by the Glaucus Research Group on August 2, 2011.  We vehemently deny that we filed any false reports with the SEC, and we plan to defend this lawsuit vigorously.

 

 

Item 1A. Risk Factor

 

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

Risks Relating to the Company and Our Business

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

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

31


 

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

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

  • sustained high pricing environment for raw materials, including, among other things, diesel fuel, explosives and steel;
  • changes in the laws and/or regulations that we are subject to, including permitting, safety, labor and environmental requirements;
  • labor shortages; and
  • changes in the coal markets and general economic conditions.

 

 

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

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

Our ability to acquire new coal mines and to expand production capacity in China and to procure related licenses and permits is subject to approval of the PRC government (including local governments.) Delays in securing or failure to secure relevant PRC government approvals, licenses or permits, as well as any adverse change in government policies, may hinder our expansion plans, which may materially and adversely affect our profitability and growth prospects. We cannot assure you that our future acquisitions, expansions, or investments will be successful.

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

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

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

32


 

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

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

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

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

 

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

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

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

33


 

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

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

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

         require the establishment of reserves for reclamation and rehabilitation;

         impose fines for serious environmental offenses; and

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

 

Some of our operations are based on traditional, old coal extraction and processing techniques, which are popular in China, and which produce waste water, gas emissions and solid waste materials. The PRC government has tightened enforcement of applicable laws and regulations and adopted more stringent environmental and operational standards. We believe that our coal mining, washing and coking operations comply in all material respects with existing Chinese environmental and safety standards. However, our Ping Yi mine was recently subject to what we believe was a county-wide shut down and safety inspection of coal mines by the Pan County government and it remains unclear when or if operations will be resumed at this mine. If we are unable to resume operations in a timely manner, our results of operations will be harmed.

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

  

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, and our professional team and advisors. 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 investors that we will be able to attract or retain the key personnel needed to achieve our business objectives. While Mr. Dickson V. Lee is covered by a one-year term accident insurance policy in China, which is paid for by the Company, we currently do not maintain “key person” life insurance coverage for any of our officers.   

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

 

34


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

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

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

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

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

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

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

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

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

35


 

 

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

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

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

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

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

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

 

Risks Related to Doing Business in China

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

Although our principal executive office is located in Seattle, Washington, all of our current coal business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including its levels of government involvement, level of development, growth rate, 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

36


 
and guide the allocation of resources, some of these measures may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Also, since early 2004, the Chinese government has implemented certain measures to control the pace of economic growth including certain levels of price controls on raw coking coal. Such controls could cause our margins to be decreased. In addition, such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition. Adverse changes in economic policies of the Chinese government or in the laws and regulations, if any, could have a material and adverse effect on the overall economic growth of China, and could adversely affect our business operations.

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

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

        On April 15, 2011, the Guizhou province of China, in which the Company operates two of its four coal mines, issued a provincial-level notice/order (the “Guizhou Consolidation Policy”) that set forth the following key requirements, among others—by the end of 2013: (i) the total number of coal-mine related business enterprises in the Guizhou province (“Guizhou Coal Enterprise”) shall be limited to no more than 200; (ii) each Guizhou Coal Enterprise in Gui Yang City of Guizhou province shall reach at least the capacity to produce One Million (1,000,000) tons of coal per year; (iii) each Guizhou Coal Enterprise in Liu Pan Shu City of Guizhou province shall reach at least the capacity to produce Two Million (2,000,000) tons of coal per year; (iv) for certain coal mines, the mechanization level for coal-mine development and coal mining shall reach, respectively, 70% and 45% (by the end of 2015, 80% and 55% respectively.)  While the Guizhou Consolidation Policy has opened the door for the Company to acquire/consolidate additional smaller coal mines in the Guizhou province at faster speed and at attractive prices, the Company is also aware that the Company’s current coal-production capacity and mechanization level have not met the requirements set forth in the Guizhou Consolidation Policy, but we intend to work diligently to meet the requirements in the policy by the end of 2013. 

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

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

37


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

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

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

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

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

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

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

38


 

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 July 22, 2011, the Renminbi appreciated to approximately RMB 6.45 per U.S. Dollar. It is expected that the revaluation of the Renminbi and the exchange rate of the Renminbi may continue to change in the future. Fluctuations in the exchange rate between the RMB and the United States dollar could adversely affect our operating results. Results of our business operations are translated at average exchange rates into United States Dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. We do not use hedging techniques to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock prices.

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

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

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

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

Risks Related to Our Common Stock

The market price of our stock may be volatile.

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

  • actual or anticipated fluctuations in our quarterly operating results;
  • changes in financial estimates by securities research analysts;
  • conditions in coal energy markets;
  • changes in the economic performance or market valuations of other coal energy companies;
  • announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
  • addition or departure of key personnel;
  • fluctuations of exchange rates between RMB and the U.S. dollar; and
  • general economic or political conditions in China.

39


 

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

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

Members of our management and their affiliated entities own or have the beneficial ownership right to approximately 30% of our outstanding common shares, representing approximately 30% of our voting power. These stockholders, acting individually or as a group, could exert substantial influence over matters such as approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal stockholders and their affiliated entities, elections of our board of directors will generally be within the control of these stockholders and their affiliated entities. While all of our stockholders are entitled to vote on matters submitted to our stockholders for approval, the concentration of shares and voting control presently lies with these principal stockholders and their affiliated entities. As such, it would be difficult for stockholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of the company.

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

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

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

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

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

         

   The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. If the trading price of our common stock falls below $5.00 per share, the open-market trading of our common stock is subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer

 

40


 

orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

 

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

 

Stockholders should have no expectation of any dividends.

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

 

Item 1B. Unresolved Staff Comments

 

The Company has outstanding unresolved comments from the SEC from a letter it received during the first quarter of 2011 relating to its Registration Statement on Form S-1 filed with the SEC on January 3, 2011, its Form 10-K for the fiscal year ended April 30, 2010 and its Form 10-Q for the fiscal quarter ended October 31, 2010.    

 

 

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

 

        During the first quarter ended July 31, 2011, the Company transferred 600,000 shares of treasury stock to investors and 200,000 shares of treasury stock to a subsidiary as an investment for a combined total value of $2,443,000.

 

On August 29, 2011, Dickson Lee, Chairman and CEO of the Company, converted $420,000 of his prior loan to the Company into 49,411 shares of common stock of the Company at the conversion price of $8.50/share.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

 

Item 4.   Reserved

 

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

 

 

Item 5.   Other Information

 

None.

 

 

41


 

Item 6.   Exhibits

 

 

Exhibit number

Description

3.1

Bylaws (amendment)

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 9, 2011

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

 

 

 

EXHIBIT 31.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

I, Dickson V Lee, certify that:

 

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

 

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

 

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

 

42


 

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

 

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

 

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

 

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

          

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

 

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

 

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

 

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

 

 

L&L ENERGY, INC.

Date: September 9, 2011

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

43


 

 

EXHIBIT 31.2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER

I, Ian G. Robinson, certify that:

 

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

 

  1. 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;

 

  1. 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;

 

  1. 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

44


 

 

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

 

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

 

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

 

 

L&L ENERGY, INC.

Date: September 9, 2011

By:

/S/ Ian G. Robinson

 

Name:

Ian G. Robinson

 

Title:

CFO

 

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 July31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dickson V. Lee, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge based upon the review of the Report:

 

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

 

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

 

 

 

L&L ENERGY, INC.

 

 

 

Date: September 9, 2011

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

45


 

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 July31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ian G. Robinson, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge based upon a review of the Report:

 

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

 

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

 

 

 

L&L ENERGY, INC.

 

 

 

Date: September 9, 2011

By:

/S/ Ian G. Robinson

 

Name:

Ian G. Robinson

 

Title:

CFO

 

 

46