XFRA:7LM Quarterly Report 10-Q Filing - 9/10/2012

Effective Date 9/10/2012

 

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, 2012.

 

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 7, 2012 there were 37,293,108 shares of common stock outstanding, with par value of $0.001.

 

1


 
 

 

L & L ENERGY, INC.

Form 10-Q Quarterly Report

 

 

 

Table of Contents

 
     
   

Page

PART I – FINANCIAL INFORMATION

 
     

Item 1.

Condensed Consolidated Financial Statements – Unaudited

 
 

Balance Sheets as of July 31, 2012 and April 30, 2012

3

 

Statements of Income and Other Comprehensive Income for the three months

 
 

ended July 31, 2012 and 2011

5

 

Statements of Cash Flows for the three months ended July 31, 2012 and 2011

7

 

Notes to Condensed Consolidated Financial Statements – Unaudited

9

     

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

Item 4.

Controls and Procedures

38

     
     

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 1B.

Unresolved Staff Comments

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults upon Senior Securities

49

Item 4.

Reserved

49

Item 5.

Other Information

50

Item 6.

Exhibits

50

     

Signatures

 

51

Index to Exhibits

51

 

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.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JULY 31,2012 AND APRIL 30,2012

(Unaudited)

     

July 31, 2012

 

April 30, 2012

ASSETS

       
 

CURRENT ASSETS:

       
 

Cash and cash equivalents

$

6,690,290

$

4,040,020

 

Accounts receivables

 

35,339,734

 

33,099,101

 

Prepaid and other current assets

 

27,940,821

 

22,824,020

 

Other receivables, net

 

7,806,753

 

8,738,868

 

Inventories

 

6,471,490

 

4,946,231

 

Total current assets

 

84,249,088

 

73,648,240

           
 

Property, plant, equipment, and mine development, net

 

153,260,042

 

132,630,829

 

Construction-in-progress

 

12,125,833

 

31,259,260

 

Intangible assets, net

 

400,933

 

428,036

 

Goodwill

 

3,736,722

 

3,768,443

 

Other assets

 

873,444

 

885,680

 

Long term receivable, net

 

26,276,812

 

27,840,433

 

Related party notes receivable

 

5,750,823

 

6,096,617

 

Total non-current assets

 

202,424,609

 

202,909,298

         

 

TOTAL ASSETS

$

286,673,697

$

276,557,538

           

LIABILITIES AND EQUITY

       

CURRENT LIABILITIES:

       
 

Accounts payables

$

3,326,436

$

803,975

 

Accrued and other liabilities

 

1,092,652

 

1,090,310

 

Other payables

 

21,652,625

 

20,969,802

 

Related party payables

 

17,036,441

 

17,251,921

 

Due to officers

 

421,333

 

414,667

 

Taxes payables

 

14,303,719

 

13,636,288

 

Customer deposits

 

605,526

 

1,542,064

 

Bank loans

 

2,210,992

 

2,229,761

 

Total current liabilities

 

60,649,724

 

57,938,788

           

LONG-TERM LIABILITIES

       
 

Long-term payable

 

302,384

 

304,951

 

Asset retirement obligation

 

2,487,066

 

2,459,352

 

Total long-term liabilities

 

2,789,450

 

2,764,303

           
 

Total Liabilities

 

63,439,174

 

60,703,091

           

EQUITY:

       

L&L ENERGY STOCKHOLDERS' EQUITY:

       
 

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

 

-

 

-

 

Common stock ($0.001 par value, 120,000,000 shares authorized: 37,224,073 and 36,991,397 shares issued and outstanding at July 31, 2012 and April 30, 2012 respectively)

 

37,224

 

36,991

 

Additional paid-in capital

 

66,318,438

 

65,752,560

 

Accumulated other comprehensive income

 

9,276,174

 

10,622,683

 

Retained Earnings

 

102,321,253

 

96,134,782

 

Treasury stock (143,093 shares and 143,093 shares at July 31, 2012 and April 30, 2012 respectively)

 

(123,968)

 

(123,968)

 

Total L & L Energy stockholders' equity

 

177,829,121

 

172,423,048

 

Non-controlling interest

 

45,405,402

 

43,431,399

 

Total equity

 

223,234,523

 

215,854,447

TOTAL LIABILITIES AND EQUITY

$

286,673,697

$

276,557,538

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

 

3


 
 

4


 
 

 

L & L ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS COMPRHENSIVE INCOME

FOR THE THREE MONTHS ENDED JULY 31, 2012 AND 2011

(Unaudited)

 

For The Three Months Periods Ended

July 31,

 

 

   

2012

 

2011

 

 

NET REVENUES

$

45,305,935

$

36,143,879

 

 

COST OF REVENUES

 

32,253,021

 

27,762,280

 

 

GROSS PROFIT

 

13,052,914

 

8,381,599

 

 

           

 

OPERATING COSTS AND EXPENSES:

         

 

Salaries & wages-selling, general and administrative

 

1,037,714

 

933,000

 

 

Selling, general and administrative expenses, excluding salaries and wages

 

2,865,806

 

2,397,516

 

 

Total operating expenses

 

3,903,520

 

3,330,516

 

 

           

 

INCOME FROM OPERATIONS

 

9,149,394

 

5,051,083

 

 

OTHER INCOME (EXPENSE):

         

 

Interest income (expense)

 

63,924

 

197,184

 

 

Other income (expense)

 

328,123

 

(762,483)

 

 

Total other income (expense)

 

392,047

 

(565,299)

 

 

           

 

INCOME BEFORE FROM CONTINUING OPERATIONS BEFORE PROVISON FOR INCOME TAXES

 

9,541,441

 

4,485,784

 

 

LESS PROVISION FOR INCOME TAXES

 

1,009,445

 

585,867

 

 

INCOME FROM CONTINUING OPERATIONS

 

8,531,996

 

3,899,917

 

 

           

 

Income attributable to non-controlling interests

 

2,345,525

 

697,314

 

 

Income attributable to L & L

 

6,186,471

 

3,202,603

 

 

           

 

DISCONTINUED OPERATIONS

         

 

Net loss from discontinued operations

 

-

 

(816,715)

 

 

TOTAL LOSS FROM DISCONTINUED OPERATIONS

 

-

 

(816,715)

 

 

           

 

NET INCOME

$

8,531,996

$

3,083,202

 

 

           

 

Net income attributable to non-controlling interests

 

2,345,525

 

697,314

 

 

Net income attributable to L & L

 

6,186,471

 

2,385,888

 

 

           

 

OTHER COMPREHENSIVE INCOME:

         

 

Foreign currency translation (loss) gain

 

(1,346,509)

 

1,212,580

 

 

COMPREHENSIVE INCOME

$

7,185,487

$

4,295,782

 

 

           

 

Comprehensive income attributable to non-controlling interests

$

2,094,286

$

1,740,794

 

 

Comprehensive income attributable to L & L

 

5,091,201

 

2,554,988

 

 

           

 

 

5


 
 

 

           

INCOME PER COMMON SHARE – basic from continuing operations

$

0.17

$

0.10

 

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

$

-

$

(0.02)

 

INCOME PER COMMON SHARE – basic

$

0.17

$

0.08

 
           
           

INCOME PER COMMON SHARE – diluted from continuing operations

$

0.17

$

0.10

 

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

$

 

$

(0.02)

 

-

INCOME PER COMMON SHARE – diluted

$

0.17

$

0.08

 
           

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – basic

 

36,839,324

 

31,355,781

 
           

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - diluted

 

36,839,324

 

31,704,978

 

 

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

 

 

 

 

 

 

 

 

 

 

 

6


 
 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED JULY 31,

           
     

2012

 

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income

$

8,531,996

$

3,899,917

 

Loss from discontinued operations, net of income taxes

 

-

 

(816,715)

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

 

Income from continuing operations, net of income taxes

 

8,531,996

 

3,083,202

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

       
 

Depreciation and amortization

 

1,582,219

 

1,001,138

 

Stock compensation

 

566,111

 

262,190

 

Accretion of asset retirement obligation

 

27,714

 

56,899

 

Accounts receivable

 

(2,240,633)

 

(7,420,621)

 

Prepaid and other current assets

 

(5,116,801)

 

12,186,844

 

Inventories

 

(1,525,259)

 

(1,142,871)

 

Other receivable

 

932,115

 

243,836

 

Accounts payable and other payable

 

2,989,804

 

(361,067)

 

Customer deposit

 

(936,538)

 

(492,168)

 

Accrued and other liabilities

 

(225)

 

107,516

 

Taxes payable

 

668,942

 

229,752

 

Note receivable

 

345,794

 

(195,806)

Net cash provided by continuing operating activities

 

5,825,239

 

7,558,844

Net cash provided by discontinued operating activities

 

-

 

513,730

Net cash provided by operating activities

 

5,825,239

 

8,072,574

           

CASH FLOWS FROM INVESTING ACTIVITIES:

       
 

Acquisition of property and equipment

 

(98,629)

 

(376,833)

 

Construction-in-progress

 

(5,661,986)

 

(7,558,723)

 

Increase in restricted cash

 

-

 

(19,130)

 

Proceeds from repayment of long term receivable

 

1,563,621

 

-

 

Cash received from HSC disposal

 

-

 

1,088,524

Net cash used in continuing investing activities

 

(4,196,994)

 

(6,866,162)

Net cash used in discontinued investing activities

 

-

 

(3,138,231)

Net cash used in investing activities

 

(4,196,994)

 

(10,004,393)

           

CASH FLOWS FROM FINANCING ACTIVITIES:

       
 

Due to officers

 

6,666

 

-

 

Proceeds from Treasury stock sold

 

-

2,443,000

 

Payment to previous owner of acquired mine

 

-

 

(1,676,307)

 

Increase in related party receivable

 

-

 

(2,533,512)

Net cash provided by (used in) continuing financing activities

 

6,666

 

(1,766,819)

Net cash provided by discontinued financing activities

 

-

 

4,615,740

Net cash provided by financing activities

 

6,666

 

2,848,921

           

Effect of exchange rate changes on cash and cash equivalents

 

1,015,359

 

265,562

           

INCREASE IN CASH AND CASH EQUIVALENTS

 

2,650,270

 

1,182,664

CASH AND CASH EQUIVALENTS, BEGINNING BALANCE

 

4,040,020

 

4,914,425

CASH AND CASH EQUIVALENTS, ENDING BALANCE

$

6,690,290

$

6,097,089

           

SUPPLEMENTAL INFORMATION

       

INTEREST PAID

$

80,862

$

72,819

INCOME TAX PAID

$

580,334

$

400,668

 

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

 

7


 
 

8


 
 

 

L & L ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Description Of Business

 

L & L Energy, Inc. (“L&L” and/or the “Company”) was incorporated in Nevada, and is headquartered in Seattle, Washington.  Effective on January 4, 2010, the State of Nevada approved the Company’s name change from L&L International Holdings, Inc. to L & L Energy, Inc.  The Company is a coal (energy) company, and started its operations in 1995.  Coal sales are generated entirely in China, from coal mining, clean coal washing, 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, 2012, the Company has the following subsidiaries or operations in China:

 

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

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

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

·         Da Ping Coal Mine (“DaPing”);

·         Wei She coal mine (“Weishe”)

·         DaXing L&L Co.; Ltd

·         Guizhou LiWei Coal Co.; Ltd

 

Basis Of Presentation

 

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

 

 

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Principles

 

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

 

Principles of Consolidation

 

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

 

9


 
 

Use of Estimates

 

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.

 

New accounting pronouncements

 

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

 

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

 

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

 

 

NOTE 3.  BUSINESS COMBINATIONS

 

Acquisitions

 

DaPing Coal Mine

 

On March 15, 2011, the Company entered into an Acquisition Agreement to acquired 60% equity of the DaPing Coal Mine (“DaPing”), with an effective date of March 15, 2011, for a purchase price of 112,080,000 RMB (equivalent to approximately US$17,064,815).An initial installment of 10,000,000 RMB (equivalent to US$1,592,686) had been paid as of July 31, 2012.  The remaining balance of 102,080,000 RMB is to be paid based on the achievement of several requirements by the Company and DaPing, which were met during the year-ended April 30, 2012. After meeting five requirements, 30% of the total purchase price, RMB33,624,000 (equivalent to US$5,355,249) should be paid. The remaining balance of 68,456,000 RMB (equivalent to US$10,902,894) is payable after meeting another 3 requirements subsequent. As of July 31, 2012, the remaining balance of approximately US$15 million is payable since the first 5 requirements haven’t been fully met. The Company paid the $1,676,307 of the total amount of purchase price in the period ended July 31, 2012.

 

 

 

10


 
 

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

 

 Allocation of purchase price: 

 Current assets

$

528,914

 Property, plant and equipment

 

3,899,314

 Intangible assets*

 

26,673,895

 Fair value of assets

 

31,102,123

 Less: Fair value of liabilities 

 

(14,037,308)

Net assets acquired 

$

17,064,815

Non-controlling interest 

$

9,626,043

 

*Includes goodwill $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. Tai Fung is a marketing and distributing company of coal throughout China and began operation in April 30, 2011. The net assets on acquisition date comprise only cash contributed by the 2% non-controlling interest.

 

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

 

Weishe Coal Mine (“Weishe”)

 

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

 

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

 

Allocation of purchase price:

Current assets

$

1,158,026

Fixed assets

 

30,188,177

Intangible assets*

 

779,075

Fair value of assets

$

32,125,278

Less: Fair value of assets

 

(14,609,871)

Net assets acquired

$

17,515,407

Non-controlling interest

$

7,822,636

 

 

*Includes goodwill of $779,075

 

11


 
 

Pro-forma Information

 

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

 

 

For the period ended

   

July 31, 2012

 

July 31, 2011

Net revenue

$

45,305,935

$

36,678,795

Income from continuing operations

 

9,149,394

 

4,141,709

Net income attributable to L&L Energy

$

6,186,471

$

2,336,621

Basic proforma earning per share

 

0.17

 

0.07

Diluted proforma earning per share

 

0.16

 

0.07

 

Divestiture

 

Sale of HSC

 

In late 2009, early 2010, the Company determined that it was in the best interest of the Company for management’s time to be expended on other prospective acquisitions that would provide a better return to its stockholders.  Therefore, on April 18, 2010, the Company entered into an Equity Sale and Purchase Agreement (the “Equity Sale Agreement”) with Guangxi Liuzhou Lifu Machinery Co, Ltd, whereby the Company sold its 93% equity ownership interest in HSC for 41,000,000 RMB (equivalent to approximately US$6,000,000).  Guangxi Liuzhou Lifu Machinery Co, Ltd assumed the obligation of the Company to pay to HSC 23,800,000 RMB (equivalent to approximately US$3,485,300) that remained payable to HSC pursuant to the December Agreement.  Guangxi Liuzhou Lifu Machinery Co, Ltd also agreed to pay the remaining balance of 17,200,000 RMB (equivalent to approximately US$2,514,700) to the Company in three installments, (1) 3,440,000 RMB (approximately $502,940 USD) within six months of the sale, (2) 5,160,000 RMB (approximately $754,410 USD) between six months and twelve months after the sale, and (3) 8,600,000 RMB (approximately $1,257,350) between twelve and twenty-four months after the sale.  Pursuant to the Equity Sale Agreement, if Guangxi Liuzhou Lifu Machinery Co, Ltd does not make such scheduled payments, a penalty of 1% of the applicable payment will be assessed for any deadline that is missed.  Additionally, interest of 3.5% per annum of the applicable payment will be assessed as of the day after the applicable payment date.  The portions of the purchase price that are due within twelve months after the sale (i.e., the first two installments) are included as “Other receivables” on the Company’s consolidated balance sheets and the portion of the purchase price due within 24 months of the sale (i.e., the third installment) is included as a “Long term receivable” on the Company’s consolidated balance sheets.  The Company recorded US$834,181 as income from discontinued operations and recognized a gain of US$1,017,928 on the saleon April 18, 2010.As of July 31, 2012, outstanding receivable from sales of HSC was USD$8,021,256, which is expected to be received before April 30, 2013.

 

12


 
 

Sale of Ping Yi Mine

 

With consideration of several factors including continuing development strategies, the Company made the determination to dispose of the Ping Yi Mine.  On April 30, 2012, the Company entered into an Equity Sale and Purchase Agreement with Mr. Zhang, the previous owner of Ping Yi Mine, whereby the company sold its 100% equity ownership interest in Ping Yi Mine for RMB 196,000,000, approximately $31,000,000.  The payment was agreed to take the form of receipt with  payment in two parts, (1) through receipt of coal extracted from Ping Yi Mine subsequent to the disposal, including priority receipt of future coal from Ping Yi mine at a 5% discounted price compared to the market price until 70% of the payment is received; (2) through receipt of the use of Ping Yi Mine’s washing facilities subsequent to disposal, including  usage fees charged at a 3%~5% discounted price compared to the market price until 30% of the payment is received. The terms of the agreement state that full payment must be received within five years, and that 70% of total receipts must occur by the end of year three. As of July 31, 2012, the Company received total payment of 869,374, which $825,155 as prepayment of raw coal and 44,219 as coal washing facilities service.

 

The Company recorded $408,020 as income from discontinued operations for the year-ended April 30, 2012. Additionally, the company recorded $3,183,786 of costs to dispose related to the provision of discounting the estimated receipt of the payment over the payment term (refer to Note 5 and 11). Subsequently, the Company has written back $159,189 as income related to the provision for the three months ended July 31, 2012.

 

 

NOTE 4.  PREPAID EXPENSES AND OTHER CURRENT ASSET

 

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 an unconditional liability of the bank.  But the holder of the draft can sell (exchange) it for cash at a discount to a bank or endorse it to another company instead of cash payment.

 

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

 

Advances to suppliers increased by approximately $5 million as of July 31, 2012 compared to the same period of 2011, which mainly caused by the increase of prepayment of purchasing raw coal in our washing subsidiaries. During this quarter, the raw coal’s marketing price declined a little due to decrease of the national consumption. The company forecasts the marketing price of raw coal will increase again in future and it is a right time to purchase coal for washing, we increase prepayments to suppliers in order to lock up the current coal price.

 

Prepaid expenses and other current assets consisted of the following:

 

 

Description

July 31, 2012

April 30, 2012

Advances to suppliers

$ 27,526,916

$ 22,417,596

Bill receivable

-

-

Advanced to employees

363,825

344,124

Other

50,080

62,300

Total

$27,940,821

$ 22,824,020

 

 

13


 
 

NOTE 5.  OTHER RECEIVABLES

 

Other receivables consisted of the following:

 

Description

July 31, 2012

April 30, 2012

Short term loans to business associates

$366,725

$554,726

PYC receivable-current (note 3)

6,384,219

7,094,403

HSC receivable (note 3)

801,256

801,256

Other

254,554

288,483

Total

$7,806,753

$8,738,868

 

The Company made short term loans to business associates in order to develop a long term business relationship.  Such loans are considered consistent with accepted business practices in China.  These business associates are suppliers to our Company and we believe that these loans result in securing adequate supplies for the expansion of production capacity in our mines. As more fully discussed in Note 3, the Company sold its 100% equity ownership interest in Ping Yi Mine for RMB 196,000,000, approximately $31,200,000. The estimated receipt of payment is expected to generally occur of a five-year term, in accordance with the contract. As such, a valuation allowance was recorded to reflect the net present value of the payments during that term at a rate of 5%, which is with reference to the discount explicit in the agreement. The initial recording of this discount resulted in the recognition of a cost of disposal in the period when the disposal incurred, which will be accreted as interest income by effective interest method over the life of the agreement. As of July 31, 2012, the receivable related to the disposal of the Ping Yi Mine, net of discount of $27,306,030, with a current portion of $6,384,219.

 

 

NOTE 6.  INVENTORIES

 

Inventories are primarily related to coal located at KMC, Wei She, Tai Fung and TNI. Inventories consisted of the following:

 

Description

 

July 31, 2012

 

April 30, 2011

Raw Coal

$

1,689,071

$

897,004

Coke Coal

 

529,118

 

4,739

Fine Coal

 

4,253,301

 

4,044,488

Total  

$

6,471,490

$

4,946,231

 

 

NOTE 7.  PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

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

 

Description

 

July 31, 2012

 

April 30, 2012

Mine development

$

68,793,675

$

44,638,648

Mineral rights

 

65,645,925

 

66,203,195

Building and improvements

 

5,902,702

 

5,952,811

Machinery and equipment

 

25,306,253

 

26,759,805

Assets retirement cost, net

 

2,095,248

 

2,121,964

   

167,743,803

 

145,676,423

Accumulated depreciation and amortization 

 

(14,483,761)

 

(13,045,594)

Property, Plant and Equipment, net

$

153,260,042

$

132,630,829

 

Mineral rights represent the exclusive right, granted by the Chinese government, to operate the 4 Mine, DaPuAn, SuTsong, DaPing and WeiShe. The rights were acquired in the first quarter of 2008 as a result of the acquisition of the “2 Mines” on May 1, 2008 and on November 1, 2009, the acquisition of the DaPing on March 15, 2011 and the acquisition of the Wei She on February 3, 2012, respectively. The Company has elected to use unit-of-production method to depreciate its mineral rights.

 

Depreciation expense was $1,549,776 and $1,532,880 for the three months ended July 31, 2012 and July 31, 2011, respectively. 

 

14


 
 

NOTE 8.   CONSTRUCTION IN PROGRESS

 

Construction in progress includes mine development, ventilation and electrical system improvements, building of staff quarters, and beginning construction of a sewage treatment system and road expansion for the washing facilities.  Construction in progress was $12,125,833 and $31,259,260 as of July 31, 2012 and April 30, 2012, respectively.  Capitalized interest costs included in construction in progress were approximately $0 and $41,390 for the three months ended July 31, 2012 and 2011, respectively.

 

 

NOTE 9.   INTANGIBLE ASSETS

 

Customer relationship and technology assets are being amortized over a period of 7 years.  Amortization expense for these assets was $23,564 and $41,090 for the three months ended July 31, 2012 and 2011, respectively.  Amortization expense of Asset Retirement Cost was $8,879 and $11,578 for the three and three months ended July 31, 2012 and 2011.

 

Intangible assets consisted of the following:

 

 

Description

 

July 31, 2012

 

April 30, 2012

Technology

$

264,236

$

266,479

Customer relationship

 

393,765

 

397,108

   

658,001

 

663,587

Accumulated amortization

 

(257,068)

 

(235,551)

Total

$

400,933

$

428,036

 

 

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

 

 

Remainder of Fiscal 2013

$

47

Fiscal 2014

 

84

Fiscal 2015

 

121

Fiscal 2016

 

139

Thereafter

 

10

Total

$

401

 

 

NOTE 10.   OTHER ASSETS

 

Other assets represent the long-term restricted cash which included bank deposits placed as guarantee for the future payments of costs related to land subsidence, restoration, rehabilitation and environment protections required by the coal authority, amount of $82,051 and $791,393 of Yunnan and Guizhou Province, respectively.

 

15


 
 

NOTE 11.   LONG TERM RECEIVABLE

 

In fiscal year of 2011, the Company entered into several agreements with Colorado-based Bowie Resources, LLC and have loaned a total of approximately $7 million.  The loan originally carried an interest rate of approximately between nine (9) percent to approximately eleven (11) percent.  The loan is co-senior with another lender.  The total owing to the Company as of July 31, 2012 is $5,355,001 include interest of $308,988. 

 

As more fully disclosed in Note 3 and Note 6, the Company has recorded a long-term receivable related to the disposal of the Ping Yi Mine, as of July 31, 2012, the amount is of $20,921,811, net of a present value discount of $3,005,231 provided in the 10K ended April 30, 2012.

 

 

NOTE 12.   RELATED PARTY TRANSACTIONS

 

Related Party Notes Receivable

 

The Company loaned money to various entities that have non-controlling interests with the Company.  Those loans are reflected in the consolidated balance sheets as related party notes receivables, and are secured by assets and machinery of the various mines or businesses, as indicated below.  Because these borrowers have business in which the Company has an interest, the Company considers these borrowers as related parties. The business purpose of these related party transactions relates to the maintenance of long-term business relationships.

 

There was no impact to the statements of income and other comprehensive income for the three months ended July 31, 2012 and year ended April 30, 2012 as a result of these loans. For the three months ended July 31, 2012, the total amount of loan repayments was approximate $5.8 million.

 

Related party notes receivable consisted of the following as of July 31, 2012:

 

Borrowers

Relationship

USD

Maturity

Collateralized By

Associates to TianRi Coal Mine

Shareholder & non-controlling interest holder

$1,356,601

May 1, 2015

Mining Equipment

Associates to SuTsong

Shareholder & non-controlling interest holder

2,845,131

May 1, 2015

Mine Assets

Associates to DuPuAn

Shareholder & non-controlling interest holder

965,044

May 1, 2015

Mine Assets

Yunnan Tinnan Co. Ltd.

Non-controlling interest holder

366,751

May 1, 2015

Machinery

Others

Shareholder & non-controlling interest holder

217,295

Various dates

 
   

$5,750,822

   

 

 

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

 

Borrowers

Relationship

USD

Maturity

Collateralized By

Associates to TianRi Coal Mine

Shareholder & non-controlling interest holder

$1,614,984

May 1, 2015

Mining Equipment

Associates to SuTsong

Shareholder & non-controlling interest holder

2,869,284

May 1, 2015

Mine Assets

Associates to DuPuAn

Shareholder & non-controlling interest holder

973,237

May 1, 2015

Mine Assets

Yunnan Tinnan Co. Ltd.

Non-controlling interest holder

443,128

May 1, 2015

Machinery

Others

Shareholder & non-controlling interest holder

195,984

Various dates

 
   

$6,096,617

   

 

16


 
 

Related Party Payable

 

Related party payable consisted of the following:

 

 

 

July 31, 2012

 

April 30, 2012

Payable to Robert Lee

$

1,647,933

$

1,647,933

Share to be issued to Board of Directors and Officers

 

-

 

215,480

Payable to previous owners of DaPing Coal Mine

 

15,388,508

 

15,388,508

Total related party payable - current

 

17,036,441

 

17,251,921

Payable to previous owners of ZoneLin (non-current)

 

302,384

 

304,951

Total related party payable

$

17,338,826

$

17,556,872

 

 

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

 

Due to Officers

 

Due to officers consisted of the following:

 

Due to officer

 

July 31, 2012

 

April 30, 2012

Dickson Lee

$

250,000

$

243,334

Clayton Fong

 

111,333

 

111,333

Shirley Kiang

 

60,000

 

60,000

Total due to officers/directors

$

421,333

$

414,667

 

 

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

 

The DaPing Mine was acquired by the Company in March 2011. According to the mine reservation report, management expects to extract approximately 15 million tons of coal over the remaining 26 years. DaPing 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 October 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 October 31, 2010. We based these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates. We evaluated the forecasted cash flows as of January 31, 2012, and no revision was deemed necessary.

17


 
 

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

 

 

   

July 31, 2012

 

April 30, 2012

Beginning balance

$

2,459,352

 $ 

1,978,877

Liabilities incurred during the period

 

-

   

902,178

Liabilities settled during the period

 

-

   

                        (673,214)

Accretion of interest

 

27,714

 

251,511

Ending balance

$

2,487,066

$

2,459,352

 

 

NOTE 14.   OTHER PAYABLES

 

Other Payables consisted of the following:

 

Description

 

July 31, 2012

 

April 30, 2012

Payable to business associates

$

2,501,522

$

2,029,517

Resource surcharge payable of WeiShe Coal Mine

 

13,265,951

 

13,378,566

Others

 

5,885,152

 

5,561,719

Total other payables

$

21,652,625

$

20,969,802

 

Total Other Payables was $21.7 million as of July 31, 2012. None of these payables are collateralized by any assets of the Company. $2 million was a temporary interest free loan from a business partner. $13.3 million is estimated resource surcharge payable of Wei She Mine through acquisition. The estimated resources surcharge is determined by the coal reserve and surcharge per ton, which the guidance was issued by GuiZhou Land Resources Council.The other $5.9 million is for salary payable, notes payable, miscellaneous payment of fees related to maintenance, safety, employee training for security and environmental matters.

 

 

NOTE 15.  TAX PAYABLES

 

Taxes payable consisted of the following:

 

Description

 

July 31, 2012

 

April 30, 2012

VAT Payable

$

5,503,966

$

5,397,254

Income Tax Payable

 

5,314,409

 

4,885,298

Other Taxes Payable

 

3,485,344

 

3,353,736

Total Tax Payable

$

14,303,719

$

13,636,288

 

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

 

 

NOTE 16.   BANK LOANS

 

During the fourth quarter of 2011, as part of acquisition of DaPing, the Company assumed RMB 20 million bank loan or approximately $3,077,160 with interest rate of 9.18% per annum and matured on October 29, 2011. RMB 6 million or approximately $0.95 million of this loan had been paid in early November 2011 and the other RMB 14 million or approximately $2.2 million has since been extended to November 30, 2012. All loans are unsecured.

 

 

18


 
 

NOTE 17.   INCOME TAXES

 

Our effective tax rates were approximately 10.6% and 13.0% for the three months ended July 31, 2012 and 2011, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates, and the Company has net operating loss carry-forwards available to offset current and future taxable income.

 

 

NOTE 18.   STOCKHOLDERS’ EQUITY

 

Stock Issued for Compensation:

 

The Board of Directors approved to issue shares in respect to the services provided by Ian Robinson, our Chief Financial Officer and other key employees during this quarter. For the three months ended July 31, 2012, the Company issued 32,175 shares to Ian Robinson and 179,667 shares to other key employees, with the share value of $164,092 and $350,768.

 

For the three months ended July 31, 2012, the Company issued 20,834 shares of common stock to the Board of Directors, with the share value of $51,250.

 

For the three months ended July 31, 2012, the Company issued 5,000 shares of common stock with the share value of $11,850 for advisor. Simultaneously, the company cancelled 5,000 shares issued as advisor compensation during last fiscal year, with the share value of $11,850.

 

During the first quarter, no stock options or warrants were issued for compensation

 

Stock issued for Cash:  

 

For the three months ended July 31, 2012, no common stock was issued for cash. During the first quarter, no warrants were issued or exercised for cash, respectively.

 

Treasury Stock:

 

During the first quarter ended July 31, 2012, no treasury stock has been purchased or sold by the Company.

 

 

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, 2012:

 

 

 

July 31, 2012

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.

 

(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, 2012, no warrant was issued or exercised.

19


 
 
 

Following is a summary of the status of warrants outstanding at July 31, 2012:

 

Type of Warrants

 

Range of Exercise Prices

 

Total Warrants Outstanding

 

Weighted Average Remaining Life (Years)

 

Weighted Average Exercise Price

Executives-Class D

$

              2.25

 

                10,000

 

0.58

$

          2.25

Directors - Class E

$

        3.00 - 9.34

 

               210,916

 

2.29

$

              3.03

Non-employee

$

11.22

 

1,000

 

2.88

$

11.22

Total

     

                221,916

 

2.72

$

               3.03

 

 

Warrants Issued to Investors

 

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

 

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

 

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

 

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

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

 

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

 

For the three months ended July 31, 2012, no warrants were issued to investors. No warrants were exercised, respectively.

 

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

 

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

20


 
 

The table below is a summary of all warrants activity as of July 31, 2012:

 

Warrants Roll-forward Summary

           
 

Units

 

Weighted Average Exercise Price

 

Weighted Average Remaining Life (in Years)

Outstanding at April 30, 2012

870,692

 

$5.19

 

2.88

Issued

-

 

-

   

Exercised

-

 

-

   

Expired

-

 

-

   

Outstanding at July 31, 2012

870,692

 

$5.19

 

2.63

Exercisable at July 31, 2012

870,692

 

$5.19

 

2.63

 

 

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 (2 coal mining operations), TNI, Tai Fung, DaPing and WeiShe. During the fiscal year 2010, the Company increased its ownership interest in L&L Coal Partners to 80% from 60% at April 30, 2009. The equity related to non-controlling interest as of July 31, 2012 represents 20% third party interest in L&L Coal Partners, 2% third party interest in TNI, 2% third party interest in Tai Fung, 40% third party interest in DaPing and 49% third party interest in WeiShe. The non-controlling interest in Weishe is measured at fair value at the acquisition date, with a discount rate 16% which reflected the factor of lack of marketability.

 

Below is a schedule of changes in ownerships interest as of July 31, 2012 and April 30, 2011:

 

   

July 31, 2012

 

April 30,2012

Beginning balance

$

43,431,399

$

29,530,133

Non-controlling interest related to acquisitions

     

7,822,636

Translation

 

(371,522)

 

1,083,961

Net income related to non-controlling interest

 

2,345,525

 

4,994,669

Ending balance

 

45,405,402

 

43,431,399

 

 

 

21


 
 

NOTE 21.   EARNINGS PER SHARE

 

The Company only had common shares, warrants and stock options issued and outstanding as of July 31, 2012.  Under the treasury stock method of earnings per share, the Company computed the diluted earnings per share as if all issued warrants or options were converted to common stock and cash proceeds were used to buy back common stock. The exercised prices of warrants and options are greater than fair market price. The securities are anti dilutive and can be ignored in the diluted Earnings Per Share calculation.

 

   

For the Three Months Ended July 31  

   

2012

2011

EPS numerator:

     

Net income from continuing operations, net of income taxes

$

8,531,996

3,899,917

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

 

2,345,225

697,314

Income from continuing operations attributable to common stockholders

 

6,186,471

3,202,603

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

 

-

(816,715)

Net income attributable to common stockholders

$

6,186,471

2,385,888

EPS denominator:

     

Weighted average shares outstanding — basic

 

36,839,324

31,355,781

Effect of dilutive shares

 

-

349,197

Weighted average shares outstanding — diluted

 

36,839,324

31,704,978

Basic EPS attributable to common stockholders:

     

Income from continuing operations

 

0.17

0.10

(Loss) income from discontinued operations

 

-

(0.02)

Net income attributable to common stockholders

$

0.17

0.08

Diluted EPS attributable to common stockholders:

     

Income from continuing operations

 

0.17

0.10

(Loss) income from discontinued operations

 

-

(0.02)

Net income attributable to common stockholders

$

0.17

0.08

 

 

 

22


 
 

NOTE 22.   COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

The Company held an operating lease in the Seattle office and the lease will expire in July 2013. 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 $ 38,070 and $12,690 respectively. 

 

Legal Matters

 

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

 

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

 

On November 15, 2011, a complaint was filed by Russell L. Bush, an individual, in a derivative suit against the Company as nominal defendant, and against all existing directors (i.e., Dickson V. Lee, Norman Mineta, Ian G. Robinson, Robert W. Lee, Shirley Kiang, Dennis Bracy, Syd S. Peng) in the United States District Court, Western District of Washington at Seattle (the “Bush Derivative Suit”, with the Stouffer Derivative Suit, the “Derivative Suits”). It mainly alleges that the defendants breached fiduciary duties by failing to install proper internal control and overseeing system, and were unjustly enriched by accepting compensation while breaching fiduciary duties.

 

The Company is unable to estimate the amount or range of any potential loss in the event of an unfavorable outcome. As such, as of July 31, 2012, the Company has not accrued any liability in connection with potential losses from legal proceedings.

 

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, 2012, we had one major customer who purchased 26% of the Company’s total sales, and represented $9,124,107 of AR balance in total as of July 31, 2012. In addition, we had two major suppliers who provided 46% of our total purchases, and the relevant account payable had been paid off as at July 31, 2012

 

 

23


 
 

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.

 

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

 

For the three month ended July 31, 2012, 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, 2012:

 

 

2013

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.

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

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

 

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

 

 

24


 

The following summarizes pricing and term information for options outstanding as of July 31, 2012:

 

 

   

Options Outstanding

       

Weighted

   

Range of

 

Total Options

 

Average Remaining Life

 

Weighted

Exercise Prices

 

Outstanding

 

(Years)

 

Average Exercise Price

7.65

 

40,000

 

3.59

 

7.65

 

 

As of July 31, 2012, all stock options outstanding for compensation were exercisable. The weighted-average grant-date fair value of options granted during the year ended July 31, 2012 was $7.06.  

 

The following table is a summary of stock option activity under the Stock Incentive Plan as of July 31, 2012 and changes for the year then ended:

 

 

Incentive Stock

 

Weighted Average

 

Weighted Average

 

Options

 

Exercise Price Per Share

 

Remaining Life (Years)

Outstanding at May 1, 2012

40,000

 

7.65

 

-

Granted

-

 

-

 

-

Exercised

-

 

-

 

-

Canceled

-

 

-

 

-

Outstanding at July 31, 2012

40,000

 

7.65

 

3.59

Exercisable at July 31, 2012

40,000

 

7.65

 

3.59

 

 

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 ended July 31,

Total Revenues (including intersegment sales)

 

2012

   

2011

Coal mining revenue

$

15,546,853

 

$

6,889,562

Coal wholesale revenue

 

12,294,981

   

4,462,730

Coking revenue

 

1,720,948

   

6,644,119

Coal washing revenue

 

17,910,229

   

18,860,387

 

$

47,473,011

 

$

36,856,798

Discontinued operations

       

 

Coal mining revenue

 

-

   

366,258

Coal washing revenue

 

-

   

489,427

 

$

-

 

$

855,685

         

 

 

 

 

   

 

Total Revenue

$

47,473,011

$

37,712,483

         

 

Intersegment revenues

 

2012

   

2011

Coal mining revenue

$

-

 

$

712,920

Coal wholesale revenue

 

74,401

   

-

Coking revenue

 

-

   

-

Coal washing revenue

 

2,090,675

   

-

 

$

2,167,076

 

$

712,920

Discontinued operations

       

 

Coal mining revenue

 

-

   

-

Coal washing revenue

 

-

   

366,258

 

$

-

 

$

366.258

         

 

 

 

 

   

 

Total Intersegment revenues

$

2,167,076

 

$

1,079,178

25


 
 

 

Net revenues

 

2012

   

2011

Coal mining revenue

$

15,546,853

 

$

6,889,561

Coal wholesale revenue

 

12,294,981

   

4,462,730

Coking revenue

 

1,720,948

   

6,644,120

Coal washing revenue

 

17,910,228

   

18,860,387

Less intersegment revenues

 

(2,167,076)

   

(712,919)

 

$

45,305,934

 

$

36,143,879

Discontinued operations

         

Coal mining revenue

 

-

   

366,258

Coal washing revenue

 

-

   

123,169

 

$

-

 

$

489,427

           
   

 

   

 

Total Net revenues

$

45,305,934

 

$

36,633,306

           

Net income attributable to L&L

 

2012

   

2011

Coal mining

$

5,671,969

 

$

2,730,099

Coal wholesale

 

403,649

   

299,342

Coking

 

107,411

   

667,531

Coal washing

 

1,701,577

   

2,027,568

Parent Company

 

(1,698,135)

   

(2,521,937)

 

$

6,186,471

 

$

3,202,603

Discontinued operations

         

Coal mining

 

-

   

(543,471)

Coal washing

 

-

   

(273,244)

 

$

-

 

$

(816,715)

           
   

 

   

 

Total Net income attributable to L&L

$

6,186,471

$

2,385,888

26


 
 

Depreciation expense

 

2012

   

2011

Coal mining

$

1,234,000

 

$

656,960

Coal wholesale

 

11,747

   

15,319

Coking

 

89,040

   

76,187

Coal washing

 

143,122

   

138,285

Parent Company

 

71,866

   

67,006

 

$

1,549,775

 

$

953,757

Discontinued operations

         

Coal mining

 

-

   

332,653

Coal washing

 

-

   

246,470

 

$

-

 

$

579,123

           

 

 

 

   

 

Total Depreciation expense

$

1,549,775

$

1,532,880

           
           

Total assets

 

As of July 31, 2012

   

As of April 30, 2012

Coal mining

$

181,838,496

 

$

172,732,033

Coal wholesale

 

18,758,425

   

19,375,449

Coal coking

 

11,384,584

   

11,615,194

Coal washing

 

37,396,531

   

33,011,004

Parent Company (intercompany)

 

37,295,661

   

39,823,859

 

$

286,673,697

 

$

276,557,539

27


 
 

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

 

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

 

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

 

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

 

Overview

   

We produce, process, and sell coal in the People’s Republic of China (“China” or “PRC”) and also have a financial interest in the Bowie Mine, a U.S. thermal coal mine located in Paonia, Colorado. As of July 31, 2012 our vertically integrated coal operations include four coal mines, three coal washing plants, one coking facility, and a coal wholesale and distribution network in the southwest region of China. Currently, substantially all of our coal mining operations are located in the Guizhou and Yunnan provinces. Our operations are located in inland and rural areas of China, which are being developed at a faster rate than the coastal areas that have historically received most of the PRC’s government focus. We sell the coal we produce, or acquire through wholesalers, both though direct sales to end users in China and through other wholesalers.

 

28


 
 

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

 

We conduct our operations through both wholly- owned subsidiaries, majority interests in other entities, and one investment in a U.S.-based mine. As of April 30, 2012, we entered into several agreements with Colorado-based Bowie Resources, LLC (“Bowie”) and have loaned a total of about $7 million to Bowie..  The loan originally carried an interest rate of nine (9) percent and co-senior (secured against the assets of the mine)which has since increased to eleven (11) percent.  The loan and interest payment timetable is on schedule.  In addition to the loan, the Company has secured exclusive rights to market coal from Bowie to China, Taiwan, Japan, and Korea.  Bowie has been mining coal since 1997 and recently resumed its long wall production.  It produces high quality (“super compliance”) thermal coal with high Btu, low sulfur, and low ash.

 

We derive our revenues from selling coal to customers, mainly State Owned Enterprises (SOE) in Yunnan and Guizhou Provinces.  Our thermal or steam coal is sold to SOEs that are utilities that generate power, mainly electricity.  Our metallurgical coal and coking coal is sold to SOEs that make steel, though some steelmaker customers also purchase thermal coal to generate power for the steel factory.  

 

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

 

Macroeconomic Factors

 

There were several relevant macro-economic factors directly impacting our operating environment in China during FY 2012, including GDP growth and inflation. Last year, China’s economy expanded 9.2%, down from 10.4% the previous year.  This was largely attributable to a turbulent world economic climate and China’s efforts to tame inflation.   China’s GDP growth fell to 8.1 percent in the first quarter of 2012 after an 8.9 percent gain in the fourth quarter of 2011.  The consensus view among economists is that China will see growth of 8.0 percent for calendar 2012 while China’s Premier Wen Jiabao has lowered expectations to 7.5%. 

 

At the start of the Company’s prior fiscal year in May 2011, inflation in China was 5.5%, rising to a high of 6.5% in July 2011.  After the PRC tightened their fiscal policies, which included letting interest rates rise and capping prices of certain domestically-produced commodities like coal not to exceed last year’s prices, inflation fell to 3.6% at the end of the Company’s prior fiscal year in April 2012. As a result, China began our last fiscal year with higher demand for coal to fuel GDP growth but coal shortages due to the capping of coal prices and ended our fiscal year with slightly decreasing demand from a slowing national economy and an oversupply of coal from a flood of cheaper imported coal.

 

The coal shortages in 2011 were exacerbated by floods in Australia and inclement weather in Indonesia, both temporarily decreasing coal production in countries that export coal to China.  This resulted in temporarily benefiting U.S. producers until Australian mines got back into production.  Indonesia normally experiences heavy rainfall during their rainy season but has seen relatively light rains this year, resulting in increasing the supply of export coal because of higher coal production.  Coal prices in the United States have declined because there is lower demand for coal due to unseasonably adverse weather conditions, a large surplus inventory of coal, the current administration’s anti-coal policies, and increased competition from natural gas.  Combined with a sluggish market for coal in Europe due to slow economic growth, coal exporters have taken advantage of the arbitrage opportunities between Chinese domestic coal prices and international coal prices.  This has created a temporary oversupply of coal, filling the storage capacity in Chinese ports and Chinese coal-fired electrical power plants have reported record inventories of coal.   

 

However, while the coastal metropolises have great demand for coal, growth is slowing in these large cities.  But growth, and therefore demand, is still high in the secondary cities in non-coastal China (like Kunming in Yunnan Province and Guiyang in Guizhou Province, both where we operate).  China has a relatively underdeveloped rail system of which the government has chosen to put a higher emphasis on developing passenger rail over freight rail.  Therefore, the coal-fired electrical power plants in coastal cities have huge stockpiles of coal and the excess coal that is crowding port storage facilities sits there because the rail system is inadequate to transport the coal to non-coastal cities that need it.  Also because of the lack of supply of freight rail, it is costly and mostly negates the price advantage of cheap imported coal.

 

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

 

 

29


 
 

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

 

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

 

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

 

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

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

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

 

Soon after the distribution of Guizhou Province’s policy, Liupanshui City Government, which is the local government of Pan County where our DaPing Mines operate, issued their implementation policy. We also anticipate and are prepared for the consolidation policy to eventually be implemented and accelerated in Yunnan Province.  As a result of increasing individual mine production standards and the accelerating consolidation policy, our coal operations have grown significantly in the last five years, primarily through acquisitions, and more recently from expanding production capacity at existing mines.

 

General Discussion and Analysis of First Quarter FY2013 Results

 

The first quarter results continued the momentum created by the growing recovery of our mining segment in the fourth quarter of FY2012. The coal produced and sold by our mines increased 33% from Q4 FY2012 to Q1 FY2013 and the tons of coal sold through our wholesale segment jumped 145% for the same period. However, our revenues were impacted by seasonal softening of coal prices in the regions we operate in. Our washing business performed consistent with last quarter while our coking segment continued its decline.

In addition, the Company announced a discretionary stock buy-back program in which up to $10 million of shares may be purchased from time-to-time in the open market during appropriate trading periods when the return on investment of the Company’s capital invested in re-purchased shares supersedes all other uses of that capital. The Company also entered into a MOU to purchase the two other mines owned by Union Energy, namely Louzhou and Lashu mines. Both have been designed to meet the maximum anticipated production capacity mandated by the Guizhou provincial government. The acquisition of Louzhou mine may include a swap of the DaPing mine, the ZoneLin coking plant, and shares of the Company for controlling interest in Louzhou mine. Our Weishe mine passed its final safety inspection in July and will receive its license for coal production, after which Weishe mine is projected to initially produce at an annual run rate of 150,000 tons.

Subsequent to these events in the first quarter, the Company recruited Mr. Y.P. Chan as our Managing Director for Mergers and Acquisitions. Mr. Chan is a seasoned executive who served as Interim CEO and COO of an U.S. publicly-listed company and earned both an MBA in Finance and MSEE from Columbia University. The Company also hosted its second annual on-site investor tour in China, visiting our loading and storage space at ShinPingBa, Guang SunYuan Mining Co.’s 33-acre site where we plan to co-develop a coal washing, blending, and storage facility, and our Weishe mine.

30


 
 

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. Additional plan of operations for expanding our coal business includes expanding our coal wholesale operations into Guizhou, pursuing strategic partnerships, exploring viable options for raising capital with an emphasis on debt and other non-dilutive instruments, and strengthening our team.

 

Organic Growth

 

We acquire producing 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 to expand their production capacity and improve safety. Most coal mines in Southwest China, including our mines, use the conventional/traditional mining method, under which the coal seam is broken up by explosives and then the coal is gathered and loaded on to shuttle cars, which are winched to the surface loading area by a cable and rail system. In lieu of shuttle cars, the Company uses conveyer systems at both the Da Ping and Weishe mines, which are much more efficient and safer than shuttle cars.  We also drill additional shafts in some of our mines to increase safety, operational efficiency, and improve the working environment. While our mines continue to use timber to reinforce mine shafts, the Company has improved safety by using steel and hydraulic braces to reinforce the support the roof of the mine. We have also invested in monitoring equipment for hazardous gases like methane, better electrical equipment and communication systems, GPS locators for each underground miner, and blowers and better ventilation systems to ensure safe air quality. The Company also seeks to acquire larger mines and mines designed to scale up to large production have come on the market recently because the consolidation policy requires that all mines come under a holding company that controls one to two million tons of production per year.

 

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

 

This has resulted in the successful integration and safe expansion of the four mines we have acquired and currently operate, all of which are producing more than when we acquired them and are on their way to meeting the current 300,000 tons a year government-mandated minimum annual production requirement. For example, for the two mines which the Company has owned the longest, and have had the most time to work on our expansion plans, DaPuAn mine’s production increased from 33,814 tons during the three months ended July 31, 2011 to 53,144 tons during the three months ended July 31, 2012, representing approximately a 57.2% increase. Also, SuTsong mine’s production increased from 24,733 tons in this quarter FY2011 to 30,360 tons in this quarter FY2012, representing approximately a 22.8% increase.

 

Coal washing increases the value and revenue of some of our mined coal. The Company constructed the DaPuAn coal washing plant to enhance the value of the coal mined at DaPuAn mine. In addition, the Company expanded the capacity of our coal washing facilities, in particular Hong Xing and Da Ping (before its divesture), both of which washed other mines’ coal. In 2012, in order to save cost and expand business, The Company built a newly washing plant for Da Ping, Heng Tai Washing Plant.

 

Given the increasing frequency of the government-ordered idling or slowdown of mines in the areas the Company operates in, we have been fully compliant with provincial and local government authorities. During these periods, the Company continues to expand the capacity of our mines and improve the safety of our mines. When approved for production, we have been producing to a capacity that avoids the risk of any accidents, generally to the capacity of our approved mining permit instead of near the capacity of our mining permit application to increase the specific number of tons of coal that can be extracted from our mines each year.  In the past, the government has allowed the Company to produce more than the existing permit allows but less than the amount applied for in the application.

 

31


 
 

Acquisitive Growth

 

We believe that the current consolidation policy in China will continue and thus create more acquisition opportunities for us. The Company will also need to accelerate the rate of acquisitions and increasing consideration of acquiring larger mines and mines designed with larger production capacity in order to comply with the government-mandated consolidation targets for holding companies. Our focus in the short term will be taking advantage of unique opportunities to acquire 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.

 

We seek two types of acquisitions. Our standard criteria include existing mines in production with good infrastructure and sufficient reserves but lacking the capital and management to expand to or beyond the current minimum of 300,000 tons per year or mines. Because the consolidation policy requires that all mines must also join a holding company that controls coal production between 800,000 tons and 2,000,000 tons, our criteria now include larger operating or mines that were designed for a 300,000 and larger capacity mines that need to join a holding company.  We then send in a team to inspect the mine, evaluate the management, and perform extensive 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. We may not acquire all the mines that we have signed letters of intent for. Our inspection team, with suggested strategies by Dr. Syd Peng , was in China at the end of our second fiscal quarter and the start of our fourth fiscal quarter to inspect, assess, and supervise the acquisitions. Dr. Peng and the inspection team have physically inspected a significant number of potential mines for acquisition and have recommended the Company pursue the acquisition of several of mines. Our teams are currently focused on extensive due diligence of these potential acquisitions in preparation for upcoming negotiations. 

 

In addition to mines that meet our preferred criteria, we have been inspecting larger mines with production near 300,000 tons or more, or mines designed with greater production capacity, and have considerable proven coal reserves, better geology, and strong management teams already in place. When these well-designed mines are executed effectively, they require less capital expenditure to expand capacity. Strong management teams are integral to better safety and allow for scaling up operations more quickly. Mines with these characteristics are on the market more frequently than in the past because the government implementation of the Guizhou consolidation plan announced in the spring of 2011 has started to change the local market. The Company will put a higher priority on larger mines while continuing to explore existing mines that meet our preferred criteria. As a result, the Company recently entered into a relationship with Union Energy who is developing three mines, each designed with 450,000 tons of production capacity each. We have acquired the Weishe mine and may acquire the remaining two mines pending further due diligence, final negotiations on the terms, and board approval.

 

Other

 

In addition to acquiring mines, the Company established a new coal wholesale operation DaXing L&L Coal Company. With approval from the government, DaXing has begun developing additional coal storage space and growing its distribution network.  Our subsidiary is expected to generate revenue in 2012 and through its sourcing of coal, introduce potential mine acquisitions to the Company in a similar manner as KMC. DaXing recently entered into a joint sales agreement with two strategic partners. The first is China Chengtong Metal Tianjin Company, a wholly owned subsidiary of CCMC, a large China state owned enterprise specializing in coal and metal trading throughout northern China and Inner Mongolia. The second is Tianjin Fuhao Industrial Co. Ltd. Both companies agree to source and sell up to one million tons of coal each with the Company in calendar 2012.

 

In addition, the Company is also exploring strategic partnerships that can accelerate our ability to grow organically and acquisitively and has signed a memorandum of understanding with Tianjin Fuhao Industrial Co. Ltd to explore strategic opportunities to expand and enhance the value of both companies. Tianjin Fuhao is a major coal wholesaler and logistics company in Northern China and is a wholly owned subsidiary of Tianjin Materials and Equipment Co., which ranks 57th among China’s top 500 enterprises with recent revenues of over $16 billion.

 

32


 
 

We may need to raise additional capital to acquire additional profit making operations. To assist the government-mandated consolidation of the coal industry, the provincial government has made debt financing available for up to 70% of the purchase price of each mine acquisition through commercial banks for government-supported consolidators. On September 26, 2011, the Company received a letter of endorsement from the Industrial and Commercial Bank of China stating that the Corporate Banking Department of the Guizhou Province Branch is willing to support our plan of consolidation. The bank has indicated that it will provide up to 50% financing for acquisitions for a period of time no greater than five years subject to due diligence on each acquisition. 

 

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

 

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

 

Results of Operations

 

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

 

For Continued Operations (Excluding Ping Yi Mine and Washing Plant)

   
             
   

Three Months Ended July 31,

   

2012

 

2011

 

  

Amount

% of Revenue

  

Amount

% of Revenue

Revenues

$

45,305,935

100%

$

36,143,879

100%

Cost of revenue

  

32,253,021

71%

  

27,762,280

77%

Gross profit

 

13,052,914

29%

 

8,381,599

23%

Selling general & administrative

  

3,903,518

9%

  

3,330,516

9%

Interest expense (income)

 (63,924)

0%

 

(197,184)

(1)%

Other expense (income)

  

(328,124)

(1)%

  

762,483

2%

Provision for income taxes

  

1,009,445

2%

  

585,867

2%

Net Income Attributable to Non-controlling interest

 

2,345,525

5%

 

697,314

2%

Net income

$

6,186,474

14%

$

3,202,603

7%

33


 
 

For Discontinued Operations (Ping Yi Mine and Washing Plant):

   
             
   

Three Months Ended July 31,

   

2012

 

2011

 

  

Amount

% of Revenue

  

Amount

% of Revenue

Revenues

$

-

-

$

489,428

(60)%

Cost of revenue

  

-

-

  

681,695

(83)%

Gross profit/(Loss)

 

-

-

 

(192,267)

24%

Selling general & administrative

  

-

-

  

620,533

(76)%

Interest expense (income)

-

-

 

(1,164)

0%

Other expense (income)

  

-

-

  

5,078

(1)%

Provision for income taxes

  

-

-

  

-

0%

Net Income Attributable to Non-controlling interest

 

-

-

 

-

0%

Net income/(Loss)

$

-

-

$

(816,715)

100%

 

 

Revenue

 

The following table presents revenues by operating segment:

 

For Continued Operations (Excluding Ping Yi Mine and Washing Plant)

 

 

Three Months Ended

 

Increase (Decrease)

 

 

July 31,

 

to Revenues

 

 

2012

2011

 

$

%

 

                 

 

Coal Mining

$

15,546,853

$

6,176,642

 

$

9,370,211

152%

 

Coal Wholesale

 

12,218,580

 

4,462,730

   

7,755,850

174%

 

Coal Washing

 

15,819,554

 

18,860,387

   

(3,040,833)

(16)%

 

Coal Coking

 

1,720,948

 

6,644,120

 

 

(4,923,172)

(74)%

 

Total Revenues

$

45,305,935

$

36,143,879

 

$

9,162,056

25%

 

                 

For Discontinued Operations (Ping Yi Mine and Washing Plant):

       

 

 

Three Months Ended

 

Increase (Decrease) to Revenues

 

 

July 31,

 

 

 

 

 

 

2012

2011

 

$

%

 

   

 

 

   

 

 

 

 

Coal Mining

$

-

$

366,258

 

$

(366,258)

(100)%

 

Coal Wholesale

 

-

 

-

   

-

 

 

Coal Washing

 

-

 

123,169

   

(123,169)

(100)%

 

Coal Coking

 

-

 

-  

 

 

-

 

 

Total Revenues

$

-

$

489,427

 

$

(489,427)

(100)%

 

                                                     

34


 
 

For continued operations, in this quarter, our net revenue increased from $36.1 million during the three months ended July 31, 2011 to $45.3 million during the three months ended July 31, 2012, representing approximately a 25% increase. The increase was primarily due to the increased volume of coal production and sales. In the quarter, our coal mining revenue increased from 6.2million during the three months ended July 31, 2011 to $15.5 million during the three months ended July 31, 2012, representing approximately a 152% increase. The revenue of coal wholesale increased from $4.5 million during the three months ended July 31, 2011 to $12.2 million during the three months ended July 31, 2012, representing approximately a 174% increase.

 

The strength in our organic coal sales in the quarter ended July 31, 2012 is chiefly attributable to our investment in mechanization and mine infrastructure, both of which allow us to increase the productivity of our mines. We also continued to benefit from growth in China’s economy and the resulting demand for energy. In particular, the China Central Government Western Development Program, which is a government mandate for additional energy to fuel economic growth, creates significant demand for coal and coal-related products in our markets.

Coal Mining

 

During the three months ended July 31, 2012, our coal mining net revenues increased from $6.2 to $15.5 million approximately a 152% increase compared to the three months ended July 31, 2011. The sales increase was due to the expansion of coal sales from 69,181 tons during the three months ended July 31, 2011 to 134,998 tons during the three months ended July 31, 2012, representing approximately a 115% increase. The corresponding impact on revenue was moderately reduced due to coal prices per ton declining slightly from $119.69 per ton the same period last year to $113.95 per ton this year, representing approximately a 4.8% decrease.All of our mines were operational during the quarter and production was on target. We accomplished continuing grow from last quarter to this quarter. The coal mining revenues increased from $12.8 million during the three months ended April 30, 2012 to $15.5 million during the three months ended July 31, 2012, representing approximately a 20.5% increase from last quarter to this quarter.  

 

Wholesale revenues increased by 174% during the three months ended July 31, 2012 compared to the three months ended July, 31, 2011, resulting from the increased volume of sales due to our effective sales and marketing management. In addition, we were able to expand local market share and signed long-term contracts with local clients and state-owned enterprises because of our good working relationships with local and provincial governments. The wholesale revenues increased from $6.3 million (including $6 million of fine-coal and $290,140 of raw-coal, respectively.) during the three months ended April 30, 2012 to $12.2 million ($11.3 million of fine-coal and $890,520.83 of raw-coal, respectively) during the three months ended July 31, 2012, representing approximately a 93.6% increase from last quarter to this quarter.  

 

Coal washing revenue decreased by 30.1% during the three months ended July 31, 2012 compared to the three month ended July 31, 2011 because tight supplies and falling price in this quarter.

 

Coal Coking revenue decreased by 49.8% of revenue due to the continued reduced production of Zone Lin Coking Plant. Initially the decrease was attributed to the shortage of raw coal sources because of the government mandated temporary slowdowns and idling of area mines. However, our coking segment has additionally been negatively impacted by slow steel demand and the resulting high stockpiles of coking coal. However, the average price per ton during the three months ended July 31, 2012 increased slightly compared to the same period last year.

 

35


 
 

Gross Profit

 

Our gross profit percentage in this quarter increased to 29% from 23% of the same quarter last fiscal year mainly as a result of the increase in production and sales volume in our mining segment revenue the increase in our coal wholesaling segment revenue. Coal mining has historically been the Company’s most profitable business segment. The corresponding change in product/segment mix and the reduction of fixed costs have accordingly increased the gross profit of the current period.

 

Selling general & administrative

 

Total sales, general, and administrative expense account for 9% of revenue, during the three months ended July 31, 2012 which was similar to the same period in 2011. This result is mostly due to our effective and sustainable management and stable operating mode.

 

Provision for income taxes

 

For Continued Operations (Excluding Ping Yi Mine and Washing Plant)

 

 

Three Months Ended July 31,

 
   

2012

 

2011

 

Net income before income taxes

$

9,541,441

$

4,485,784

 

Provision for income taxes

1,009,445

 

585,867

 

Effective tax rate

 

10.58%

 

12.99 %

 

 

 

Our provision for income taxes increased from the three months ended July 31, 2011 to the three months ended July 31, 2012, primarily as a result of increased net income.

 

Our effective tax rate decreased from 12.99% during the three months ended July 31, 2011 to 10.58% during the three months ended July 31, 2012.

 

Net Income Attributable to Common Stockholders

 

The following table presents net income attributable to common stockholders:

 

For Continued Operations (Excluding Ping Yi Mine and Washing Plant)

 

 

   

Three Months Ended July 31,

 

 Increase (Decrease) to Income

   

2012

2011

 

 $

 %

Net income from continued operations (before non-controlling int.)

$

8,531,996

3,899,917

 

4,632,079

119%

Less: Net income attributable to non-controlling interests

2,345,525

697,314

 

1,648,211

236%

Net income attributable to Common shareholders

$

6,186,471

3,202,603

 

2,983,868

93%

             

 

The increase of our net income from continued operations before non-controlling interests was due to expansion of our mine market share and streamlining our selling, general &administrativeexpense. During the three months ended July 31, our coal mining segment and coal wholesale segment significantly improved our performance this quarter compare to the same period last year, increasing 152% and 174%, respectively. Specifically our DaPuAn Coal Mine coal accounted for 55% of the coal mining segment, which increased the percentage of net income attributable to non-controlling interests to net income from continued operations before non-controlling interest and led to a higher net income attributable to common shareholders.

 

 

 

36


 
 

Liquidity and Capital Resources

 

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

 

Net cash provided by operating activities was $5,825,239 for the three months ended July 31, 2012.  For the three months ended July 31, 2011, net cash flow provided by operating activities was $8,072,574.  The decrease in cash flow during the current quarter is due to increase in prepayments that mainly due to the market fluctuation in national wide. During this quarter, the market price of raw coal went down caused by the inventory increased. However, we expected this situation would not last too long base on two reasons. First, it is considered that the market price will go up as the 18th National Congress of the Communist Party of China will be held in October and the Government may implement some positive policies to stimulate the economy. Second, coal is the main energy source in China. To take advantage of the lower price of raw coal, we prepaid more to our suppliers in this quarter for future purchases.

 

Net cash used in investing activities was $4,196,994 during the three months ended July 31, 2012, compared to $10,004,393 used in investing activities during the same period in 2011. The decrease in cash outflow is due to decrease of cash used for construction-in-progress and property and equipment purchase.

 

Net cash provided by financing activities was $6,666 during the three months ended July 31, 2012, compared to $2,848,921 used during the same period in 2011. The decrease of cash inflow was caused by no treasury stock was sold during this period compared to the proceeds from the treasury stock sold of $2.4 million in the same period last year.

 

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

 

Off-Balance Sheet Arrangements:

 

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

 

Contractual Obligations

 

As of July 31, 2012, 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

 

1,119,187

 

-

 

1,119,187

 

-

 

-

Total

$

25,535,441

$

-

$

20,507,695

$

5,027,746

$

-

 

Critical Accounting Policies and Estimates

 

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

 

 

Our critical accounting policies are discussed in “Management's  Discussion and Analysis or Plan of Operation” in our Annual Report on Form 10-K for the year ended April 30, 2011 and Quarterly Report on Form 10-Q for the quarter ended July 31. Those critical accounting policies remained unchanged at July 31, 2012.

37


 
 

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

 

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of October 31, 2011 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

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

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

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

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

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

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

Since April 30, 2011, the Company has also completed the necessary improvements to our internal controls with the assistance of independent internal controls consulting firm and from comments received from our auditors while in the performance of their annual audit and reviews of our quarterly filings. Further, our internal control consultants conducted extensive internal controls testing in the following areas: equity grants and stock administration, financial reporting (including impairment testing, period end reconciliation, and financial reporting), IT general and application controls (security and access, capturing and processing information, end user computing, data backup and restoration), and each internal control tested effective.  Also the company employs a team of in-house internal control audit personnel. The Company believes that the deficiencies were remediated by the reporting period of July 31, 2012.

38


 
 

 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

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

 

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

 

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

 

On November 15, 2011, a complaint was filed by Russell L. Bush, an individual, in a derivative suit against the Company as nominal defendant, and against all existing directors (i.e., Dickson V. Lee, Norman Mineta, Ian G. Robinson, Robert W. Lee, Shirley Kiang, Dennis Bracy, Syd S. Peng) in the United States District Court, Western District of Washington at Seattle (the “Bush Derivative Suit”, with the Stouffer Derivative Suit, the “Derivative Suits”).  It mainly alleges that the defendants breached fiduciary duties by failing to install proper internal control and overseeing system, and were unjustly enriched by accepting compensation while breaching fiduciary duties. 

 

We have notified our insurance carrier of the Securities Class Action and the Derivative Suits, have retained outside legal counsels, and intend to defend these lawsuits vigorously.

 

 

Item 1A. Risk Factor

 

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

Risks Relating to the Company and Our Business

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

39


 
 

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, Weishe 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.

40


 
 

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

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

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

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

41


 
 

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, some of our mines were recently subject to what we believe county-wide shut downs and safety inspection of coal mines by the local governments and it remains unclear when or if operations will be resumed to their full production level. If we are unable to resume operations to full production level 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.

   

42


 
 

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

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

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

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

43


 
 

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. 

44


 
 

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 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 Shui City of Guizhou province shall reach at least the capacity to produce Two Million (2,000,000) tons of coal per year; (iv) for certain coal mines, the mechanization level for coal-mine development and coal mining shall reach, respectively, 70% and 45% (by the end of 2015, 80% and 55% respectively.)  While the Guizhou Consolidation Policy has opened the door for the Company to acquire/consolidate additional smaller coal mines in the Guizhou province at faster speed and at attractive prices, the Company is also aware that the Company’s current coal-production capacity and mechanization level have not met the requirements set forth in the Guizhou Consolidation Policy, but we intend to work diligently to meet the requirements in the policy by the end of 2013. 

45


 
 

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

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

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

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

Our Chinese subsidiaries, Kunming Biaoyu Industrial Boiler Co., Ltd. (“KMC”) 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 fail to obtain the required PRC government approvals for our acquisitions or fail to remit all of the required payments for acquisitions, such acquisitions may be deemed void or unwound. Should this occur, we may seek to acquire the equity interest of our subsidiaries through other means, although no assurance can be given that we will be able to do so, nor can we assure that we will be successful if we do.

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.

46


 
 

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

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

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

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

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.

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.   

47


 
 

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.

48


 
 

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

 

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

 

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

 

Stockholders should have no expectation of any dividends.

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

 

Item 1B. Unresolved Staff Comments

 

The Company has outstanding unresolved comments from the SEC from a letter it received on January 12, 2012 relating to its Registration Statement on Form S-1 filed with the SEC on December 8, 2011, its Form 10-Q for the fiscal quarter ended October 31, 2011.        

 

 

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

 

None.

 

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

 

Item 4.   Reserved

 

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

 

49


 
 

 

Item 5.   Other Information

 

None.

 

 

Item 6.   Exhibits

 

Exhibit number

Description

31.1

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

31.2

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

32.1

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

32.2

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

 

 

 

50


 
 

 

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 10, 2012

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

 

 

 

EXHIBIT 31.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

I, Dickson V Lee, certify that:

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

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

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

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

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

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

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

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

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

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

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

 

 

L&L ENERGY, INC.

Date: September 10, 2012

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

 

51


 
 

 

EXHIBIT 31.2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER

I, Ian G. Robinson, certify that:

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

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

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

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

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

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

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

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

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

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

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

 

L&L ENERGY, INC.

Date: September 10, 2012

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 July 31, 2012 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 10, 2012

By:

/S/ Dickson V. Lee

 

Name:

Dickson V. Lee, CPA

 

Title:

CEO

52


 
 

EXHIBIT 32.2

 

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

 

In connection with the quarterly report on Form 10-Q of L&L Energy, Inc. (the “Registrant”) for the period ended July 31, 2012, 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