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       Coal extracted from DaPuAn coal mine is for industrial use and is extracted from DaPuAn mine using traditional mining methods.

All raw coal extracted from DaPuAn mine is loaded and transported by a chain conveyor into crates which are carried out to the surface by an electrical winch. Each crate carries approximately 0.75 metric tons. Air compressors are provided for underground air tool use. Electrical power is supplied internally from the Company’s own power stations through state-owned power lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions.

 Normal water inflow into the mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes exhaust fans on the surface of the main incline. Auxiliary fans are used as needed. The present fans are capable satisfying ventilation requirements of the mining operation.

    The extracted coal is transported by truck to a warehouse located approximately 300 meters from the mine site, processed at our coal-washing facility and sorted. Out of the coal produced at the DaPuAn Mine, typically a portion is sold to customers as raw coal, a portion is sold after the washing process as washed fine coal, and a portion that meets certain specific chemical requirements is sold as coking coal. Coking coal is sent to a coking plant to further process it into high valued coke. Coke is a critical material for making of steel.

          

         The DaPuAn Mine’s annual production volumes for the years ended April 30, 2008 through April 30, 2012 are as follows:

 

 

Starting with the end of the fourth quarter of FY2011, we experienced normal seasonal decreases in coal prices from the warming spring weather and what appeared to be temporary government-mandated idling of DaPuAn due to nearby fatal accidents in non-LLEN mines, these lead to a decrease in our operation result in 2012.

 

The Company did not acquire interests in DaPuAn mine until May 1, 2008.  Because the original owner(s) of the mine did not retain annual production information for the mine in respect of 2008, we are unable to accurately provide the corresponding annul production numbers.

 

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SuTsong Coal Mine

 

SuTsong Coal Mine is located in A’ang Town, Luoping County, Yunnan Province, China. The SuTsong coal mine is an underground coal mine and is accessible by public roads. The map below shows the location of SuTsong Coal Mine.

  

Before our acquisition of majority controlling interest of the SuTsong mine, the mine was separately operated by LoPing County SuTsong Coal Mine pursuant to resource mining permits effective from 2009 through 2015. In May 2008, we acquired majority controlling ownership interest in the resource mining permits and the mining rights to the SuTsong mine and assumed mining operations.

 It is a general policy that the government owns such resources as coal and other minerals. Accordingly, the amount of coal that we can extract from the mine is based on a mining right issued by the Yunnan Province Municipal Bureau of Land and Resource. The mining right is issued pursuant to a reserves appraisal report submitted by government authorized mining engineers, and the mining right is issued upon approval of such appraisal report by the Qujing XiaGuang Geological Engineering Co. Ltd. in Yunnan, China. The amount of coal that can be extracted under the mining right represents the coal tonnage that the Chinese government (the Yunnan Province Municipal Bureau of Land and Resource) has authorized the Company to extract in compliance with the applicable laws and regulations in China.

Under current mining rights for the SuTsong Mine, we are permitted to extract coal from SuTsong mine. These rights, originally for a 50-year term, have approximately 39 years remaining. Under our current production rate at SuTsong, useful life of the mine is approximately 16 years. The coal selling price in Yunnan province is determined on a per ton basis, and is subject to change based on the prevailing market price which is influenced by the State Bureau of Coal Industry of Yunnan. The original owner paid the one-time extraction license fee when it acquired the original mining rights to the mine prior to our acquisition of the SuTsong Mine. We pay the required government taxes for the coal we extract from the SuTsong Mine.

A resource mining permit issued by the Yunnan Province Municipal Bureau of Land and Resource specifies the acreage of production of the SuTsong Mine’s mining area and the mine’s designated annual production capacity. The resource mining permit for the SuTsong Mine estimates that the mine’s acreage of production is 0.3918 square kilometers and the scale of production is 90,000 tons per year based on the current mining operations and we are in the process of expanding the mine’s capacity to 300,000 tons per year.  The Qujing XiaGuang Geological Engineering Co. Ltd. report dated July 2007 estimated the total In-Place Reserve for the SuTsong Mine was 2.136 million tons.

Coal extracted from SuTsong coal mine is for industrial use and is extracted from SuTsong mine using traditional mining methods..All raw coal extracted from SuTsong mine is loaded and transported by a chain conveyor into crates which are carried out to the surface by an electrical winch. Each crate carries approximately 0.75 metric tons.  Air compressors are provided for underground air tool use. Electrical power is supplied internally from the Company’s own power stations through state-owned power/utility lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions.

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 Normal water inflow into the mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes an exhaust fan on the surface of the main incline. Auxiliary fans are used as needed. The present mine fan is capable of satisfying ventilation demands of the mining operation.

The extracted coal is shipped via trucks to warehouses located approximately 200 meters from the mine site and processed at our coal-washing facility for washing and sorting. Samples are taken prior to and after the coal-washing process, to analyze and determine coking readiness which is based primarily on coal moisture, ash content, sulfur percentage, and volatile contents. Out of the coal produced at the SuTsong Mine, typically a portion is sold to customers as raw coal, and certain portions as washed coal.  

The SuTsong Mine’s annual production volumes for the years ended April 30, 2008 through April 30, 2012 are as follows:

 

 

The Company did not acquire interests in SuTsong mine until May 1, 2008.  Because the original owner(s) of the mine did not retain annual production information for the mine with respect to, we are unable to accurately provide the corresponding annul production numbers.

Ping Yi Coal Mine

 

The Ping Yi Coal Mine is located in Yiche Village, Ping Guan Town, Liu Panshui City, Pan County, Guizhou Province, China. It is an underground coal mine and is accessible by public roads. The map below shows the location of Ping Yi Coal Mine.

 

Before our acquisition of Ping Yi mine, the mine was mainly operated by Mr. Bao Guo Zhang. In January 2010, we acquired majority controlling ownership interest in the resource mining permits and the mining rights to the Ping Yi mine and assumed mining operations. In April 2012, we sold our interest back to Mr. Bao and the other original owners.  Because Ping Yi’s results were included in the Company’s operating results for almost the entire FY 2012 fiscal year, the following description of Ping Yi is relevant to understanding the Company’s historical results of operation.

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 It is a general policy that the government owns such resources as coal and other minerals. Accordingly, the amount of coal that the Company can extract from the mine is based on a mining right issued by the Guizhou Province Municipal Bureau of Land and Resource. The mining right is issued pursuant to a reserves appraisal report submitted by government authorized mining engineers, and the mining right is issued upon approval of such appraisal report by the Guizhou Province National Land Resources Survey and Planning Institute in Guizhou Province. The amount of coal that can be extracted under the mining right represents the coal tonnage that the Chinese government (the Guizhou Province Municipal Bureau of Land and Resource) has authorized the Company to extract in compliance with the applicable laws and regulations in China.

 Under current mining rights for the Ping Yi mine, we were permitted to extract coalfrom Ping Yi mine. These rights are normally about 50 years, which have approximately 39 years remaining. Under the current production rate at Ping Yi, useful life of the mine is approximately 11 years. Coal selling price in Guizhou province is determined on a per ton basis, and is subject to change based on the prevailing market price as influenced by the State Bureau of Coal Industry of Guizhou. The original owner paid the one-time extraction license fee when it acquired the original mining rights to the mine prior to our acquisition of the Ping Yi mine. We pay the required government taxes for the coal we extract from the Ping Yi mine.

A resource mining permit issued by the Guizhou Province Municipal Bureau of Land and Resource specifies the acreage of production of the Ping Yi mine’s mining area and the mine’s designated annual production capacity. The resource mining permit for the Ping Yi mine estimates that the mine’s acreage of production is 2.2694 square kilometers and the scale of production  is 150,000 tons per year based on current mine operating conditions, and we are in the process of expanding the mine’s capacity to 300,000 tons per year. The Guizhou Land Survey and Planning Institute report dated January 2008 estimates the total In-Place Reserve for the Ping Yi mine was 13.506 million tons.

 Coal extracted from Ping Yi coal mine is for industrial use and is extracted from Ping Yi mine using traditional mining methods.  All raw coal extracted from the Ping Yi mine is loaded and transported by a chain conveyor into crates which are carried out to the surface by an electrical winch. Each crate carries approximately 0.75 metric tons. Air compressors are provided for underground air tool use. Electrical power is supplied internally from the Company’s own power stations through state-owned power lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions.

  Normal water inflow into the mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes exhaust fans on the surface of the main incline. Auxiliary fans are used as needed. The present fans are capable satisfying ventilation requirements of the mining operation.

The extracted coal is transported by truck to a warehouse located near the mine site, processed at our coal-washing plant and sorted. Out of the coal produced at the Ping Yi mine, typically a portion is sold to customers as raw coal, a portion is sold after the washing process as washed fine coal, and a majority of the coal is sold as coking coal. Coking coal is sent to a coking plant to further process it into high valued coke. Coke is a critical material for making of steel.

The Ping Yi mine’s approximate annual production volumes for the years ended April 30, 2008 through April 30, 2012 are as follows:

 

 

The Company did not acquire interests in Ping Yi mine until November 1, 2009. Because the original owner(s) of the mine did not retain annual production information for the mine in respect of  2008 and 2009, we are unable to accurately provide the corresponding annul production numbers.

 

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Da Ping Coal Mine

The Da Ping Coal Mine is located in Shinao Village, Ping Guan Town, Pan County, Liu Panshui City, Guizhou Province, China. It is an underground coal mine and is accessible by public roads. The map below shows the location of the DaPing Coal Mine.

 

Before our acquisition of majority controlling interest of the Da Ping mine, the mine was wholly owned and operated by Mr. Hobin. Effective March 15, 2011, we acquired 60% of the ownership interest in the Da Ping mine, including interest in the corresponding resource mining permits and the mining rights to the Da Ping mine, and assumed mining operations. Under the transfer agreement between the Company and Mr. Hobin effective March 15, 2011, the Da Ping mine and all related assets will be transferred to a newly formed Chinese corporate entity (“DaPing Co., Ltd.”), and 60% of the entity is owned by the Company and the remaining 40% owned by Mr. Hobin.

It is a general national policy that the Chinese government owns such resources as coal and other minerals. Accordingly, the amount of coal that the Company can extract from the mine is based on a mining right issued by the Guizhou Province Municipal Bureau of Land and Resource. The mining right is issued following a reserves appraisal report submitted by government authorized mining engineers, and the mining right is issued upon approval of such appraisal report by the Guizhou Province National Land Resources Survey and Planning Institute in Guizhou Province. The amount of coal that can be extracted under the mining right represents the coal tonnage that the Chinese government (the Guizhou Province Municipal Bureau of Land and Resource) has authorized the Company to extract in compliance with the applicable laws and regulations in China.

 Under current mining rights for the Da Ping mine, we are permitted to extract coal from Da Ping mine. These rights normally continue for a period of approximately 50 years, which have approximately 39 years remaining. Under our current production rate at Da Ping, useful life of the mine is approximately 28 years, with approval of a new license.  Coal selling price in Guizhou province is determined on a per ton basis, and is subject to change based on the prevailing market price as influenced by the State Bureau of Coal Industry of Guizhou. The original owner paid the one-time extraction license fee when it acquired the original mining rights to the mine prior to our acquisition of the Da Ping mine. We pay the required government taxes for the coal we extract from the Da Ping mine.

A resource mining permit issued by the Guizhou Province Municipal Bureau of Land and Resource specifies the acreage of production of the Da Ping mine’s mining area and the mine’s designated annual production capacity. The resource mining permit for the Da Ping mine estimates that the mine’s acreage of production is 0.7768 square kilometers and the scale of production  is 150,000 tons per year based on current mine operating conditions and we are  in the process of expanding the mine’s capacity to 300,000 tons per year. The Guizhou Land Survey & Plan Institute report estimates the total In-Place Reserve for the Da Ping mine was 14.75 million tons.

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Coal extracted from Da Ping coal mine is for industrial use and is extracted using traditional mining methods. All raw coal extracted from Da Ping mine is loaded and transported by a conveyer belt delivery system and carried up to the surface.  Air compressors are provided for underground air tool use. Electrical power is supplied internally from the Company’s own power stations through state-owned power/utility lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions. Normal water inflow into the mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes an exhaust fan on the surface of the main incline. Auxiliary fans are used as needed. The present mine fan is capable of satisfying ventilation demands of the mining operation.

The extracted coal is shipped via trucks to a warehouses located near the mine site, processed at our coal-washing facility for washing and sorting. Samples are taken prior to and after the coal-washing process, to analyze and determine coking readiness which is based primarily on coal moisture, ash content, sulfur percentage, and volatile contents. Out of the coal produced at the Da Ping Mine, typically a portion is sold to customers as raw coal, a portion sold after the washing process as washed fine coal, and a portion that meets certain specific chemical requirements is sold as coking coal. Coking coal is sent to a coking plant to further process it into high valued coke.  Coke is a critical material for making steel.  

Based upon a review by an engineer engaged by us, his report on the DaPing mine concluded that it has a complicated geological structure which makes the extraction of coal more difficult. And initially, the mince experienced a shortage of workers due to seasonal availability, which hampered the full production at the mine. However, we have been able to improve our recruitment of mine workers which has contributed in increased production at the mine.

 

The Da Ping mine’s approximate annual production volumes for the years ended April 30, 2008 through April 30, 2012 is as follows:

 

 

The Company did not acquire interests in Da Ping mine until March 15, 2011.  Because the original owner(s) of the mine did not retain annual production information, we are unable to accurately provide the corresponding annul production numbers.

 

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WeiShe Coal Mine

The WeiShe Coal Mine is located in WeiShe FangYuTang Village, HeZhang County, Bijie Area, Guizhou Province, China. It is an underground coal mine and is accessible by public roads. The map above shows the location of the Weishe Coal Mine.

Prior to our acquisition of majority controlling interest of the Weishe mine, the mine was wholly owned and operated by Union Energy. Effective February 3, 2012, we acquired 51% controlling interest in the Weishe mine (including 51% interest in the corresponding resource mining permits and the mining rights to the WeiShe mine) and assumed mining operations.

The WeiShe mine, including the mine site and the underlying coal and other minerals, is owned by the Chinese government as a general national policy that the government owns such resources. Accordingly, the amount of coal that the Company can extract from the mine is based on a mining right issued by the Guizhou Province Municipal Bureau of Land and Resource. The mining right is issued pursuant to a reserves appraisal report submitted by government authorized mining engineers, and the mining right is issued upon approval of such appraisal report by the Guizhou Province National Land Resources Survey and Planning Institute in Guizhou Province. The amount of coal that can be extracted under the mining right represents the coal tonnage that the Chinese government (the Guizhou Province Municipal Bureau of Land and Resource) has authorized the Company to extract in compliance with the applicable laws and regulations in China.

 Under current mining rights for the WeiShe mine, we are permitted to extract coal from Da Ping mine. These rights for the WeiShe mine has approximately 5 years remaining, but it can be extended later on . Under our current production rate at WeiShe, useful life of the mine is approximately 17 years, with approval of a new license.  Coal selling price in Guizhou province is determined on a per ton basis, and is subject to change based on the prevailing market price as influenced by the State Bureau of Coal Industry of Guizhou. The original owner paid the one-time extraction license fee when it acquired the original mining rights to the mine prior to our acquisition of the WeiShe mine. We pay the required government taxes for the coal we extract from the WeiShe mine.

 A resource mining permit issued by the Guizhou Province Municipal Bureau of Land and Resource specifies the coordinates of the Weishe mine’s mining area and the mine’s designated annual production capacity. The resource mining permit for the Weishe mine estimates that the mine’s acreage of production is 1.8772 square kilometers and the scale of production is 150,000 tons per year based on current mine operating conditions and we are in the process of expanding the mine’s capacity to 300,000 tons per year. The Guizhou Land Survey & Planning Institute report October 2007 estimates the total In-Place Reserve for the Weishe mine was 20 million tons.

Coal extracted from Weishe coal mine is for industrial use and is extracted using traditional mining methods.  All raw coal extracted from Weishe mine is loaded and transported by a conveyer belt delivery system and carried up to the surface.  Air compressors are provided for underground air tool use. Electrical power is supplied internally from the Company’s own power stations through state-owned power/utility lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions.   Normal water inflow into the mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes an exhaust fan on the surface of the main incline. Auxiliary fans are used as needed. The present mine fan is capable of satisfying ventilation demands of the mining operation.

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The extracted coal is shipped via trucks to a warehouses located near the mine site, processed at our coal-washing facility for washing and sorting. Samples are taken prior to and after the coal-washing process, to analyze and determine coking readiness which is based primarily on coal moisture, ash content, sulfur percentage, and volatile contents. Out of the coal produced at the Weishe mine, typically a portion is sold to customers as raw coal, a portion sold after the washing process as washed fine coal, and a portion that meets certain specific chemical requirements is sold as coking coal.  Coking coal is sent to a coking plant to further process it into high valued coke.  Coke is a critical material for making steel.  

The WeiShe mine’s approximate annual production volumes for the year ended April 30, 2012 is:

 

 

The Company did not acquire interests in WeiShe mine until February 3, 2012.  Because Union Energy purchased the WeiShe mine from the original owner(s) and subsequently redeveloped the mine, there is was no production during the redevelopment. Also, the original mine owners did not retain annual production information and therefore we are unable to accurately provide the corresponding annual production numbers.

TianRi Mine

 

TianRi Mine has an estimated reserve of 53 million tons of coal, but as of July 2011, the Company has not developed the mine because it believes that, under the current coal market condition in Yunnan and Guizhou provinces, it is more cost effective to focus on acquiring existing mines with full production capability than developing a new mine, such as the TianRi mine. In addition of taking advantage of the current government-mandated coal consolidation policy in Guizhou, we are also reviewing various alternatives and options in respect of the mine. 

 

Additional Coal Mining Opportunities

 

As a part of its growth strategy, the Company from time to time acquires additional coal mines to increase its mining capacity. Recently, the Company has entered into some Memorandums of Understanding in respect of potential acquisition of additional coal mines in Guizhou province. 

  

Coal Wholesale Operations

 

In addition to coal mining, we also engage in coal wholesale and distribution through three subsidiaries: Kunming Biaoyu Industrial Boiler Co., Ltd. (“KMC”), Yunnan L&L Tai Fung (“Tai Fung”) in Yunnan Province and DaXing L & L Coal Co., Ltd. (“DaXing”) in Guizhou Province.  Depending on market conditions, our coal wholesale operations may broker coal from small independent mine operators in its surrounding areas who may lack the means to transport coal from their mine sites or are otherwise unable to sell their coal due the size of their operations. KMC has two large coal storage facilities for its consolidation and wholesale operations with railroad loading access. Tai Fung was formed in March 2011 and began operations in May 2011.  DaXing was formed in November 2011 and in April 2012, secured coal storage and rail loading space in ShinPingBa in Guizhou Province.

Coal Washing Operations

 

Coal washing involves crushing coal and washing out soluble sulfur compounds with water or other solvents. This procedure eliminates impurities in the coal and improves its quality and increases its value. Each ton of washed coal requires the input of approximately 1.4 tons of raw coal. Approximately 50% of washed coal qualifies as coking coal because it meets certain chemical requirements and can be processed into highly-valued coke, which is a critical material for making steel. The coal washing process eliminates impurities in the coal, and thus improves the quality of the coal and increases the value of the coal products. Test samples are taken prior to and after the coal-washing process, to analyze and determine efficiency of the washing process, and to determine if coal is suitable as coking coal, based primarily on moisture, ash content, and sulfur percentage.

 

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We own two washing facilities with an aggregate annual coal-washing capacity of approximately 600,000 tons. The facility at Hong Xing washes coal mainly for third parties (i.e., non-affiliates to the Company.)  The facility at the DaPuAn Coal mine only washes coal from the DaPuAn mine.

 Coal washing produces two byproducts. One byproduct in China is commonly known as “medium coal”, which is coal that does not have sufficient thermal value for coking.  Such coal is typically mixed with raw coal or coal slurries, and the mix is sold for home and industrial heating purposes.  The other byproduct is coal slurries (or coal slime), which are the castoffs and debris from the washing process. Coal slurries can be used as a fuel with low thermal value, and are sold “as is” or mixed with medium coal.

 

Coke Manufacturing Operations

 

Coke is a hardened, solid carbonaceous residue derived from baking low-ash, low-sulfur bituminous coal in an oven without oxygen at high temperatures so that the fixed carbon and residual ash are fused together while volatile constituents of the coal such as water, coal-gas, and coal-tar are driven off. We produce metallurgical coke.

 

Metallurgical coke is primarily used for steel manufacturing. China has exacting national standards for coke, based upon a variety of metrics, including most importantly, ash content, volatility, caking qualities, sulfur content, mechanical strength and abrasive resistance. Typically, metallurgical coke must have more than 80% fixed carbon, less than 15% ash content, less than 0.8% sulfur content and less than 1.9% volatile matter. According to national standards, metallurgical coke is classified into three grades – Grade I, Grade II and Grade III, with Grade I being the highest quality, and chemical coke is its separate grade. Generally, customers do not provide specifications for coke. However, we occasionally make requested adjustments, for instance to moisture content, as requested by customers from time to time. The amount of each type of coke that our coking facility produces is based on market demands, although historically its customers have only required Grade II and III metallurgical coke.

 

Effective November 1, 2009, we acquired the ZoneLin coking operation, which has the capacity to produce 150,000 tons of coke annually.  Coal is sent to a coal blending room where it is crushed and blended to achieve an optimal coking blend. Samples are taken from the coal blend and tested for moisture, chemical composition and other properties. The crushed and blended coal is transported by conveyor to a coal bin to be fed into the waiting oven below. After processing through the three temperature-controlled ovens at temperature of 1200°C (2,192 °F), hot coke is pushed out of the oven chamber onto a waiting coke cart, transported to an adjacent quench tower where it is cooled with water spray, and hauled to a platform area to be air-dried. Coke samples are taken at several stages during the process and analyzed in the Company’s testing facility, and data is recorded daily and kept by technicians. After drying, the coke is sorted according to size to meet customer requirements.  In the traditional coking process, small amounts of coking gas are emitted into air. Our coking facility has equipment to capture the emitted gas, and to recycle the gas emission into benzene and other byproducts in compliance with the Chinese environmental standards and requirements.

 

We plan to use a substantial portion of the metallurgic coke-quality coal extracted from the DaPuAn and the SuTsong for coke production. If the amount of coal supplied by these mines is not sufficient for our full coke production capacity, however, then we will also purchase suitable coal from third parties to meet the needs of our coking plant.

 

Customers

 

All our customers are located in the Yunnan and Guizhou provinces of China and are primarily in the steel industry (for metallurgical coke, which is one of the two critical materials for steel making) and the electrical/utility industry (where heating coal is used to produce steams for electricity generation). In addition, there are cement factories that purchase our coal for cement making. For the fiscal year ended April 30, 2012, 2011 and 2010, we had three significant customers that represented approximately 33%, 13% and 57% of our total coal sales, respectively. They also represented approximately 34%, 25% and 56% of accounts receivable. We sold $28 million and $25 million to these two major customers in fiscal year of 2012, respectively.

 

Distribution

 

During the year ended April 30, 2012, 2011 and 2010, we sold approximately 92%, 87% and 62% of our coal through direct sales and approximately 8%, 13% and 38% through third-party wholesalers. The amount sold through third-party wholesalers decreased significantly in the year ended April 30, 2012 compare to the previous two years.  And all such sales were made in the ordinary course of business.  

 

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Our direct sales force consists of approximately 100 full and part time employees who market directly to our customers, who are mostly end users of coal with long-term sales agreements. While individual spot sales might be made to a customer if we have adequate capacity at the time, most of our sales are pursuant to agreements which are signed for two- to four-year terms, with monthly adjustments on pricing. Our customers are primarily located in the Yunnan and Guizhou Provinces, and are accessible by rail lines, which is the most cost effective method for coal transport and which represents the primary means of transporting coal products to our customers.

 

Competitors

 

The development of coal industry in China is influenced by the larger number of small scale enterprises and the wide geographical distribution of coal reserves and a result there are currently relatively few large-scale coal production enterprises in China.  We compete with coal and coke producers in the southern regions of China. In the Yunnan and Guizhou Provinces where we principally operate, there are other coal mines and wholesaling, coking and washing operations which directly compete with us. Competitive factors include geographic location, coal quality and reliability of deliveries.  Some of our competitors may have greater financial, marketing, distribution or/and technological resources than we have, and they may have more well-known brand names in the market.

 

Suppliers

 

The primary materials used in our coal mining and processing operations are: (i) steel and logs to support underground tunnels for the mining operations; (ii) cement for the construction of underground tunnels; and (iii) water used in our coal washing and coking production process. We procure logs, steel and cement principally from local suppliers often on annual contracts. Water is procured primarily from our own water drilling. The ultimate price of materials is set at market rates or determined through negotiation. We believe that we have well-established, cooperative relationships with our suppliers, enabling us to secure reliable supplies of the materials required in our production process. We believe that a number of alternative suppliers exist for the key materials required for our coal operations, and there is no shortage of supplier to choose from.  For the year ended April 30, 2012 and 2011, we had two major suppliers provided over 10% (approximately $20.6 and $12.9 million, respectively) of our total purchases, respectively. There was no significant supplier during the fiscal year of 2010. The corresponding accounts payable both have been paid in full for the year ended April 30, 2012 and 2011.  We purchased $10.7 million and $10 million from these two suppliers in fiscal year of 2012, respectively.

 

We use electricity in our operations from both local power companies and our own power facilities. Electricity prices in China are regulated by the government. Total electricity costs are not materially significant to our operations.

 

Government Regulation

 

General.

 

Currently, all of our coal mining operations are conducted in the PRC and are subject to various PRC government regulations. The following is a summary of the principal governmental laws and regulations that are or may be applicable to our operations in China. The scope and enforcement of many of the laws and regulations in PRC described below are uncertain. We cannot predict the effect of further developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws.

 

The mining industry, including coal exploration, mining, coal washing and coal coking activities, is highly regulated in China. Any company that wishes to enter into the coal business in PRC is required to obtain a coal license. Regulations issued or implemented by the State Council of PRC, the Ministry of Land and Resources, local environmental agencies and other government authorities cover many aspects of coal exploration, and coal mining. Chinese government regulations also monitor the scope of permissible business, shipment of coal, tariff policy and foreign investment allowed in PRC.

 

The principal regulations governing the mining business in China include, without limitation:

• China Coal Law, which regulates coal mining enterprises and their activities including addressing mining safety issues.
• China Mineral Resources Law, which requires a mining business to have exploration and mining licenses from provincial or local land and resources agencies.
• China Mine Safety Law, which requires a mining business to have a safe production license and provides for random safety inspections of mining facilities.
• China Environmental Law, which requires a mining project to obtain an environmental feasibility study of the project.
• Foreign Exchange Controls. The principal regulations governing foreign exchange in China are the Foreign Exchange Control Regulations (1996) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations (1996), (“the Foreign Exchange Regulations”). Under the Foreign Exchange Regulations, Renminbi (“RMB”) is freely convertible into foreign currency for current account items, including the distribution of dividends. Conversion of RMB for capital account items, such as direct investment, loans and security investment, however, is still subject to the approval of the State Administration of Foreign Exchange (“SAFE”). Under the Foreign Exchange Regulations, foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account items. In addition, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.

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Our operating subsidiaries in China have been approved by land and resources departments of local governments. Chinese regulations require that mining enterprises procure an exploration or mining license from the land and resource department of local governments before they can carry out exploration or mining activities. This license requires that an enterprise follow proper procedures in its own exploring or mining activities and in selling its products to customers. We have secured or are in the process of securing the necessary exploration or mining licenses from local governments.

 

Chinese regulations also require that a mining company must have a safety certification from China’s Administration of Work Safety before it can engage in mining and extracting activities. We have secured or are in the process of securing the necessary safety certifications from the Administration of Work Safety of local governments. Our mining operations have been granted an environmental certification from China Bureau of Environmental Protection.

 

China’s Twelfth Five-Year Plan; Guizhou Province’s Coal-Mine Consolidation Policy.

 

In March 2011, China’s National People’s Congress approved the nation’s twelfth “Five-Year Plan” (the “Plan”) which provides macro-level guidance in China with respect to national social and economic growth/development direction in the coming five years.  In the Plan, the importance of consolidating smaller coal mines into bigger coal related business enterprises via merger and acquisition tools was specifically mentioned. 

In line with the implementation/spirit of the Plan, the Guizhou province of China (in which the Company operates two of its four coal mines) on April 15, 2011 issued a provincial-level notice/order (the “Guizhou Consolidation Policy”) that set forth the following key points, among others—by the end of year 2013: (i) the total number of coal-mine related business enterprises in the Guizhou province (“Guizhou Coal Enterprise”) shall be limited to no more than 200; (ii) each Guizhou Coal Enterprise in Gui Yang City of Guizhou province shall reach at least the capacity to produce One Million (1,000,000) tons of coal per year; (iii) each Guizhou Coal Enterprise in Liu Pan Shu City of Guizhou province shall reach at least the capacity to produce Two Million (2,000,000) tons of coal per year; (iv) for certain coal mines, the mechanization level for coal-mine development and coal-mine winning shall reach respectively to 80% and 85% by the end of 2015.

      While the Guizhou Consolidation Policy has left open questions and uncertainties, it’s quite clear that owners of smaller coal mines in the Guizhou province will face significant pressure in the next few years to sell their mines to bigger coal-related business enterprises in the province.  Therefore, we believe that the Guizhou Consolidation Policy has presented to the Company certain business opportunities that do not exist before. 

 

Employees

 

We currently have approximately 1330 employees, of which approximately 760 are mine workers, approximately 190 are coking plant workers, approximately 140 are washing plant workers and approximately 240 are employed in administration or executive capacity. Our mining and coking operations run two or three shifts per day with each shift equivalent to eight hours.  We have written contracts with all of our employees in China as required by the employment law of China. We believe we have good relationship with our employees. 

Intellectual Property and Licenses

 

We currently have no material patents, trademarks, in-bound licenses, franchises or concessions other than the various required coal operating licenses issued by the Chinese government to operate coal mines, coal wholesaling, coal washing and coal coking operations as described above. 

 

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Research and Development

 

In fiscal years ended April 30, 2012, 2011 and 2010, we did not incur any material expenditure on research and development activities.

 

Available Information

 

We make publicly available free of charge, either on our Company website (www.llenergyinc.com) or via a web link to the U.S. Securities and Exchange Commission (“SEC”) website, our periodic reports (e.g., Form 10-K and Form 10-Q), our current reports (e.g., Form 8-K), our proxy statements, and any amendments thereof, as soon as reasonably practicable after we electronically or otherwise file such material with the SEC.  Please note that those information contained on our website is not a part of this annual report on Form 10-K and information on, or that can be accessed through, our website is not deemed “filed” with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933 (as amended) or the Exchange Act of 1934 (as amended).

 

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Item 1A. Risk Factors

The reader should carefully consider the risks described below together with all of the other information included in this prospectus. The statements contained in or incorporated into this prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and an investor in our securities may lose all or part of their investment.

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.

 

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

 

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

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

 

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

 

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

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

 

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

 

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

 

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.

 

 

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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.

 

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 idling, slowdowns, and 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.

 

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.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

We have not maintained sufficient documentation of our internal control over financial reporting for the years ended April 30, 2010, 2011 and 2012, 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, 2010 and 2012 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.

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

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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 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.

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

 

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

 

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

 

Effective July 21, 2005, The People’s Bank of China announced that the Renminbi (RMB) exchange rate regime changed from a fixed rate of exchange based upon the U.S. dollar to a managed floating exchange rate regime based upon market supply and demand of a basket of currencies. On July 26, 2005, the exchange rate against the Renminbi was adjusted to 8.11 Renminbi per U.S. dollar from 8.28 Renminbi per U.S. dollar, which represents an adjustment of approximately two percent. As of July 22, 2011, the Renminbi appreciated to approximately RMB 6.45 per U.S. Dollar. It is expected that the revaluation of the Renminbi and the exchange rate of the Renminbi may continue to change in the future. Fluctuations in the exchange rate between the RMB and the United States dollar could adversely affect our operating results. Results of our business operations are translated at average exchange rates into United States Dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. We do not use hedging techniques to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock prices.

 

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

          

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

 

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

 

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

 

 

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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.

 

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.

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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.

 

 

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Item 1B. Unresolved Staff Comments.

 

None – only applies to comments on 10-K and 10-Q.

 

Item 2. Properties.

        

         Our U.S. headquarters are located in Seattle, Washington, consisting of approximately 7,508 square feet under a least that expires in July 2012. Our China headquarters are located in an office property that we own in Kunming City, China, consisting of approximately 8,600 square feet.  We also lease or own additional office spaces throughout China, in Guiyang City, Shenzhen City, Guangzhou City, Beijing, and in Taipaei, Taiwan, which mainly accommodate our sales and marketing personnel.  

 

For a description of the properties used in our coal mining operations, please see Item 1. Business – Our Operations – Coal Mining Operations. 

 

Item 3. 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 4. (Removed and Reserved).

 

 

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PART II

 

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities.

 

Market Information

 

Our common stock is traded on The NASDAQ Stock Market under the symbol “LLEN”.  The following table sets forth, for the periods indicated, the reported high and low last sale price on The NASDAQ Stock Market,

 

 

As of Fiscal year ended April 30, 2012, there were approximately 10,000 shareholders

 

 

Dividends

 

We have not declared or paid any cash dividends on our common stock. We intend to retain earnings, if any, to finance the development and expansion of our business. As a result, we do not anticipate paying dividends on our common stock in the foreseeable future. Payment of dividends, if any, will depend on our future earnings, capital requirements and financial position, plans for expansion, general economic conditions and other pertinent factors.

 

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Item 6. Selected Financial Data.

 

 

 

 

For the Company acquisition and disposal during the fiscal years from 2008 to 2012, refer to the history and background section. 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the Selected Financial Data, the Company’s financial statements, and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. The following discussion includes forward-looking statements that involve numerous risks and uncertainties.  Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Annual Report on Form 10-K.  We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Company Overview

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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 April 30, 2012 our vertically integrated coal operations include four coal mines, three coal washing plans, one coking facility, and a coal wholesale and distribution network in the southwest region of China . As of April 30, 2012 the results of our annual coal operations are as follows: coal mining (approximately 616,000 tons), coal washing (approximately 768,000 tons), coal whole sale (approximately 203,000 tons) and coking (approximately 137,000 tons). Currently, substantially all of our coal mining operations are located in the Guizhou and Yunnan provinces. Our operations are located in inland and rural areas of China, which are being developed at a faster rate than the coastal areas that have historically received most of the PRC’s government focus. We sell the coal we produce, or acquire through wholesalers, both though direct sales to end users in China and through other wholesalers. We were initially founded in 1995 by an American citizen and current Chairman and CEO Dickson Lee and originally focused on consulting services.  In 2001 we 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 which has since increased to eleven (11) percent.  The total owing to the Company as of April 30, 2012, was $7,272,828 under such agreement and 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 (details of operation are still being finalized). Bowie has been mining coal since 1997 and recently resumed its longwall production.  It produces high quality (“super compliance”) thermal coal with high Btu, low sulfur, and low ash.  The Company is also exploring ports for both import and export, including Zhangjiang Port in Guangdong Province, China.

 

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 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 fiscal year in April 2012. As a result, China began our 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 froma 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.  Therefore U.S. coal prices have declined.  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.

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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 11^th 5 year plan, the policy of government-mandated consolidation has continued with the current 12^th 5 year plan, which expands and accelerates the consolidation to new provinces including Guizhou.

 

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

 

The National People’s Congress ratified the 12^th 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 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 now 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 WeiShe and 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. 

 

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General Discussion and Analysis of FY 2012 Results

        

          We began our first quarter in FY 2012 with declining production compared with the strong results from FY 2011, where we more than doubled our FY 2010 revenue. Starting with the end of the fourth quarter of FY 2011, we experienced normal seasonal decreases in coal prices from the warming spring weather and what appeared to be temporary government-mandated idling of some of our mines due to nearby fatal accidents in non-LLEN mines.  For example, in the fourth quarter of FY 2011, there were 21 fatal mining accidents in Yunnan Province and 6 fatal mining accidents in Pan County of Guizhou Province.  And while there were no fatal accidents at any of our mines, because the new Guizhou consolidation policy had a greater emphasis on increasing safety standards for coal mines and increasing safety enforcement, the government began slowing down or idling all nearby mines until each mine passed a new safety inspection, including the Company’s.  Further, due to the consolidation policy being new, the policies, processes, and regulations were still being developed by the government, which added uncertainty and lack of visibility to how long mines would be idled or production slowed down. 

 

These area-wide slowdowns and idling also reduced the supplies of raw coal needed for our coal washing, coal wholesale and distribution, and coking segments, resulting in reduced revenues for some months during the quarter.  However, through better sourcing, the Company was able to secure a steady supply of raw coal needed to sustain the consistent quarterly production in our coking and washing segments.  In the month of June, DaPuAn and SuTsong started ramping up production and DaPing proceeded to expand its production capacity but Ping Yi remained idled.  Overall, our Q1 FY 2012 results were approximately one third less than Q1 FY 2011, but we began to see some recovery in our mining and washing segments toward the end of the quarter as the government allowed for some production in our mines and neighboring mines. 

          

Also during the first quarter of FY 2012, Ed Moy, Vice President of Corporate Infrastructure was elected an officer of the Company in May.  The Company hosted its first Investor Day in New York City in May, featuring the Honorable Norm Mineta, Vice Chairman of the Board and former Secretary of Commerce appointed by President Bill Clinton and former Secretary of Transportation appointed by President George W. Bush.  Also in May, the Company established our second coal wholesale and distribution subsidiary Yunnan L&L Tai Fung Co., Ltd. and transferred Hong Xing from TNI to Tai Fung.  In June, the Company appointed Ian Robinson to become the Chief Financial Officer.  Mr. Robinson was a former partner at Ernst & Young and remains a director of the Company.  The Company also elected Dr. Syd Peng as a director of the Company.  Dr. Peng is a renowned coal mining expert and a professor of the Department of Mine Engineering at the West Virginia University and previously served as Chair of the department.

 

         The second quarter of FY 2012 started with improvement in the performance of our mining and washing segments because of fewer intermittent slowdowns and idling of our mines and neighboring mines.  DaPuAn and SuTsong mines produced at a steady pace though less than FY 2011 production levels.  DaPing produced 8,500 tons from the successful test run in August of their increased capacity and Ping Yi produced a respectable 13,000 tons from the successful test run in August before being idled in September as a result of government-mandated idling of area mines after a major fatal accident mid-August just 10 miles from Ping Yi mine.  While Q2 FY2012 coal mining revenues were down approximately one third compared to Q2 FY2011, they were equivalent to Q4 FY2011 when the government began their increased safety enforcement. While our coal washing segment revenues were down approximately one third compared to Q2 FY2011, it performed strongly in August, raising our quarterly results for our washing segment to nearly matching Q4 FY2011 and Q1 FY2012. Our coking segment also had a production high in August, raising our quarterly results to exceed both Q4 of FY2011 and Q1 of FY2012.  However, our wholesale and distribution segment continued to lag due to lack of raw coal supplies resulting from the government-mandated slowdowns and idling of other area coal mines.  Overall our Q2 FY2012 results were less than Q2 FY2011 but our revenues increased from the first quarter to the second quarter FY2012.

 

         Also during the second quarter of FY2012, board members Robert Okun and Andrew Leitch both decided not to stand for reelection and shareholders reelected the 7 remaining directors at the annual general shareholders meeting in September.  Throughout the quarter, the Company received encouragement and support from the Guizhou government including the Guizhou Vice Governor, the Guizhou Energy Bureau Chief, and the Pan County (Guizhou Province) government.. The Company entered into a strategic partnership with Tianjin Fuhao, a large Chinese logistics company.  The Company also received signed letters of intent from 14 operating coal mines in Guizhou Province that were willing to be acquired by the Company subject to further due diligence and negotiations on the terms.  In September, the Company received a letter of endorsement from the Industrial and Commercial Bank of China indicating intent to provide debt financing for the Company’s consolidation efforts in Guizhou, subject to due diligence on each acquisition.

 

         The third quarter of FY2012 started with a significant fatal accident in November in a non-LLEN mine operating illegally near our DaPuAn mine, and DaPuAn and other area mines were subject to a government-mandated idling or slowdown in production.  This major accident caused our mine’s production to drop over half in Q3.  Many small mine operators who are uncertain of their future under the Guizhou accelerated consolidation and the Yunnan consolidation, have tried to maximize their gain in the short term by pushing their production beyond their capacity while reducing expenditures for safety.  This has resulted in increasing the number of mining accidents, sometimes with high numbers of fatalities.  In turn, the provincial and local governments have responded by ordering temporary idling or slowdowns of mines in the region for safety inspections or safety briefings.  Some choose to operate illegally during the idling or slowdown periods.  Others when allowed to produce again push even harder to make up for lost production.  This behavior coupled with the complicated geology of the Yunnan and Guizhou regions contributes toward a higher risk for fatal mining accidents.  This cycle is consistent with the earlier consolidation in other provinces. 

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Beginning in November 2012, Da Ping progressed from idled to slowdown status, resulting in increasing production over half from Q2 to Q3, which was the highest quarterly production since the Company acquired the mine.  Ping Yi continued to be idled and produced a moderate amount of coal as a byproduct of expanding its production capacity during the idling. In addition, the dismissal of some local government officials further complicated the resumption of normal production.  SuTsong mine, which produced slightly less in Q3 than in Q2 due to frequent government-mandated slowdowns due to nearby accidents.  By January 2012, DaPuAn, SuTsong, and DaPing mines were ramping up production to the capacity of our approved mining permit rather than 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.  Because of decreased supplies of raw coal and fine coal resulting from the government mandated temporary slowdowns and idling of coal mines in the regions we operate, wholesale revenues and coal washing revenues decreased by over half during Q3 FY2012 compared to Q3 FY2011, while coal coking revenue decreased by more than a third during Q3 FY2012 compared to Q3 FY2011.

 

Therefore our net revenues for Q3 FY2012 decreased over half compared to Q3 FY2011. The decrease was primarily due to the government’s temporary slowdown and idling of all mines in our region, including our mines, coupled with the Chinese New Year holiday, which this year, the majority fell in January instead of spread between January and February.  These factors reduced our sources and volume of coal available for our coal washing, coking, and wholesale and distribution segments and decreased our production in our mines.    Second quarter to the third quarter revenues decreased almost a third from $41.8 million to $30.2 million.  The revenue decline was partially slowed because the shortage of coal in the regions we operate due to mine slowdowns and idling resulted in an increase in the price customers paid per ton of coal. 

 

         Also during the third quarter of FY2012, the Company established DaXing L&L Coal Co., Ltd., a new coal wholesale and distribution operation in Guizhou Province in November.  The Company announced in December two joint sales agreements, one with China Chengtong Metal Corporation and the other with Tianjin Fuhao, to sell 1 million tons each in calendar 2012.  Director Robert Lee resigned from the board and Ed Moy, Vice President for Corporate Infrastructure and an officer of the Company, was elected a director in December.  The Company also announced in early January an MOU to potentially acquire three mines in Guizhou Province, all under development by Union Energy.  At the beginning of February, the Company acquired majority equity interest one of the mines covered by the MOU, the Weishe mine.

 

         In the fourth quarter of FY2012, we began a promising recovery in our mining segment.  The total tons produced during Q4 exceeded each of the four prior quarters.  DaPuAn mine passed the government safety inspection mid-February was approved to begin ramping up production, and its Q4 production neared its approved production license for 150,000 tons per year and SuTsong mine’s Q4 production neared its approved production license for 90,000 tons per year.  Both mines’ expansion of production capacity is on schedule.  DaPing mine’s Q4 production succeeded Q3 as the highest production since we owned the mine.  Ping Yi mine continued to be idled with no clarity on when it would be approved for production, and as a result, the Company sold it at the end of April back to the original owners.  Our coal washing segment rebounded from a low Q3 to average quarterly levels in Q4.  However our coal wholesale segment has performed consistently with the last three quarters, remaining low due to lack of coal supplies from decreased supplies of raw coal and fine coal resulting from the government mandated temporary slowdowns and idling of area mines.  Our coking segment experienced a sharp downturn in Q4 due to slow steel demand and resulting high stockpiles of coking coal and therefore production at our ZoneLin coking plant at the end of the quarter was minimal.

 

         The Company did execute our MOU to acquire majority interest in the Weishe mine, which is one of three mines being developed by Union Energy.  This marks a shift our acquisition strategy driven by the continued implementation of the Guizhou consolidation policy.  Until recently, the Guizhou mines available to be acquired were small operating mines lacking the capital to expand to meet the production requirements of the consolidation policy.  Because the mines were built for smaller capacity, they required considerable capital expenditures to expand production capacity, which the Company used the mine’s operating surplus to fund the capital expenditures (“CapEx”).  However, larger mines designed with production capacity to surpass the maximum production requirements of the consolidation policy have recently become available for acquisition because the consolidation policy requires all mines to come under a holding company controlling between 1,000,000 and 2,000,000 tons.  Weishe mine is designed to produce up to 450,000 tons when fully built out, and is phasing in production beginning at 150,000 tons the first year.  This is in contrast to SuTsong mine, which was built to have a maximum capacity of 90,000 tons and needs significant CapEx to meet the minimum consolidation production requirement of 300,000 tons. 

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         Also during the fourth quarter of FY2012, the Company continued the expansion of its coal wholesale and distribution business in Guizhou by signing a strategic sales agreement with AVIC International Coal Logistics Co., Ltd.,  and through its DaXing wholesale subsidiary signed two long term sales contracts:  providing coal to both  Guodian Yongfu Power Generation Co., Ltd. to Datang International Power Generation Co., Ltd. which the Company delivered its first shipment in Q1 FY2013.  To accommodate our growing Guizhou wholesale business, the Company secured a large coal storage and rail loading space in ShinPingBa in Guizhou Province. Also in April, former top executive from the largest coal company’s in the world Shenhua Group Corporation, Jingcai Yang was elected to the board. 

 

         Finally, there have been a number of key events that have occurred subsequent to the Company’s fiscal year end April 30, 2012 that will be discussed in more detail in the 10-Q for Q1 FY2013.  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 Da Ping mine, the ZoneLin coking plant, and shares of the Company for controlling interest in Louzhou mine.  The acquisitions are dependent on further due diligence, final negotiation on the terms, and board approval.  In addition, Weishe mine passed its final safety inspection in July and will receive its license for coal production.

 

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 plans for 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.

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This has resulted in the successful integration and safe expansion of the five mines we have acquired, which include the four mines we 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 121,159 tons in FY2009 to 245,545 tons per year in FY2011 and SuTsong mine’s production increased from 83,852 tons in FY2009 to 122,081 tons in FY2011.

 

The value and revenue of some of our mined coal is increased by coal washing.  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 Ping Yi (before its divesture), both of which washed other mines’ coal.  The divesture of Ping Yi coal washing includes prepaid coal washing services for the Company, ensuring some washing capacity for the Company’s coal.

 

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.

 

Acquisition 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, suggests 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.

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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.

 

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.

 

Discussion of Critical Accounting Policies and Estimates

 

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from the estimates used. Our actual results have generally not differed materially from our estimates. However, we monitor such differences and, in the event that actual results are significantly different from those estimated, we disclose any related impact on our results of operations, financial position and cash flows. Note [2] to our audited consolidated financial statements included in Item 15 of this Annual Report on Form 10-K provides a description of our significant accounting policies. We believe that of these significant accounting policies, the following involve a higher degree of judgment or complexity:

 

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.  We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.  These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.

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Estimate of recoverable coal reserves.  The Company capitalizes its mineral rights at fair value when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated recoverable coal.  

 

Estimate Impairment of Long-Lived Assets - The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company evaluates the recoverability of its long-lived assets if circumstances indicate impairment may have occurred.  This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of April 30, 2012 and 2011, there was no impairment of its long-lived assets.

 

Estimate Impairment Intangibles - The Company applies Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other Intangible Assets, to record goodwill and intangible assets.  In accordance with ASC 350, certain intangible assets are to be assessed periodically for impairment using fair value measurement techniques. Goodwill is tested for impairment on an annual basis as of the end of the Company's fiscal year, or more frequently when impairment indicators arise. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances which indicate that impairment exists. The Company believes that as of April 30, 2012 and 2011, there was no impairment of its goodwill.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

Accounts receivable - The Company’s policy is to maintain reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of April 30, 2012 and 2011, the Company determined that no reserve for accounts receivable was necessary. No allowance for doubtful accounts or sales returns deemed necessary.

 

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

 

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

 

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

    

Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.  GAAP also requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. As of April 30, 2012, income tax positions must meet a more-likely-than-not recognition threshold to be recognized.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  No material deferred tax amounts were recorded at April 30, 2012 and 2011, respectively.  GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

  

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

 

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

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

 

 

Comparison of the fiscal years ended April 30, 2012 and 2011

 

Our operating results during the year ended April 30, 2012 compared to the year ended April 30, 2011 reflect a decline mostly due to the temporary government-mandated idling and slowdowns from nearby fatal accidents in non-L&L Energy, Inc. mines. Because all area mines were impacted, there were also less raw coal supplies for our coal washing, coking, and wholesale and distribution segments  However, in the last two months of Q4 FY2012, our mines were on their way to producing to their approved levels, leading the turnaround of our coal mining segment, which is our main business.

 

The results of operations attributable to each of our 4 segments -- coal mining, wholesale coal, coking, and coal washing is discussed in detail below.

 

Coal Mining Segment

 

In April 2012, we sold our interest on Ping Yi mine and coal washing plant back to the original owner. Ping Yi’s operational performance was under our target due mostly to production disruptions from sequential two major fatal mine accidents nearby. There was also larger than expected capital expenditures to upgrade safety and expanding the production capacity, and very little clarity on when the government would approve the mine operating at full production capacity. Because the Company owned Ping Yi for almost the whole fiscal year, to provide a thorough comparison, the coal mining segment analysis is separated into a table for continued operations (which exclude Ping Yi mine) and discontinued operations (which include only Ping Yi mine). The following tables summarize the year-to-year operating data for our coal mining segment:    

For Continued Operations (Exclude Ping Yi Coal Mine):

 

 

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For Discontinued Operations (Ping Yi Mine):

 

 

Coal Mining Revenue  

Total coal mining revenue decreased 12% for our continued operations during the year ended April 30, 2012 compared to the year ended April 30, 2011, primarily as a result of the temporary government-mandated idling because of the nearby fatal accidents in non-LLEN mines. In addition, in some cases, the Company elected to slowdown production in some mines for construction related to increasing the production capacity.

The average price per ton during the year ended April 30, 2012 increased 10% because the domestic demand of coal is still relatively strong but the supply of coal did not meet the demand because of the government-mandated idling and slowdowns of many mines in the area. This also led to an impact on the amount of tons we sold in this year.  Tons sold in FY 2012 fell 20% as the government mandated that area mines complete a series of safety inspections, even if the mine does not have an accident record. Also, because most of our mines are undergoing an expansion of production capacity, there was a small amount of coal is a byproduct of the construction process.  However, Q4 production exceeded each of the prior four quarters, driven by our mines ramping up to their approved production levels during the last two months of the quarter.

For the discontinued operation (Ping Yi Mine), the tons sold in FY 2012 dropped 87%, coal mining revenue decreased 83%, which in turn led to a high cost of goods sold per ton and high average SG&A per ton. 

 

Coal Mining Cost of Sales

For the continued operations (excluding Ping Yi Mine), the tons of sold in the fiscal year ended April 30, 2012 decreased 20% compared to the fiscal year ended April 30,2011, and the total cost of goods sold still increased 22%. During the government-mandated idling and slowdown of area mines, there are still considerable maintenance that still needs to be performed even when the mine does not extract any coal and with the Company used the idling and slowdowns to continue the expansion of production capacity, which together led to extra labor costs. The Average Cost of Goods Sold per ton increased 53%.

 

Meanwhile, the increase in coal mining cost of sales was also impacted by the increase in the cost of both direct labor (wages) and direct materials (inflation in price of raw materials).  Lastly, the depreciation related to our investments in infrastructure, allocated as a direct expense, increased during the period.

Coal Mining SG&A

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For the continued operations (excluding Ping Yi Mine), total coal mining selling, general, and administrative expense increased by approximately 35% during the year ended April 30, 2012. Our increase in real dollar fixed cost was related to hiring additional personnel associated with sales, maintenance, safety, and training.

Wholesale Segment

The following table is a summary of important year-to-year operating data for our Wholesale segment:

 

Wholesale Revenue  

Wholesale revenues decreased by 36% during the year ended April 30, 2012 compared to the year ended April 30, 2011. Even though the average price per ton sold increased 37%, the Tons sold decreased 53% during the same period. The decrease in revenue was fueled both by a shortage of coal supplies because of the government-mandated temporary slowdowns and idling of area mines and also because the sometimes cheaper imported coal from other countries decreased some of the domestic demand for local coal even though  coal consumption has generally increased in China.

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Wholesale Cost of Sales  

Wholesale cost of goods sold decreased 35% while the average whole sale cost of goods sold per ton increased 39% during the year ended April 30, 2012 compared to the year ended April 30, 2011. This result was primarily based on the wage structure of our wholesale team, which is base salary plus a bonus according to the sales target achievement. The Company believes that the wholesale and distribution market will recover because imported coal is beginning to loose its competitive advantage, and as a result, we have expanded our operations by establishing our third coal wholesale and distribution entity, DaXing L&L Coal Co., Ltd. in Guizhou and we own a 100% equity interest in DaXing.

 

Wholesale SG&A  

Total wholesale SG&A decreased 45% while the average SG&A per ton rose 18% during the year ended April 30, 2012 compared to the year ended April 30, 2011. The result was primarily based on the wage structure of our wholesale team with base salary plus a bonus according to the sales target achievement. Also, the average SG&A per ton increased because the start up costs of the recently established DaXing L&L Coal Co., Ltd.

Coke Segment

The following table is a summary of the year-to-year operating data for our Coke segment:

 

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Coking Revenue  

 Coking revenue for the year ended April 30, 2012 decreased 23% the average price per ton sold increased 11% and the number of Tons sold decreased 30% compared to the year ended April 30, 2011.  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, new changes in government regulations and new environmental standards that were recently implemented, have led to the the possible acceleration of our expansion plans and possible increased capital expenditures, in addition to some increased expenditures. Additionally, our coking segment experienced a sharp downturn in Q4 due to slow steel demand and resulting high stockpiles of coking coal.  Therefore production at our ZoneLin coking plant at the end of the quarter was minimal.

 

Coke Cost of Sales  

Coking cost of goods sold decreased 22% during the year ended April 30, 2012 compared to the year ended April 30, 2011.

Coke SG&A  

Coke SG&A increased 62% during the year ended April 30, 2012 compared to the year ended April 30, 2011 due to the additional expenses to comply with changing government regulations and new environmental standards.

 

Coal Washing Segment

  In April 2012, we sold our interest on Ping Yi mine and coal washing plant back to the original owners. Ping Yi’s operational performance was under our target due mostly to production disruptions from sequential two major fatal mine accidents nearby.  Coupled with larger than expected capital expenditures to upgrade the safety and expanding the production capacity, and there was little clarity on when the government would approve the mine operating at full production capacity. Because the Company owned Ping Yi for almost the whole fiscal year, to provide a thorough comparison, the coal washing segment analysis is separated into a table for continued operations (which exclude Ping Yi mine) and discontinued operations (which include only Ping Yi).

The following tables summarize the year-to-year operating data for our coal washing segment:    

For Continued Operations (Excluding Ping Yi Washing Plant):

 

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For Discontinued Operations (Ping Yi Washing Plant):

 

 

Coal Washing Revenue

For continued operations (excluding Ping Yi washing plant), coal washing revenue increased 11% in the year ended April 30, 2012 compared to the year ended April 30, 2011. The increase in revenue was primarily a result of the increase of average price per ton sold. The average price per ton sold increased 17% the tons sold decreased by 4% in the year ended April 30, 2012 compared to the year ended April 30, 2011.

 

Coal Washing Cost of Sales

For continued operations (excluding Ping Yi washing plant), coal washing cost of sales increased 6% in the year ended April 30, 2012 compared to the year ended April 30, 2011. The increase in cost of sales was primarily the result of the increase of revenue. The average cost of goods sold per ton increased slightly during the year FY2012 as government mandated slow down increased the price of raw coal.  

 

Coal Washing SG&A

For continued operations (excluding Ping Yi washing plant), coal washing SG&A decreased 7% and average SG&A decreased 3% in the year ended April 30, 2012 compared to the year ended April 30, 2011. The average coal washing operating income increased 74% during the FY 2012 was primarily a result of a $25 increased on the average price per ton sold.

 

Comparison of the years ended April 30, 2011 and 2010

                                                                              

Our operating results during the year ended April 30, 2011 compared to the year ended April 30, 2010 reflect strong growth and, in particular, organic expansion of current operations. In the year ended April 30, 2011, we invested in and increased the capacity of two of our current mines, DaPuAn and SuTsong (each from 150,000 tons to 300,000 tons), and we finished construction of a 600,000 ton DMS coal washing facility at Ping Yi mine site. During the year ended April 30, 2011, we also acquired a majority interest in DaPing Mine, which added additional capacity of 300,000 tons per year.

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The results of operations attributable to each of our 4 segments -- coal mining, wholesale coal, coke, and coal washing is discussed in detail below.

 

 

Coal Mining Segment

 

The following table is a summary of important year-to-year operating data for our coal mining segment:

 

 

Coal Mining Revenue  

 

Total coal mining revenue increased 23.2% during the year ended April 30, 2011 compared to the year ended
April 30, 2010, primarily as a result of strong organic growth. Revenue from the DaPing mine generally did not impact revenue in the year ended April 30, 2011, as the acquisition of such mine was completed late in the year

 

Strength in our organic coal sales in the year ended April 30, 2011 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 resultant demand for energy. In particular, the China Central Government Western Development Program, a government mandate for additional energy to fuel economic growth, creates significant demand for coal and coal-related products in our markets.

  

Average price per ton during the year ended April 30, 2011remained steady, compared to the year ended April 30, 2010, primarily due to a price freeze implemented by the government. The Company is vertically integrated and was able to manage price volatility in the year ended April 30, 2010, to a certain extent, by selling some production from Ping Yi coal mine to Ping Yi coal washing plant (the net effect of which is eliminated via inter-company sales in our financial statements). Ping Yi mine accounted for 37% of the Company’s total production volume in the year ended April 30, 2011.

 

Our coal mining sales in the fourth quarter of the year ended April 30, 2011 decreased relative to the rest of the year, partly due to normal seasonal adjustment (coal prices typically fall as the weather gets warmer), and partly due to government mandated shut downs at several of our mines. We are occasionally obligated to shut down our mines, through no fault of our own, when other mines in our regions experience accidents or safety violations. There were 21 fatal mining accidents in Yunnan Province and 6 fatal accidents in Pan County of Guizhou Province during the fourth quarter of the year ended April 30, 2011, and these events prompted several shut downs at our facilities. None of these accidents or fatalities happened in L&L properties.

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Coal Mining Cost of Sales

 

Total coal mining cost of goods sold increased 102% during the year ended April 30, 2011 compared to the year ended April 30, 2010 and 10.9% during the year ended April 30, 2011 relative to revenues for the same period. The relative increase in coal mining cost of sales was primarily due to an increase in the cost of both direct labor (wages) and direct materials (inflation in price of raw materials).  To a lesser extent, we experienced an increase in the direct cost of extraction due to increased direct safety and the maintenance costs in our mining operations. Lastly, the depreciation related to our investments in infrastructure, allocated as a direct expense, increased during the period.

 

Coal Mining SG&A

 

Total coal mining selling, general, and administrative expense increased by approximately $1 million during the year ended April 30, 2011, but was approximately unchanged relative to revenues. Our increase in real dollar fixed cost was related to hiring additional personnel associated with sales, maintenance, safety, and training.

 

Wholesale Segment

 

The following table is a summary of important year-to-year operating data for our Wholesale segment:

 

 

Wholesale Revenue  

 

Wholesale revenues increased by 98.9% during the year ended April 30, 2011 compared to the year ended April 30, 2010. The increase in revenue was fueled both by a large increase in average price per ton sold (up nearly $23 per ton) and a sizeable increase in year over year tonnage bought by its KMC subsidiary (50% more) and sold (almost 84,000 more tons).  .

 

Wholesale Cost of Sales  

 

Wholesale cost of sales increased 104.7% during the year ended April 30, 2011 compared to the year ended April 30, 2010.  This increase was primarily a result of a doubling of tons sold. Wholesale cost of goods sold increased 2.5% relative to sales due to inflation in the cost of fine coal.

 

Wholesale SG&A  

 

Wholesale SG&A increased 52% during the year ended April 30, 2011 compared to the year ended April 30, 2010.  This increase was primarily a result of an large increase in sales. Wholesale SG&A increased approximately 50% relative to sales due to increased selling expense related to shipping terms and increases in the price of fuel.

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Coke Segment

 

The following table is a summary of important year-to-year operating data for our Coke segment:

 

 

 

Coke Revenue  

 

Coking revenue for the year ended April 30, 2011 increased 112% compared to the year ended April 30, 2010, this was primarily attributable to revenue from our Zone Lin facility’s first complete year of service, which began coking operations during the third quarter of the year ended April 30, 2010. On a prorated basis, increased average price offset a slight decrease in average tonnage sold. Management continues to be pleased with the facility’s progress and plans to add to its existing 150,000 tons per year capacity in the future.

 

Coke Cost of Sales  

 

Coking cost of goods sold was essentially flat during the year ended April 30, 2011 compared to the year ended April 30, 2010.

 

Coke SG&A  

 

Coke SG&A was essentially flat during the year ended April 30, 2011 compared to the year ended April 30, 2010 (when adjusted pro rata).

 

Coal Washing Segment

 

The following table is a summary of important year-to-year operating data for our Coal Washing segment:

 

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Coal Washing Revenue

 

Coal Washing revenue increased 325% in the year ended April 30, 2011 compared to the year ended April 30, 2010. This reflected an additional 600,000 tons of capacity added to its Ping Yi facility at the end of the 1st quarter of the year ended April 30, 2011. Average selling price per ton and quarterly tonnage (on a pro rata basis) both increased nominally throughout the year due to steady customer demand.

 

Coal Washing Cost of Sales

 

Coal Washing cost of sales increased approximately 321% in the year ended April 30, 2011 compared to the year ended April 30, 2010. This was primarily attributable to the increased capacity added to our Ping Yi facility.  We were also  able to benefit from a slight decrease in our washing cost inputs during the year ended April 30, 2011, including buying coal more cheaply and efficiently, while managing to increase its selling prices. The average selling price of coal increased over 7% while average direct costs per ton slightly increased about 5%. The effect was that gross profits increased about $2 per ton during the year. 

 

Coal Washing SG&A

 

Coal Washing SG&A increased approximately $2 million in the year ended April 30, 2011 compared to the year ended April 30, 2010. This was primarily due to our investment in the Ping Yi facility mentioned above. Depreciation related to the facility increased markedly during the year ended April 30, 2011 because the facility transferred from in-process construction status to a fixed asset.  As part of the ramp up to full production capacity, the Company also added administrative and safety staff and bought maintenance, safety, and training equipment that, in total, equated to a $1.40 per ton additional expense. 

 

Comparison of the years ended April 30, 2010 and 2009

                                                                              

Coal Mining Segment:

 

The following table is a summary of important year-to-year operating data for our coal mining segment:

 

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Coal Mining Revenue

 

Total coal mining revenue increased 103.6% during the year ended April 30, 2010, . Our revenues increased, relative to the prior period, both due to acquisitions and expansion of current operations. We increased the capacity of DaPuAn and SuTsong mines (each to 300,000 tons) during the year ended April 30, 2010, and we acquired Ping Yi Mine during the third quarter of the fiscal year.

 

Coal Mining Cost of Sales

 

Total coal mining cost of goods sold decreased 4.2% relative to sales. The positive margin movement was primarily a result of decreased extraction costs, including both labor and direct materials, related to efficiencies and economies of scale in our mines.

 

Coal Mining SG&A

 

Total coal mining selling, general, and administrative expense increased by approximately $1.5 million during the year ended April 30, 2010, but was down 1.2% relative to revenues due to operating leverage in our fixed expenses. Our increase in real dollar fixed cost was related to startup costs and hiring personnel associated with sales, maintenance, safety, and training.

 

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Wholesale Segment

 

The following table is a summary of important year-to-year operating data for our Wholesale segment:

 

 

Wholesale Revenue  

 

Wholesale revenues increased by 19.7% during the year ended April 30, 2010 compared to the year ended April 30, 2009. The increase in revenue was the result of a 26% increase in tonnage that compensated for a drop in average price per ton sold. We acquired a large, new customer in the first quarter of fiscal year 2010 who significantly affected revenues and who accounted for 27% of total Wholesale revenues for the year.

 

Wholesale Cost of Sales  

 

Wholesale cost of goods sold decreased by 4.5% relative to sales during the year ended April 30, 2010 due to the lowered cost of inputs, particularly fine coal.

 

Wholesale SG&A  

 

Wholesale SG&A decreased approximately $67,000, or 18%, relative to sales due to lowered warehouse rental and staffing costs.

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Coke Segment

 

The following table is a summary of important operating data for our Coke segment for the year ended April 30, 2010, as we did not have any operations in our Coke segment during the year ended April 30, 2009:

 

 

Coke Revenue  

 

Coking revenues during the year ended April 30, 2010 reflect the acquisition of our Zone Lin facility during the third quarter of fiscal 2010.

 

Coke Cost of Sales  

 

Coking cost of goods sold were 87.4% of sales during the year ended April 30, 2010.

 

Coke SG&A  

 

Coke SG&A of $129,000 reflects staffing and transition costs.

 

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Coal Washing Segment

 

The following table is a summary of important year-to-year operating data for our Coal Washing segment:

 

 

Coal Washing Revenue  

 

The Company’s Coal Washing revenues during the year ended April 30, 2010 reflect the acquisition of Hong Xing (Q2) and Ping Yi (Q3). Management believes vertical integration increases the overall value of its coal and adds the stability to the supply chain.

 

Coal Washing Cost of Sales  

 

Coal Washing COGS were 89.6% of sales during the startup year of operations. 

 

Coal Washing SG&A  

 

Coal Washing SG&A reflected startup costs, new administrative and safety staff, and the acquisition of maintenance, safety, and training equipment equating to about $1.67 per ton expense. 

 

 

Liquidity and Capital Resources

 

Our primary sources of cash include cash on hand, cash from sales of coal production to our customers, borrowings under credit facilities, proceeds from financing transactions, and occasional sales of non-core assets. We believe the principal indicator of our liquidity is our cash position. As of April 30, 2012, our cash and cash equivalents was $4,040,020.

 

Our primary uses of cash include our cash costs of coal production, capital expenditures (and related construction in progress), installment payments related to acquisitions, debt service costs (interest and principal), and lease obligations in regards to office space and related equipment. Our principal liquidity requirement is working capital to finance our coal production. We generally fund both our operations and our capital expenditure requirements with cash generated from operations.

 

Cash Flows

 

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Net cash provided by operating activities was $25,766,254 for the year ended April 30, 2012, compared to $26,100,677 from the same period in 2011. Our net income reduced approximately $23 million in this period caused by the periodical provincial safety closures of mines (all mines in Yunnan province were covered). Besides, the decrease in net cash provided by operating activities for the year ended April 30, 2012 was also mainly contributed by (i) Increase in depreciation and amortization of $2.2 million; (ii) increase in cash inflow of accounts receivables of $7.6 million due to timely settlement by the customers; (iii) increase in cash inflow of prepayment and other current assets of $8.9 million and decrease in cash-outflow of account payable and other payable by $14.3 million, which were due to the decrease in material and supplies purchases used in the production; (iv) increase in cash inflow of note receivables by $4m due to increase in settlement as of April 30, 2012.

 

Net cash used in investing activities was $28,388,363 for the year ended April 30, 2012 compared to $34,375,753 for the year ended April 30, 2011. The decrease in net cash used in investing activities was mainly due to the net effect of (i) Increase in cash outflow from disposal of business, net cash disposed of $1.2 million upon the disposal of PingYi mine in the current year; (ii) decrease in out-flow in loan to related party of $5.4 million since no loan to related party was granted in the current year.

 

Net cash provided by financing activities was $2,706,638 for the year ended April 30, 2012, compared to $2,780,634 from the same period in 2011.

 

Net cash provided by operating activities was $26,100,677 for the year ended April 30, 2011, compared to $30,878,280 from the same period in 2010. This decrease is attributable to periodical provincial safety closures in our mines.

 

For the year ended April 30, 2011, net cash used in investing activities was $34,375,753compared to $40,843,206 for the year ended April 30, 2010. This decrease was mainly attributable to the company executing fewer acquisitions of new assets in FY 2011 compared to FY2010.

 

Net cash provided by financing activities was $2,780,634 for the year ended April 30, 2011, compared to $12,140,692 from the same period in 2010. This was a result of a decrease in issuance of common stock.

 

Net cash provided by operating activities was $30,878,280 for the year ended April 30, 2010, compared to $16,924,070 from the same period in 2009. This increase is attributable to cash improvements incurred due to an increase in net income, which was mainly due to the acquisition of Hong Xing and Zone Lin.

 

For the year ended April 30, 2010, net cash used in investing activities was $40,843,206 compared to $17,226,929 for the year ended April 30, 2009. This increase was mainly due to an increase in construction in progress and the purchase of additional property plant and equipment in line with our organic growth plans of acquisitions.

                                                                                                               

Net cash provided by financing activities was $12,140,692 for the year ended April 30, 2010 compared to $3,883,786 during the same period in 2009. This was a result of increase in issuance of common stock

 

Capital Expenditures

 

Our business is capital intensive and requires substantial capital expenditures for, among other things, developing our mines and purchasing and upgrading equipment.  We also make investments to improve the productivity of our operations and comply with local license and safety regulations. We have historically funded, and expect to continue to fund, capital expenditures predominantly with cash from operations.

  

• Capital expenditures were approximately $22 million for the year ended April 30, 2012.
• We expect our total capital expenditures will be approximately $36 million for equipment and infrastructure, based on our existing coal operations, for the year ending April 30, 2013.

 

Working Capital

 

• During the year ended April 30, 2012 our accounts receivable (“AR”) increased $9.1 million. The increase in AR balance is primarily attributable to AR increases in TF, which was established in April of 2011, our KMC's and TNI’s subsidiaries.
• During the year ended April 30, 2012, our accounts payable decreased by $2.6 million. Accounts payable decreased in this fiscal year due to the decrease in purchase of material, supplies and services used in production. Our production level went down in this fiscal year was mainly caused by the periodical provincial safety closure of our mines.
• Our inventories decreased by $1.7 million in this fiscal year. We carried lower level of inventories was due to increased market demand of the goods and decreased production during the year.
• During the year ended April 30, 2012, our other payables increased by $13.4 million. The increase in other payable balance is primarily due to the acquisition of Wei She mine. We booked the estimated resource surcharge payable of $13.3 million.

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Construction in Progress

               

• Construction in Progress represents the Company’s in progress, not-yet-capitalized, investment in infrastructure. Construction in Progress for the year ended April 30, 2012 includes mine development, ventilation and electrical system improvements, building of staff quarters, beginning construction of a sewage treatment system, and road expansion. Construction in Progress totaled $31.2 million as of April 30, 2012.

 

Management presently believes that cash flow from operations and increasing access to credit will provide the company sufficient capital resources for the infrastructure, mechanization, and safety elements of its business strategy.

 

To implement its acquisition strategy, in conjunction with the government mandated consolidation of mines, the Company may consider the issuance of additional debt or equity securities.  In addition to potential externally raised funds, the Company intends to utilize a combination of existing cash on hand, cash flow from operations, and seller paper to finance the acquisition of mines.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet financing arrangements for the fiscal year ended April 30, 2010, 2011, and 2012.

 

Contractual Obligations

 

As of April 30, 2012, we were contractually obligated, per our purchase agreements, to inject capital as follows:

 

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During the fourth quarter of 2011, as part of the acquisition of DaPing mine, the Company assumed a RMB 20 million bank loan or approximately $3,077,160 with an interest rate of 9.18% per annum.  The Company had paid RMB 6 million or approximately $941 thousands and the other RMB 14 million or approximately $2.2 million will mature on October 29, 2012.

 

Insurance

 

We operate coal mines and related facilities that are inherently dangerous. We, like other similar companies, have experienced accidents that have caused property damage and personal injuries. Although we have implemented safety measures such as fire training and job-specific safety training, and we continuously review our existing operational standards, there can be no assurance that natural disasters and industry-related accidents will not occur in the future. The insurance industry in China is in a developmental stage, and Chinese insurance companies offer only limited business insurance products. We currently purchase work-related injury insurance for our employees at the DaPuAn, SuTsong Ping Yi and Da Ping mines, and limited accident insurance for staff working in China. Insurance-related liabilities and losses above our coverage could have a material adverse effect on our financial condition.

 

Environmental Compliance

 

We are subject to significant, extensive and increasingly stringent environmental protection laws. These laws and regulations 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 or suspend any facility that it determines has failed to comply with environmental regulations.

 

The PRC government has tightened enforcement of applicable laws and regulations and adopted more stringent environmental and operational standards. While we believe that our coal mining, washing, and coking operations currently comply in all material respects with existing Chinese environmental standards, future environmental-related issues could have a material adverse effect on our financial condition and the results of our operations.

 

Recent Financings 

 

May 2009 Financings

 

On May 12, 2009, the Company issued to Silver Rock II, Ltd. (“Silver Rock”) an 8% convertible debenture (the “Debenture”) in the original principal amount of $100,000 which was due and payable on May 6, 2012. 

 

On November 5, 2009, Silver Rock converted the debenture plus accrued interest into 160,000 shares of Common Stock.  In connection with the issuance of the Debenture, the Company issued to Silver Rock a three-year warrant to purchase up to 500,000 shares of Common Stock at an exercise price of $1.40 per share (the “May Warrant Shares”).  On January 17, 2010, Silver Rock exercised its warrant and purchased 250,000 May Warrant Shares for an aggregate purchase price of $350,000.

 

October 2009 Financing

 

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On October 8, 2009, the Company entered into a Securities Purchase Agreement with accredited investors (the “October Buyers”), pursuant to which the Company sold Units (the “October Units”) to the October Buyers.  Each Unit purchased consisted of one share of unregistered common stock of the Company (the “Common Stock”) and 6/10ths of a warrant (the “October Warrants”) to purchase a share of common stock at an exercise price of $5.62 per share and expiring in October 2014 (as exercised, collectively the “October Warrant Shares”). Each Unit was priced at $3.90.  On October 8, 2009, our common stock closed at $5.58 per share on the OTCBB.  The Company sold a total of 1,371,021 October Units for gross proceeds of $5,346,980 and representing 1,371,021 shares of Common Stock.  Pursuant to the terms of the October Warrants, the October Buyers also became entitled to purchase 822,613 shares of Common Stock of the Company at an exercise price of $5.62 per share.  The October Warrants have a term of 60 months after the issue date of October 8, 2009.  The exercise price and number of shares issuable upon exercise of the October Warrants are subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like.  The October Warrants also have a cashless exercise provision that such holders may utilize after six months from the issuance date of such warrant if a registration statement covering the shares of Common Stock underlying the October Warrants is not available to the Warrant holders and a provision which limits the October Warrant holders right to exercise the October Warrant if such exercise would result in the holder owning more than 9.99% of the Common Stock.  Laidlaw & Co. (UK) Ltd., a member of FINRA, acted as the placement agent for the transaction which was closed on October 8, 2009.

 

Pursuant to the Registration Rights Agreements (the “Registration Rights Agreement”) executed by and between the Company and the October Buyers in connection with the October Financing, the Company was required to file a registration statement on Form S-1 or Form S-3 (the “Registration Statement”) within 90 days after the closing of the transaction for purposes of registering the resale of all of the Common Stock and any shares of capital stock of the Company issued or issuable with respect to the October Warrant Shares and the October Warrants as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on exercises of the October Warrants (together with the October Warrant Shares, the “October Registrable Securities”).  Since the Registration Statement was not declared effective by the SEC by July 5, 2010, the deadline for the Registration Statement to be declared effective, the Company is required to pay cash penalties in the amount of one percent (1%) of the October Unit price up to a maximum of six percent (6%), subject to the terms of the Registration Rights Agreement.

 

Also, in connection with October Financing, Mr. Dickson V. Lee, the Company’s Chief Executive Officer, the Company and the October Buyers entered into a Make Good Escrow Agreement (the “October Make Good Agreement”) pursuant to which Mr. Lee agreed to place  up to 1.5 million of the Company's common shares that he personally owns into escrow (the “October Escrow Shares”).  Pursuant to the terms of the October Make Good Agreement, one-half of the October Escrow Shares will be released back to Mr. Lee if the Company has equal to or more than $32,040,000 in after tax net income before non-controlling interest (calculated in accordance with U.S. GAAP, as reported in the Company’s Annual Report on Form 10-K for the fiscal year ending April 30, 2010 (“2010 Form 10-K”) and as adjusted under the terms of the October Make Good Agreement) for the fiscal year ending April 30, 2010; otherwise, these October Escrow Shares will be distributed to the October Buyers in proportion to each October Buyer’s purchase price for its October Units.  Likewise, the remaining half of the October Escrow Shares will be released back to Mr. Lee if the Company has equal to or more than $108,118,950 in net revenues (calculated in accordance with U.S. GAAP, as reported in the 2010 Form 10-K and as adjusted under the terms of the October Make Good Agreement); otherwise, these October Escrow Shares will be proportionately distributed to the October Buyers.  Based upon the Statements of Income reported in the 2010 Form 10-K, the October Escrow Shares were released back to Mr. Lee.

 

The October Financing was completed through a private placement to accredited investors and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”).  Laidlaw & Company (UK) Ltd. (“Laidlaw”) acted as the placement agent and financial advisor for this transaction.  Laidlaw received cash fees consisting of eight percent (8%) of the gross proceeds and warrants to purchase 109,682 shares of the Company's common stock at $6.11 per share under the same terms as the Unit warrants.

 

November 2009 Financing

 

On November 6, 2009, the Company entered into a Securities Purchase Agreement with accredited investors (the “November Buyers”), pursuant to which the Company sold Units (the “November Units”) to the November Buyers.  Each Unit purchased consisted of one share of Common Stock and 6/10ths of a warrant (the “November Warrants”) to purchase a share of common stock at an exercise price of $5.62 per share and expiring in November 2014 (as exercised, collectively the “November Warrant Shares”). Each Unit was priced at $3.90.  On November 6, 2009, our common stock closed at $5.65 per share on the OTCBB.  The Company sold a total of 835,389 November Units for gross proceeds of $3,258,000 and representing 835,389 shares of Common Stock.  Pursuant to the terms of the November Warrants, the November Buyers also became entitled to purchase 501,236 shares of Common Stock of the Company at an exercise price of $5.62 per share.  The November Warrants have a term of 60 months after the issue date of November 6, 2009.  The exercise price and number of shares issuable upon exercise of the November Warrants are subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like.  The November Warrants also have a cashless exercise provision that such holders may utilize after six months from the issuance date of such warrant if a registration statement covering the shares of Common Stock underlying the November Warrants is not available to the Warrant holders and a provision which limits the November Warrant holders right to exercise the November Warrant if such exercise would result in the holder owning more than 9.99% of the Common Stock.  The November Financing closed on November 6, 2009.

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Pursuant to the Registration Rights Agreements (the “Registration Rights Agreement”) executed by and between the Company and the November Buyers in connection with the November Financing, the Company was required to file a registration statement on Form S-1 or Form S-3 (the “Registration Statement”) within 90 days after the closing of the transaction for purposes of registering the resale of all of the Common Stock and any shares of capital stock of the Company issued or issuable with respect to the November Warrant Shares and the November Warrants as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on exercises of the November Warrants (together with the November Warrant Shares, the “November Registrable Securities”).  Since the Registration Statement was not declared effective by the SEC by August 3, 2010, the deadline for the Registration Statement to be declared effective, the Company is required to pay cash penalties in the amount of one percent (1%) of the November Unit price up to a maximum of six percent (6%), subject to the terms of the Registration Rights Agreement.

 

Also, in connection with November Financing, Mr. Lee, the Company’s Chief Executive Officer, the Company and the November Buyers entered into a Make Good Escrow Agreement (the “November Make Good Agreement”) pursuant to which Mr. Lee agreed to place up to 395,615 of the Company's common shares that he personally owns into escrow (the “November Escrow Shares”). Under the terms of the November Make Good Agreement, since $3,258,000 was raised in this financing, the actual number of November Escrow Shares that are subject to this Make Good Agreement is 395,615 shares (the “Actual November Escrow Shares”).  Further, pursuant to the terms of the November Make Good Agreement, one-half of the Actual November Escrow Shares will be released back to Mr. Lee if the Company has equal to or more than $32,040,000 in after tax net income before non-controlling interest (hereinafter referred to as the “2010 Actual ATNI” and which shall be calculated in accordance with U.S. GAAP, as reported in the Company’s Annual Report on Form 10-K for the fiscal year ending April 30, 2010 (the “2010 Form 10-K”) and as adjusted under the terms of the November Make Good Escrow Agreement) for the fiscal year ending April 30, 2010; otherwise, the aggregate number of Actual November Escrow Shares to be distributed to the November Buyers (with such distribution being in proportion to each November Buyer’s purchase price for its Units) are calculated as follows: (i) if the difference between the 2010 Guaranteed ATNI of $32,040,000 (the “2010 Guaranteed ATNI”) minus the 2010 Actual ATNI is equal to or greater than 50% of the 2010 Guaranteed ATNI, then the aggregate number of Actual November Escrow Shares to be distributed to the November Buyers in this financing on a pro rata basis shall equal 50% of the Actual Escrow Shares; or (ii) if the difference between the 2010 Guaranteed ATNI minus the 2010 Actual ATNI is less than 50% of the 2010 Guaranteed ATNI, then the aggregate number of Actual November Escrow Shares to be distributed to the November Buyers in this financing on a pro rata basis shall be calculated by multiplying: (A) 50% of the Actual November Escrow Shares times (B) a fraction with a numerator of the difference between the 2010 Guaranteed ATNI minus 2010 Actual ATNI multiplied by 2 and a denominator of the 2010 Guaranteed ATNI.  Likewise, under the November Make Good Agreement, the other remaining half of the Actual November Escrow Shares will be released back to Mr. Lee if the Company has equal to or more than $108,118,950 in net revenues (hereinafter referred to as the “2010 Actual Revenue” and which shall be calculated in accordance with U.S. GAAP, as reported in the 2010 Form 10-K and as adjusted under the terms of the November Make Good Escrow Agreement); otherwise, the aggregate number of Actual November Escrow Shares to be proportionately distributed to the November Buyers shall be calculated as follows: (i) if the difference between the 2010 Guaranteed Revenue of $108,118,950 (the “2010 Guaranteed Revenue”) minus the 2010 Actual Revenue is equal to or greater than 50% of the 2010 Guaranteed Revenue, then the aggregate number of Actual November Escrow Shares to be distributed to the November Buyers in this financing on a pro rata basis shall equal 50% of the Actual November Escrow Shares; or (ii) if the difference between the 2010 Guaranteed Revenue minus the 2010 Actual Revenue is less than 50% of the 2010 Guaranteed Revenue, then the aggregate number of Actual November Escrow Shares to be distributed to the November Buyers in the November Financing on a pro rata basis shall be calculated by multiplying: (A) 50% of the Actual November Escrow Shares times (B) a fraction with a numerator of the difference between the 2010 Guaranteed Revenue minus 2010 Actual Revenue multiplied by 2 and a denominator of the 2010 Guaranteed Revenue.  Based upon the Statement of Income reported on the 2010 Form 10-K, the November Escrow Shares were released to Mr. Lee.

 

The November Financing was completed through a private placement to accredited investors and is exempt from registration pursuant to Section 4(2) of the Securities Act.  Barretto Securities Inc. (“Barretto”) acted as the placement agent and financial advisor for this transaction.  Barretto received cash fees consisting of eight percent (8%) of the gross proceeds and warrants to purchase 66,832 shares of the Company's common stock at $6.11 per share under the same terms as the November Unit warrants.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Foreign Currency Exchange Risk 

 

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

 

DISCLOSURES ABOUT MARKET RISK.

 

We manage our commodity price risk for our non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements. We are exposed to commodity price risk in our coal trading activities, which represents the potential future loss that could be caused by an adverse change in the market value of coal. With respect to our coal trading contracts at April 30, 2012, the potential for loss of future earnings resulting from changing coal prices was insignificant. We monitor and manage market price risk for our trading activities with a variety of tools, management alerts for mark to market monitoring and loss limits and review of daily changes in market dynamics.

 

   

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Item 8. Financial Statements and Supplementary Data.

 

 

 

L &L Energy, Inc. and Subsidiaries

Consolidated Financial Statements

For the Years Ended April 30, 2012, 2011 and 2010

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
L&L Energy, Inc. and its subsidiaries

Seattle, Washington

 

We have audited the accompanying consolidated balance sheets of L&L Energy, Inc. and its subsidiaries’ (the “Company”) as of April 30, 2012 and 2011, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the years in the three-year period ended April 30, 2012. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of L&L Energy, Inc. and its subsidiaries as of April 30, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended April 30, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), L&L Energy, Inc. and its subsidiaries’ internal control over financial reporting as of April 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 31, 2012 expressed an adverse opinion.

 

/S/ KABANI & COMPANY, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California

July 31, 2012

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
L&L Energy, Inc. and its subsidiaries

Seattle, Washington

 

We have audited L&L Energy, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of April 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. The Company did not maintain effective controls over the process of ensuring timely preparation of its consolidated financial statements to allow for sufficient review prior to its filing deadline. Additionally, the Company did not maintain effective controls over presentation and calculation of notes receivable resultant from the disposition of the Ping Yi mine in the current year. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 consolidated financial statements, and this report does not affect our report dated July 31, 2012 on those consolidated financial statements.

 

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, L&L Energy, Inc. and its subsidiaries has not maintained effective internal control over financial reporting as of April 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of comprehensive income, equity, and cash flows of L&L Energy, Inc. and its subsidiaries, and our report dated July 31, 2012 expressed an unqualified opinion.

 

 

/S/ KABANI & COMPANY, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California

July 31, 2012

 

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

 

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

 

 

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

 

 

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

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L & L Energy, Inc.

Notes to Consolidated Financial Statements

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

L & L ENERGY, INC. (“L&L” and/or the “Company”) was incorporated in Nevada, and is headquartered in Seattle, Washington.  Effective on January 4, 2010, the State of Nevada approved the Company’s name change from L&L International Holdings, Inc. to L & L Energy, Inc.  The Company is a coal (energy) company, and started its operations in 1995. Coal sales are made entirely in China, from coal mining, clean coal washing, coking and coal wholesales operations. At the present time, the Company conducts its coal (energy) operations in Yunnan and Guizhou provinces, southwest China. As of April 30, 2012, the Company has six operating subsidiaries; KMC and Tai Fung which have coal wholesale operations and Ping Yi Coal Mine (washing and mining operations “PYC”), two coal mining operations (DaPuAn Mine and SuTsong Mine) including DaPuAn’s coal washing operations (the “2 Mines” or “LLC”),and L&L Yunnan Tianneng Industry Co. Ltd. (including Hong Xing coal washing and ZoneLin coking operations) (“TNI”), DaPing Coal Mine(mining operation “DaPing”). On August 1, 2009, the Company increased its ownership of the two coal mining operations (the “2 Mines”), from 60% to 80%.

 

KMC acquired 100% equity of PYC on January 18, 2010 with an effective acquisition date of November 1, 2009.  L&L formed a new subsidiary TNI in the Yunnan province, China, and owns and 98% of controlling interest of TNI.  Through TNI, L&L acquired 100% equity of ZoneLin Coal Coking Factory in China (“ZoneLin”) on February 3, 2010 with an effective acquisition date of November 1, 2009; and acquired 100% equity of SeZone County Hong Xing Coal Washing Factory (“Hong Xing”) on January 1, 2010 with an effective acquisition date of November 30, 2009. L&L acquired 60% equity of DaPing on March 15, 2011.

 

The Company disposed of its majority interest of LEK air-compressor operations in January of 2009.  The Company acquired 93% equity interest in Hon Shen Coal Co., Ltd. (“HSC”) in July 2009 and October 2009, then disposed of HSC to Guangxi LuzhouLifu Machinery Co. Limited in April 2010 resulting a discontinued operation. 

 

In August 2011, The Company established a new subsidiary Guizhou LiWei Coal Co. Ltd., (“Guizhou LiWei”) in Guizhou,, China and own 100% of controlling interest.. 

 

The Company acquired 51% equity interest in Wei She coal mine (“WeiShe”) in February of 2012, see Note 3.

 

The Company disposed 100% ownership of PYC in April of 2012, see Note 3.

 

 

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation - The fully consolidated financial statements include the accounts of (i) the Company, (ii) its 100% ownership of KMC subsidiary including coal wholesale, (iii) 80% of operations of LLC “2 Mines”, (iv) 51% of WeiShe, (v) 98% of TaiFung 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.

 

Use of Estimates - The preparation of financial statements, in conformity with US GAAP, 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.  We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.  These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.

 

Cash and Cash Equivalents - Cash and cash equivalent consist of cash on deposit with banks and cash on hand.  The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents, for cash flow statement purposes.  Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC and with banks in the United States. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions or state owned banks within the PRC are not insured and amounted to $1,405,085 and $4,350,383 at April 30, 2012 and 2011, respectfully. As of April 30, 2012 and 2011, the Company had deposits totaling $609,239 and $172,119(in excess of federally insured limits), in U.S. Banks.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

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

 

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

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

 

Accounts receivable - The Company’s maintains reserves for potential credit losses on accounts receivable If any. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  As of April 30, 2012 and 2011, the Company determined that no allowance for doubtful accounts or sales returns was necessary.  

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

 

Non-controlling Interest - Non-controlling interest represents the portion of equity that is not attributable to the Company. The net income (loss) attributable to noncontrolling interests are separately presented in the accompanying statements of income and other comprehensive income. Losses attributable to noncontrolling interests in a subsidiary may exceed the interest in the subsidiary’s equity. The related noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit of the noncontrolling interest balance.

 

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

 

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

 

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

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

 

 

Impairment of Long-Lived Assets - The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company evaluates the recoverability of its long-lived assets if circumstances indicate impairment may have occurred.  This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of April 30, 2012 and 2011, there was no impairment of its long-lived assets.

 

Goodwill and Other Intangibles - The Company applies Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other Intangible Assets, to record goodwill and intangible assets.  In accordance with ASC 350, certain intangible assets are to be assessed periodically for impairment using fair value measurement techniques. The Company assesses annually whether there is an indication that goodwill is impaired, or more frequently if events and circumstances indicate that the asset might be impaired during the year.  The Company performs its annual impairment test in the fourth quarter of each year.  The Company has identified its operating segments as its reporting units for purposes of the impairment test.  The Company’s existing goodwill and intangible assets are associated with its mining, washing and coking segments.  The Company then determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit.  Calculating the fair value of the reporting units requires significant estimates and assumptions by management.  To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, there is an indication that the reporting unit goodwill may be impaired and a second step of the impairment test is performed to determine the amount of the impairment to be recognized, if any. The Company believes that as of April 30, 2012 and 2011, there was no impairment of its goodwill.

 

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Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.  GAAP also requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. As of April 30, 2012, income tax positions must meet a more-likely-than-not recognition threshold to be recognized.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  No material deferred tax amounts were recorded at April 30, 2012 and 2011, respectively.  GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

  

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

 

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

 

As of May 1, 2010, the Company had no material unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing ASC 740. There have been no changes to the Company’s liability for unrecognized tax benefits during the year ended April 30, 2012. 

 

The Company files income tax returns in the U.S. Federal jurisdictions.  As of the date of adoption of ASC 740 and for the year ended April 30, 2012, the Company’s tax returns remain open to examination by the Internal Revenue Service tax authorities.

 

The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of provision for income tax.  As of the date of adoption of ASC 740 and for the year ended April 30, 2012, the Company had accrued no interest or penalties related to uncertain tax positions.

 

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

 

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

  

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

 

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

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

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

 

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

 

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

 

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Concentration of Risk –Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash deposit and accounts receivable.  The Company’s cash, cash equivalents and restricted cash deposits were deposited with U.S. and PRC banks and other financial institutions and amounted to $4,608,581 at April 30, 2012. The Company does not believe there is significant risk of non-performance by the counterparties. For the year ended April 30, 2012, we had the top major customer who purchased 18% (approximately $28.5 million in value) of the Company’s total sales and represented $9.2 million or 28% of accounts receivable. The second major customer who purchased 15% (approximately $25.1 million in value) of the Company’s total sales and represented $2.2 million or 7% of accounts receivable.  In addition, two major supplier provided over 10% (approximately $20.6 million) of our total purchases. We currently have fully paid off the corresponding accounts payable.

 

Advertising Costs - The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs for the years ended April 30, 2012, 2011 and 2010 were not significant.

 

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

 

Discontinued Operations and Assets Held for Sale – The Company classifies items within discontinued operations in the consolidated financial statements when the operations and cash flows of a particular component (defined as operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity) of the Company have been (or will be) eliminated from the ongoing operations of the Company as a result of a disposal transaction, and the Company will no longer have any significant continuing involvement in the operations of that component. See Note 3 for additional details related to discontinued operations and assets held for sale.

Reclassification - Certain reclassifications have been made to the 2011 and 2010 consolidated financial statements to conform to the 2012 consolidated financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

 

New accounting pronouncements

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.

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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.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). In accordance with ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect an impact on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in ASU 2011-04 to result in a change in the application of the requirements in Topic 820. ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011. This ASU will become effective for the company beginning in the quarter ended January 31, 2012 and we do not expect an impact on our consolidated financial statements.

 

 

NOTE 3. BUSINESS COMBINATIONS AND DIVESTITURE

 

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

 

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Acquisitions

 

Acquisition of Hon Shen Coal Co. LTD (“HSC”) 

 

On July 16, 2009, the Company entered into an agreement to acquire a 65% equity interest in the coal washing facility (a distinctive operation) of HSC in Yunnan Province for a purchase price of 10,000,000 RMB (equivalent to approximately US$1,464,129).  Aggregate cash payments of 2,000,000 RMB (equivalent to approximately US$292,826) were made in August 2009.

 

Subsequently, the Company entered into an Acquisition and Capital Increase Agreement, effective as of October 23, 2009, pursuant to which the Company increased its equity interest in HSC’s coal washing facility from 65% to 93% and acquired a 93% equity interest in HSC’s coking facilities (another distinctive operation of HSC), resulting in the Company acquiring a 93% equity interest in HSC’s entire coal washing and coking operations.  In connection with such acquisition, HSC’s registered capital was increased from 3,600,000 RMB to 60,000,000 RMB and then subsequently reduced to 30,000,000 RMB (equivalent to approximately US$4,400,000).

 

Initially, the total purchase price for the Company’s 93% equity interest in HSC’s coal washing and coking operations was 55,800,000 RMB  Subsequently, pursuant to an Acquisition and Capital Increase Agreement dated December 9, 2009 (the “December Agreement”), the total purchase price was reduced to 26,400,000 RMB (equivalent to approximately US$3,865,300).  Under the December Agreement, 6,000,000 RMB is payable within three months after signing and 20,400,000 RMB is payable within two years after receipt from the Chinese Government of necessary approvals for the parties to cooperate.

 

In addition to the initial 2,000,000 RMB paid in August 2009,the Company made additional payments of 200,000 RMB in October 2009 and 400,000 RMB in November 2009, for a total of 2,600,000 RMB (equivalent to approximately US$380,000) of the aggregate 26,400,000 RMB purchase price.

 

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

 

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

 

 

Ping Yi Mine

 

On January 18, 2010, the Company, through an indirect subsidiary, Baoxing Economic and Trade Co., entered into an Acquisition Agreement to acquire 100% of the Ping Yi Coal Mine (“PYC”), with an effective date of November 1, 2009, for a purchase price of 27,042,593 RMB (equivalent to approximately US$3,955,041).  The Company paid 23,042,593 RMB (equivalent to US$3,369,390) upon signing of the Acquisition Agreement.  An installment of 1,000,000 RMB (equivalent to US$146,412) was payable in February 2010. The remaining balance of 3,000,000 RMB (equivalent to US$439,239) was payable two years after signing of the Acquisition Agreement. The Company paid the remaining balance during the year-ended April 30, 2011.

 

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

 

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SeZone County Hong Xing Coal Washing Factory (“Hong Xing”) 

 

On January 1, 2010, the Company through its 98% owned subsidiary, L&L Yunnan Tianneng Industry Co. LTD (“TNI”), acquired 100% of the equity of Hong Xing by entering into an Acquisition Agreement, effective as of November 30, 2009, with a purchase of 6,828,500 RMB (equivalent to approximately US $1,000,000).  The total amount of the purchase price was contributed by the Company to TNI and subsequently paid.

 

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

 

 

Luping County ZoneLin Coal Coking Factory in China (“Zonelin”) 

 

On February 3, 2010, the Company through its 98% owned subsidiary, TNI, acquired 100% equity of Zonelin by entering into an Acquisition Agreement for a purchase price of 13,675,000 RMB (equivalent to US$2,000,000).  The Company has paid 6,837,500 RMB (equivalent to US$1,000,000) of the purchase price and the remaining balance of 6,837,500 RMB (equivalent to US$1,000,000) is payable in five annual installments with the first payment due by the first anniversary of the signing of the acquisition agreement. The Company paid the $200,000 of the total amount of purchase price in the period ended April 30, 2012.

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

 

 

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 April 30, 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 April 30, 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 April 30, 2012.

 

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

 

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*Includes goodwill of $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 .. TaiFung is a marketing and distributing company of coals throughout China and has yet to begin operation as of April 30, 2011. The net assets on acquisition date comprise only cash contributed by the 2% 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. Guo Xu 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 has been paid to Union or a designee of Union in installments, based on the satisfaction of certain conditions set forth in the Agreement.  The stock price on February 3, 2012 was $3.22 per share. The noncontrolling 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.

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*Includes goodwill of $779,075

 

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, 2009 (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:  

 

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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 sale on April 18, 2010. As of April 30, 2012, outstanding receivable from sales of HSC was USD$8021, 256, which is expected to be received before April 30, 2013.

 

Sale of Ping Yi Mine

 

With consideration of several factors including continuing development strategies, the Company made the determination to dispose of the Ping Yi Mine.  On April 30, 2012, the Company entered into an Equity Sale and Purchase Agreement with Mr. Zhang, the previous owner of Ping Yi Mine, whereby the company sold its 100% equity ownership interest in Ping Yi Mine for RMB 196,000,000, approximately $31,000,000.  The payment was agreed to take the form of receipt with no 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.

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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).

 

  

NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Cash advances are made to coal suppliers to guarantee a certain delivery of coal to us at a specified time and price. Since the demand for coal is high, we set up agreements with these suppliers, with cash deposits, to ensure a constant supply of coal to our washing 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.

 

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

 

Prepaid expenses and other current consist of the following at April 30:

 

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NOTE 5. OTHER RECEIVABLES

 

Other receivables consist of the following at April 30:

 

 

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 current year, which will be accreted as interest income by effective interest method over the life of the agreement. As of April 30, 2012, the Company recorded a total receivable, net of discount of $28,016,214, with a current portion of 7,094,403, net of discount of $178,555.

 

NOTE 6. INVENTORIES

 

Inventories are primarily related to coal located at KMC, Wei She, Tai Fung and TNI. Inventories consist of the followings of April 30:

 

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NOTE 7.  PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT

 

Property, plant, equipment and mine development consist of the following as of April 30:

 

 

Depreciation and amortization expense was $5,717,346, $5,841,073 and $1,085,798 for the years ended April 30, 2012, 2011 and 2010, respectively.

 

We have reclassified Mineral Rights as Property, Plant, Equipment and Mine Development. Mineral Rights were disclosed as Intangible Assets in prior financial statements. We amortize our mining rights using the units-of-production basis in fiscal year 2012 and 2011.

 

Mineral rights represent the exclusive right, granted by the Chinese government, to operate the 4 Mines, DaPuAn, SuTsong, DaPing and Wei She.  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.

 

NOTE 8. CONSTRUCTION IN PROGRESS

 

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Construction in progress includes mine development, ventilation and electrical system improvements for the PingYi mine, the two coal mines, and DaPing mine, building of staff quarters, and beginning construction of a sewage treatment system and road expansion for the washing facilities. Construction in progress was $31,259,260, and $44,943,609 as of April 30, 2012 and 2011, respectively. On April 30, 2012, the Company entered into an Equity Sale and Purchase Agreement to dispose of the Ping Yi mine; the construction in progress balance in the consolidated balance sheet as of April 30, 2012 has excluded the construction in process balance of PingYi mine upon the disposal; the construction in process of PingYi mine was $23,157,475 and 22,008,825 as of April 30, 2012 and, 2011, respectively.

 

Capitalized Interest

 

The Company capitalizes interest on construction in progress related to specific mining projects. The methodology for capitalizing interest on general funds begins with a determination of the borrowings applicable to the qualifying assets. The basis of this approach is the assumption that the portion of the interest costs that are capitalized on expenditures during an asset’s acquisition period could have been avoided if the expenditures had not been made. This methodology takes the view that if funds are not required for construction then they would have been used to pay off debt. The primary debt instrument included in the rate calculation of capitalized interest incurred for the year-ended April 30, 2012 was the Company’s bank loans (as defined under Note 16, “Bank Loans”). The interest to be capitalized for any period is derived by multiplying the average rate of interest times the average qualifying assets during the period, not to exceed the total interest on the qualifying debt instruments. To qualify for interest capitalization, the Company must continue to make progress on the development of the assets. Capitalized interest costs were  $262,183, $320,788 and $172,766 for 2012, 2011 and 2010, respectively.

 

NOTE 9.  INTANGIBLE ASSETS AND GOODWILL

 

Customer relationship and technology assets are being amortized over a period of 7 years.  Amortization expense was $167,060 and $41,208 at April 30, 2012 and 2011, respectively.

 

Intangible assets consist of the following at April 30,

 

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We have reclassified Mineral Rights to Property, Plant, Equipment and Mine Development. Mineral Rights were disclosed as Intangible Assets in prior financial statements. No amortization expense was recorded for the year ended April 30, 2010.

 

 

The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, for our operating segments for fiscal 2012 and 2011 were as follows:

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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 $87,570 and $798,111 of Yunnan and Guizhou province, respectively.

 

 

NOTE 11.  LONG TERM RECEIVABLE

 

In fiscal year of 2011, the Company entered into several agreements with Colorado-based Bowie Resources, LLC and have loaned a total of approximately $7 million.  The loan originally carried an interest rate of nine (9) percent which has since increased to eleven (11) percent.  The loan is co-senior with another lender.  The total owing to the Company as of April 30, 2012 is $6,918,622 includes interest of $369,609. 

 

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 of $20,921,811, net of a discount of $3,005,231.

 

NOTE 12.  RELATED PARTY TRANSACTIONS

 

The Company loaned money to various entities who have non-controlling interests with the Company.  Those loans are notes receivables, secured by assets and machinery of the various mines or businesses indicated below.  Because the borrowers under the notes have business in which the Company has an interest, the Company believes the borrowers are considered as related parties.  Total amount of the related party transactions are approximately $6.1 million as of April 30, 2012 which is tabled below.  While in the prior year, as of April 30, 2011, total related party transactions amounted transaction amounts to approximately $7.4 million including approximately $5.5 million is a loan to non controlling interest shareholders of 2 Mines, approximately $1.5 million for an advance to a KMC manager for the development of the Tian-Ri Coal Mine. 

 

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As of April 30, 2012 and 2011, the Company had the following other payables to the related parties:

 

 

Total Payable-related party was $17.3 million as of April 30, 2012. None of these payables bear interest and they are not collateralized by any assets of the Company. $15 million was part of the consideration payable to the owner of the acquisition of DaPing coal mine during the year ended April 30, 2012. $1.6 million was a temporary interest free loan to support funding of the Bowie mine (long-term receivable) loaned by Robert Lee, who was the Company’s officer in prior years. Robert Lee is a shareholder and he is no longer an officer of the Company..

 

As of April 30, the Company’s had the following due to officers:

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In 2012, Dickson Lee, Clayton Fong and Shirley Kiang, officer and/or directors of the Company, loaned the Company $0.4 million temporary interest free loans to support funding of the Bowie mine (long-term receivable).

 

NOTE 13.  ASSET RETIREMENT OBLIGATIONS

 

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

 

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

 

As for the DaPuAn and SuTsong mines, 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 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%, which equates to a risk-free interest rate adjusted for the effect of the company's credit standing (a credit-adjusted risk-free rate). The credit-adjusted risk-free rate is deduced based on the yield curve for U.S. Treasury securities with corresponding maturity adjusted based on the company's credit standing.Da Ping Mine was acquired by the Company in March 2011. According to the mine reservation report, the management expects to extract approximately 15 million tons of coal over the remaining 26 years. Da Ping Mine is located in GuiZou 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%.

 

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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%.

 

During the quarter ended July 31, 2010, the Company revised the forecasted cash flows used for the net present value calculations for DaPuAn and SuTsong mines. The revisions to estimated cash flows pertain to revisions in the estimated amount and timing of required reclamation activities throughout the lives of the respective mines and reflect changes in estimates of closure volumes, disturbed acreages and third-party unit costs as of July 31, 2010. We based these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates. We evaluated the forecasted cash flows as of April 30, 2012, no revision was deemed necessary.

 

The following is a summary of the change in the carrying amount of the asset retirement obligation during the years ended April 30, 2012 and 2011.

 

 

NOTE 14.  OTHER PAYABLES

 

Other Payables consist of the following at April 30:

 

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Total Other Payables was $21 million as of April 30, 2012. None of these payables bear interest and they are not collateralized by any assets of the Company. $0.2 million was a temporary interest free loan from a business partner. $13.4 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 $5.6 million is for miscellaneous payment of fees related to maintenance, safety, employee training for security and environmental matters, which $1.8 million is payable to employees

 

NOTE 15. TAXES PAYABLE

 

Taxes payable consist of the following at April 30:

 

 

(1)      For China

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

 

NOTE 16.  BANK LOANS

 

During the third quarter of 2010, as part of the acquisitions of TNI the Company assumed a loan agreement with banks in China.  The loan with TNI was for RMB 14,300,000 or approximately $1,951,000.  This loan carried an interest rate of 5.4% per annum and matured on December 23, 2010, which was paid off.  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.

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NOTE 17.  CONVERTIBLE DEBT

 

On May 12, 2009, the Company issued to Silver Rock II, Ltd. an 8% convertible debenture and 500,000 warrants for a total consideration of $100,000.  The face value of the debenture is $100,000 and is due on May 6, 2012 with interest payable semi-annually. The warrants expire on May 06, 2012 and have an exercise price of $1.40 per share.

The debenture was fully discounted based on the relative fair value of the warrants and the calculated beneficial conversion feature. The Company has performed the derivative analysis in accordance with ASC 815, “Derivatives and Hedging” and determined that the warrants are considered “indexed to its own stock” and hence qualified for equity treatment.

 

On January 30, 2010, Silver Rock II, Ltd. exercised 250,000 warrants at $1.40 per share. The remaining 250,000 warrants were outstanding as of April 30, 2011.

 

On April 26, 2012, Silver Rock II, Ltd. exercised 250,000 warrants at $1.40 per share. There is no outstanding warrants as of April 30, 2012.

 

During the year ended April 30, 2010, Silver Rock II, Ltd. converted the debenture in its entirety and the accrued interest of $4,000 into 153,846 and 6,154 common shares of the Company, respectively. The unamortized discount was recognized as interest costs upon conversion and was reflected in the consolidated statements of income.

 

There was no new convertible debt issued by the Company during fiscal year 2012 and 2011.

 

NOTE 18.  INCOME TAXES

 

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

 

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There is immaterial amount of deferred income taxes for the differences between financial accounting and tax bases of assets and liabilities.  For the years ended on April 30, 2012 and 2011, there were no material temporary book/tax differences or differences between financial accounting and tax bases of assets and liabilities.      

The Company’s income tax liability for the years ended April 30,2012 and 2011 was $4,885,298 and $10,622,221, respectively.  These tax payables to Chinese local governments can be postponed temporarily as we are a U.S. company bringing in U.S. management skills and investing capital to increase coal production and safety standards, beneficial to the Chinese local communities.  According to Chinese law, a new joint venture located in the western part of China may benefit under the “Go-West” policy to enjoy a special Chinese tax rebates from the government, thus there is a high probability that the 2 Mines, KMC, Da Ping, Wei She and TNI tax liability payments may be delayed or mitigated.

 

The significant component for income taxes is described for both US and PRC operation as of April 30, 2012 and 2011 are described below.

 

a) United States of America 

 

As of April 30, 2012, the Company in the United States had $29,137,122 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward twenty years. The deferred tax assets at April 30, 2012 consist mainly of net operating loss carry forwards. Due to the uncertainty of the realization of the related deferred tax assets of $10,275,838, a reserve equal to the amount of deferred income taxes has been established at April 30, 2012. The Company has provided 100% valuation allowance to the deferred tax assets as of April 30, 2012, 2011 and 2010 $10,275,838, $7,000,000 and $2,923,000, respectively.

 

Uncertain Tax Positions

 

Current authoritative guidance requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For a tax position meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At April 30, 2012, the Company did not have any unrecognized tax benefits that, if recognized, would affect the effective tax rate.

 

The Company is subject to examination of income tax filings in the U. S. for the tax periods 2008 and forward. As of April 30, 2012, no tax examination has been conducted.

 

b) People’s Republic of China (PRC)

 

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

 

The following table sets forth the significant components of the provision for income taxes for operation in PRC as of April 30:

 

 

NOTE 19. STOCKHOLDERS’ EQUITY

 

Stock Issued for Cash:

 

For the year ended April 30, 2012, the Company issued 200,000 shares of common stock for a gross proceed of $400,000 at $2.00 per share. The company issued 49,411 shares of common stock for loan conversion, with the share value of $420,000. The Company issued 286,000 common shares upon exercise of warrants and received $379,880 from warrants holders at an average price of $0.83 and $1.40.

 

Stock Issued for Compensation

 

The Board of Directors approved to issue shares in respect to the services provided by Clayton Fong, our Executive Vice President of Operations, Edmund Moy, Vice President of the company and other key employees during the 2012 fiscal year. As of April 30, 2012, the Company issued 50,000 shares to Clayton, 33,333 shares to Edmund Moy and 1,095,074 shares to other key employees (total 1,178,407 shares), with the share value of $157,000, $394,662 and $3,807,301 (total $4,358,963), respectively; the Company issued 200,000 shares to investors with the share value of $400,000 and sold $2,391,000 treasury stock to investors to raise fund to purchase coal mine in USA. For the year ended April 30, 2012, no stock options or warrants were issued for compensation.

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Stock Issued for Subsidiary

During the fourth quarter ended April 30, 2012, the Company issued 3,000,000 shares of common stock with the share value of $9,660,000 as portion of the investment to acquire WeiShe mine.

 

Treasury Stock

 

 As year ended April 30, 2012, the Company recovered zero shares of its common stock. The Company sold 915,907 shares of treasury stock with the share value of $2,391,000 to investors. The Company transferred 200,000 shares of treasury stock with the share value of $1,000,000 to subsidiary. In accordance with US generally accepted accounting principles, the Company recorded an increase to additional paid-in-capital of $ 3,117,909, respectively, as a result of the sold and transferred treasury shares. At April 30, 2012, the Company owned a total of 143,093 of its own shares. 

 

NOTE 20.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 year ended April 30, 2012:

 

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(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 year ended as April 30, 2012, no warrant was issued or exercised for compensation.

 

Following is a summary of the status of warrants outstanding at April 30, 2012:

 

 

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As of April 30, 2012, all warrants outstanding for compensation were exercisable. The weighted-average grant-date fair value of warrants granted during the twelve months ended April 30, 2011 was $ 9.37

 

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. The Company issued 109,682 five year warrants to the placement agent with an exercise price of $6.11 that isis 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.  The Company issued 66,832 five year warrants to the placement agent with an exercise price of $6.11 that are immediately exercisable.

 

On June 1, 2010, the Company received a payment of $50,000 from an investor for extending the expiration date from June 1, 2010 to December 31, 2010 of the remaining 1,000,000 shares associated with warrant K that the investor owns. The investor exercised all the 1,000,000 shares before the extended expiration date. As such, no warrant K were outstanding as of April 30, 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.

 

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.

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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.

 

The table below is a summary of all warrants activity as of April 30, 2012:

 

 

 

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NOTE 21. NON-CONTROLLING INTEREST

 

As described in Note 1, to the consolidated financial statements, the Company has the majority controlling interest of L&L Coal Partners (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 April 30, 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 noncontrolling 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.

 

 

 

 

NOTE 22.  EARNINGS PER SHARE

 

The Company only had common shares, warrants and stock options issued and outstanding as of April 30, 2012.  Under the treasury stock method of earnings per share, the Company computed the diluted earnings per share as if all issued warrants were converted to common stock and cash proceeds were used to buy back common stock.

 

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NOTE 23. COMMITMENTS AND CONTINGENCIES

 

Commitments:

 

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.

 

Lease Commitments

 

The Company has three operating leases: for the Seattle office, GuangZhou office and GuiZhou office during fiscal year of 2012.  The leases of GuangZhou office and GuiZhou office expired in November 2011 and February 2012, respectively. The lease of the Seattle office 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 $69,813 and $12,690 respectively. 

 

Contingencies:

 

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

 

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

 

Litigation

 

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 April 30, 2012, the Company has not accrued any liability in connection with potential losses from legal proceedings.

 

 

NOTE 24.  STOCK INCENTIVE PLAN

 

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

 

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

 

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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.

 

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 year ended April 30, 2012:

 

 

 

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

 

The following summarizes pricing and term information for options outstanding as of April 30, 2012:

 

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As of April 30, 2012, all stock options outstanding for compensation were exercisable. The weighted-average grant-date fair value of options granted during the year ended April 30, 2012 was $7.06.  

 

The following table is a summary of stock option activity under the Stock Incentive Plan as of April 30, 2012 and changes for the year then ended:

 

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NOTE 25.  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.

 

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NOTE 26.  QUARTERLY FINANCIAL RESULTS (UNAUDITED)

 

The following table contains selected statements of operations information, which is unaudited and should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Operating results for each quarter of fiscal year 2012 and 2011 are summarized as follows:

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NOTE 27.  RESTRICTED NET ASSETS

 

The Company’s operations are primarily conducted through its PRC subsidiaries, which may only pay dividend out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory reserves.

 

In addition, the Company’s businesses and assets are primarily denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries to transfer their net assets to the Company through loans, advances or cash dividends, which consisted of paid-up capital, retained earnings and statutory reserves and which aggregate amount of approximately $90 million as of April 30, 2010 exceeded 25% of the Company’s consolidated net assets. Accordingly, condensed parent company financial statements have been prepared in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X, and are as follows.

 

Note 28. SUBSEQUENT EVENTS

 

On May 21 2012, the Company announced the plan to begin a discretionary stock buyback program over the next 12 months, purchasing up to $10 million of outstanding LLEN shares from the open market. Under the buyback all purchased stock will be retired, reducing the Company’s outstanding shares and raising the attributable profit per unit to the shareholders.

On June 22 2012, the Company entered into MOU to acquire the controlling interest in of LuoZhou Mine from Union Energy, a local partner in GuiZhou province. LouZhou mine locates in HeZhang County, Guizhou Province with a targeted production of 450,000 tons per annum. L&L paid a deposit of approximately $349,000. The remaining balance will be paid in installments under other consideration, including payment-in-kind of non-strategically held interests, stock and/or cash.

 

On July 12, 2012, the entity form of DaPuAn has been changed from proprietorship to corporation.

 

 PARENT COMPANY FINANCIAL INFORMATION OF L & L ENERGY, INC.

 

 Condensed Balance Sheets (000s)

 

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 Condensed Statements of Operations (000s)

 

 

 

 

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Condensed Statements of Cash Flows (000s)

 

 

 

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Note to Condensed Parent Company Financial Information:

 

The Company records its investment in subsidiaries under the equity method of accounting as prescribed in ASC Topic 323, “Investments – Equity Method and Joint Ventures”. Such investment and long-term loans to subsidiaries are presented on the balance sheet as “Investments in subsidiaries” and the income of the subsidiaries is presented as “Equity in income of subsidiaries” on the statement of income.

 

These supplemental condensed parent company financial statements should be read in conjunction with the notes to the Company’s Consolidated Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

 

As of April 30, 2012 and 2011, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the Consolidated Financial Statements, if any.

 

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A.  Controls and Procedures

 

Evaluation of disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer and acting chief financial officer, to allow timely decisions regarding required disclosures.

Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2012 and, based on this evaluation, have concluded that our disclosure controls and procedures were ineffective as of April 30, 2012.

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Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed 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.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management conducted an assessment of the effectiveness of our internal control over financial reporting as of April 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the results of this assessment and on those criteria, management concluded that we did not maintain effective controls over the process of ensuring timely preparation of our consolidated financial statements. Additionally, we did not maintain effective controls over presentation and calculation of notes receivable result from the disposition of PingYi mine in the current year.

 

Changes in Internal Control over Financial Reporting

During the year ended April 30, 2012, we took several steps to improve our internal control function throughout the Company. These efforts have included and will continue to include the following: Recruitment of additional professionals, including CPAs, a CIA, an experienced PhD who is a quantitative operational specialist, IT professionals, and outside internal control consultants to speed up the reporting process. With respect to our successful recruitments thus far, and despite our assessed deficiencies included herein, we believe that we have made extensive improvements to our internal control processes. We intend to continue with exhausted efforts in the current fiscal year to continue to improve our internal controls and procedures.

Except as otherwise discussed herein, there have been no changes in our internal control over financial reporting during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9B.  Other Information

None.

 

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PART III

 

Certain information required by Part III will be included in our definitive proxy statement for the 2012 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC within 120 days after the end of the fiscal year ended April 30, 2012 and is incorporated herein by reference.

 

Item 10. Directors and Executive Officers and Corporate Governance.

The names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I, Item 1, above.

The following information will be included in the Proxy Statement and is incorporated herein by reference:

·         Information regarding directors of the Company and any persons nominated to become directors of the Company is set forth under “Nominees and Continuing Directors.”

 

·         Information regarding the Company’s Audit Committee and designated “audit committee financial experts” is set forth under “Corporate Governance — Board Committees — Audit Committee.”

 

·         Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

Item 11.  Executive and Director Compensation.

The following information will be included in the Proxy Statement and is incorporated herein by reference:

·         Information regarding the Company’s compensation of its named executive officers is set forth under “Executive Compensation.”

 

·         Information regarding the Company’s compensation of its directors is set forth under “Executive Compensation — Director Compensation.”

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

The following information will be included in the Proxy Statement and is incorporated herein by reference:

·         Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under “Common Stock Ownership of Certain Beneficial Owners and Management.”

 

Equity Compensation Plan Information  

The following table provides information as of April 30, 2012 with respect to the shares of our common stock that may be issued under existing equity compensation plans: 

 

_____________

(1)            Includes warrants issued pursuant to individual employment agreements with directors and executive officers.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and related transactions, and director independence is set forth under “Certain Relationships and Related Transactions” and “Corporate Governance — Board Independence” in the Proxy Statement, which information is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services.

Information regarding principal auditor fees and services is set forth under “Principal Accountant Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.

 

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)     The following documents are filed as part of this report:

 

(1)     Financial Statements and Report of Independent auditor’s report on Financial Statements

(2)     Exhibits (numbered in accordance with Item 601 of Regulation S-K)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

EXHIBIT 21.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT 31.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

I, Dickson V Lee, certify that:

1. I have reviewed this annual report on Form 10-K 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;

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.

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EXHIBIT 31.2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER

I, Ian G. Robinson, certify that:

1. I have reviewed this annual report on Form 10-K 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;

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.

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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 annual report on Form 10-K of L&L Energy, Inc. (the “Registrant”) for the year ended April 30, 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.

 

 

 

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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 annual report on Form 10-K of L&L Energy, Inc. (the “Registrant”) for the period ended April 30, 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

 

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

 

 

 

 

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