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| LLFH.OB > SEC Filings for LLFH.OB > Form 10-K on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Annual Report
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS DOCUMENT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION AND OTHER PARTS OF THIS DOCUMENT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION. WHEN USED IN THIS DISCUSSION, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED DUE TO A NUMBER OF FACTORS BEYOND OUR CONTROL. WE DO NOT UNDERTAKE TO PUBLICLY UPDATE OR REVISE ANY OF OUR FORWARD-LOOKING STATEMENTS EVEN IF EXPERIENCE OR FUTURE CHANGES SHOW THAT THE INDICATED RESULTS OR EVENTS WILL NOT BE REALIZED. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR CURRENT VIEWS OF POSSIBLE FUTURE EVENTS.
Plan of Operation
The Company is engaged in and currently generates revenue from its coal mining, coal consolidation, and wholesaling businesses in China. Despite China having substantial coal resources, due to a lack of organizational skills (among other factors) within the coal industry, China's mining companies cannot produce enough coal to meet China's coal demand. As the Chinese economy continues with GDP growth at an estimated 7%-8% in 2009 with emphasis on domestic consumption, the Company plans to continue leveraging on its fourteen (14) years of in-country experience, U.S. management skills, and U.S. accounting knowledge to become a leading coal energy company in the coal-rich Yunnan Province. The Company plans to expand its coal business by acquiring and expanding upon existing operations, following China's oligopoly policy that is aimed to eliminate small, inefficient coal mines and favor efficient operations. The Company recently entered into three (3) memorandums of understanding (MOUs) to acquire additional coal entities in the Yunnan Province in July 2009. Despite the unexpected Wall Street financial crisis occurring in Fall 2008, the Company was able to increase sales and the size of its operations during the year ended April 30, 2009. The Company plans to invite qualified U.S. mining executives and strategic partners to become a part of the L & L management team, to facilitate its vertical integration objective in the coal industry. When the Company reaches a certain size, it plans to leverage the vast U.S. coal (energy) resources to diversify risks and increase revenue.
During the year ended on April 30, 2009, the Company coal related sales increased of approximately 75% to $40,938,128 as compared to $23,381,508 for the same year in 2008. The sales reported on the Consolidated Statements of Income excludes sales generated by LEK sales because of our spin off of the LEK air compressor operation in January of 2009, and, as a result, the LEK sales are being treated as a discontinued operation and were not included, following the U.S. generally accepted accounting principles (U.S. GAAP). See Note 21 (Discontinued Operation) to our Financial Statements.. The increase in our sales for the year ended April 30, 2009 is mainly due to our acquisition of a controlling equity interest in the 2 Mines, which occurred May 2008. Our revenue of $40,938,128 only represents revenue generated from our coal businesses and does not include the LEK revenue of approx. $9 million, as U.S. GAAP requires LEK's sales to be excluded in the Consolidated Statement of Income. LEK's net income is also reported on a separate line in the Consolidated Statement of Income. See Note 21 (Discontinued Operation) to our Financial Statements, in regards to LEK revenue earned by L&L for the current and prior fiscal years ended April 30, 2009 and April 30, 2008.
As of April 30, 2009, the Company controlled 100% of KMC operations, and also controls 60% of the equity ownership of L&L Coal Partners, which, in turn, owns the 2 Mines. The Company's consolidated financial statements were prepared in accordance with the U.S. GAAP, with the Company's net profit reflecting the removal of profit attributable to the 40% minority interests belonging to the minority shareholders of L&L Coal Partners. Consequently, the Company's consolidated results of operations reflect a lower profit margin than the Company would have had if the Company controlled 100% of L&L Coal Partners equity ownership interests. To reflect its true results of operation and improve its profit, the Company intends to acquire the entire equity of L&L Coal Partners from the existing minority shareholders in the future, when it is feasible to do so.
Total Revenue:
As discussed above, the Company's revenue of $40,938,128 for the year ended April 30, 2009 excluded the revenue from LEK air compressor sales. See Note 1 and Note 21 to the Company's Financial Statements. When comparing the current year's revenue of $40,938,128 to $23,381,508 for the prior year ended April 30, 2008, the increase of $17,556,620 (or 75%) for the current year ended on April 30, 2009 was due to coal sales from the 2 Mines, in which the Company acquired a controlling equity interest in the current year and which contributed over $27 million of sales for the current year, offset by the KMC sales decrease in the year ended April 30, 2009. See Note 16, Geographic Information, below, for details.
Total Operating expenses:
Total operating expenses for the year ended April 30, 2009 were $3,996,795 as compared to $887,464 for the year ended April 30, 2008, an increase of $3,109,331 (or 350%). The increase in total operating expenses was mainly due to the newly acquired 2 Mines, which resulted in an increase of our operating expenses, as well as personal cost and selling, general and administrative expenses in the amount of $2,111,361.
Interest expenses:
Interest expenses for the year ended April 30, 2009 were $265,186 as compared to $24,935 for the year ended April 30, 2008, an increase of $240,251 (or 963%). The increase reflected an increase in interest expenses due to the newly acquired 2 Mines during the year ended April 30, 2009.
Minority Interest:
Minority interest for the year ended of April 30, 2009 was $7,315,330 compared to the minority interest for the same period ended April 30, 2008 of $119,879. The increase in minority interest of $7,195,451 (6,002%) was due to the 40% of minority interest related to the newly acquired 2 Mines.
Net Income:
Net income increased by $8,982,774 (or 921%) to $9,957,243 for the year ended April 30, 2009 as compared to net income of $974,469 for the same period of 2008. The increase in net income was a result of increased revenue generated from sales of coal from the newly acquired 2 Mines sales which occurred during the current year ended April 30, 2009.
The following factors affected the Company's liquidity status and capital resources:
From the operating activities of continued operations: Net cash flow provided by the Company's operating activities was $5,475,155 for the year ended April 30, 2009. For the same period ended April 30, 2008, net cash flow provided by operating activities was $1,350,310. The cash improvement incurred during the current year is due to combined effects of an increase of the current year operating profit of both 2 Mines and KMC operations by $10,026,883, increase of minority interest of $7,195,451, and increase of accounts payable of $7,504,690, increase in tax payable of $2,795,089, and increase of accrued liabilities and other liabilities of $1,335,207; and a decrease in accounts receivable of $16, 415,792, and decrease of prepaid and other assets of $12, 264,091 The Company's operating cash flow is highly dependent upon its ability to bill for the 2 Mine and KMC sales and collect these 2 Mines and KMC operations' billings in a timely manner.
Investing activities of continued operations: Net Cash used in investing activities was $16,270,068 during the year ended on April 30, 2009, while $809,649 was provided by investing activities in the same period in 2008. The increase of net cash used in investing activities of $17,079,717 (or 2,109%) was due to the acquisition of the 2 Mines during the current year, and the change in investments.
Financing activities of continued operations: Net cash provided by financing activities was $883,786 for the year ended April 30, 2009, while $720,009 was provided by financing activities for the same period in 2008. The increase of $163,777 (or 22%) net cash provided by financing activities was due to the proceeds from stock issuance.
The current assets of the Company's continued operations were $42,485,102 and $8,741,006 for the current year ended on April 30, 2009, and for the prior year ended on April 30, 2008, respectively. The increase in current assets of $33,744,096 (or 386%) was primarily due to the increases in accounts receivable of $16,403,857, prepayment and other receivable of $7,744,873, and cash and equivalent of $4,150,501, due to the new acquired 2 Mines.
Current liabilities for continued operations were $16,110,409 and $3,173,348 for the current year ended on April 30, 2009, and the prior year ended on April 30, 2008 respectively. The current liabilities increased $12,937,061 (approximately 407%) as compared to the same period in 2008, primarily due to the increase of accounts payable of $4,667,604, tax payable of $3,811,742, and accrued and other liabilities of $1,238,230 in the current year.
Off-Balance Sheet Arrangements:
The Company does not have any off-balance sheet financing arrangements.
The Company's "current ratio" was 2.64 as of April 30, 2009, as compared to 2.75 in the fiscal year ended on April 30, 2008. The "current ratio" is current assets divided by current liabilities. The ratio is used to determine the Company's ability to pay its short-term liabilities. As a general rule, the higher the current ratio, the more likely the Company will be able to pay its short-term liabilities.
Critical Accounting Policies and Estimates
The company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). In doing so, the company must make estimates and assumptions based on these principles. Many of the estimates and assumptions involved in the application of U.S. GAAP may have a material impact on the reported financial condition, operational performance, and the comparability of such reported information over different reporting periods. The nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters of the susceptibility of such matters to changes; the impact of estimates and assumptions on financial condition or operational performance may be material. There may be uncertainties attached to the estimates or assumptions, or may be difficult to measure or value.
As assumptions for specific sensitivities may change as a result of other possible outcomes, these estimates/assumptions may change in the future and may affect our reported amounts of assets, liabilities, revenue and expense, as well as disclosures of contingent assets and liabilities.
The Company's internal control over financial reporting includes those policies and procedures that:
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only with the appropriate authorization of our management and directors; and
(iii) provide reasonable assurance for the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
The following accounts my require estimates in computing the balances:
Revenue Recognition - The Company's revenue recognition policies are in compliance with Staff accounting bulletin when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Accounts Receivable - Majority of the Company's accounts receivable is due from its customers in China. The Company determines any required allowance, by considering a number of factors including length of time trade accounts receivable are past due and the Company's previous loss history. The Company writes off accounts receivable when they become uncollectible. When payments subsequently received on such receivables, they are credited to the allowance for doubtful accounts.
Inventories - Inventories comprise finished goods and work-in-progress and are stated at the lower of cost and net realizable value. Cost, calculated on the first-in, first-out basis, comprises materials, direct labor and an appropriate proportion of all production overhead expenditure. Net realizable value is determined on the basis of anticipated sales proceeds less estimated selling expenses
Property and Equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 10 years.
Not Recording Value of Coal Reserves - On a conservative basis, the Company does not record the value of the 2 Mines' coal reserves which the Company has an exclusive right to excavate for commercial purposes and on a long term basis, as evidenced by the exclusive government mining licenses for the 2 Mines.
Income Taxes - The Company provides for income taxes based on the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which, among other things, requires that recognition of deferred income taxes be measured by the provisions of enacted tax laws in effect at the date of financial statements. Its income from overseas controlled subsidiaries is not subject to the United States federal income taxes, as income not repatriated to the U.S. is not subject to the IRS code.
Financial Instruments - Financial instruments consist primarily of cash, accounts receivables, related party receivables, investments in equity securities and obligations under a bank credit facility. The carrying amounts of cash, accounts receivable and the credit facility approximate fair value due to the short maturity of those instruments. The carrying value of the related party receivables is estimated on the basis of arms' length transactions.
Use of Estimates - The preparation of financial statements, in conformity with generally accepted accounting principles, 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. Based on the past experience, these estimates are reasonably accurate, may have not been changed, and it is our best belief that these estimates are reasonably not likely to be changed in the future under the current circumstances. Actual results could differ from those estimates.
Stock-Based Compensation - In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." SFAS No. 123R establishes the accountings transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R (1) revises SFAS No. 123, "Accounting for Stock-Based Compensation," (2) supersedes Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and (3) establishes fair value as the measurement objective for share-based payment transactions. The Company adopted SFAS No. 123R effective May 1, 2005 in accordance with the standard's early adoption provisions.
Impairment of Long-lived Assets: The Company assesses long-lived assets for impairment in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that the Company assess the value of a long-lived asset whenever there is an indication that its carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value. For purposes of these tests, long-lived assets must be grouped with other assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. No long-lived assets were impaired during the years ended April 30, 2009 and 2008.
Recently Issued Accounting Standards - In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In addition, SFAS No. 123R requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements For public entities that file as a small business issuer, SFAS No. 123R is effective for the first interim or annual reporting period of the Company's first fiscal year beginning on or after December 15, 2005. The adoption of SFAS No. 123R is not expected to have a material effect on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153 "Exchange of Non-Monetary Assets
- an Amendment of APB Opinion No. 29" to amend APB No. 29 by eliminating the
exception for non-monetary exchanges of similar productive assets and replaces
it with general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange is defined to have commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No. 153 are
effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
material effect on the Company's financial position or results of operations.
In March 2005, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 107 to give guidance on the implementation of SFAS No. 123R. The Company will consider SAB No. 107 during implementation of SFAS No. 123R.
In August 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions, and it changes the requirements for accounting for and reporting them. Unless it is impractical, the statement requires retrospective application of the changes to prior periods' financial statements. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.
SFAS 155 - 'Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140'
This Statement, issued in February 2006, amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets."
This Statement:
a. Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation
b. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB Statement No. 133
d. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives
e. Amends FASB Statement No.140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
This Statement is effective for all financial instruments acquired or issued after the beginning of our first fiscal year that begins after September 15, 2006.
The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of our fiscal year, provided we have not yet issued financial statements, including financial statements for any interim period, for that fiscal year. Provisions of this Statement may be applied to instruments that we hold at the date of adoption on an instrument-by-instrument basis.
The Company is currently reviewing the effects of adoption of this statement but it is not expected to have a material impact on our financial statements.
SFAS 156 - 'Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140'
This Statement, issued in March 2006, amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities.
4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a service elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material impact on our financial statements.
Impairment of long-lived assets is assessed by the Company whenever there is an indication that the carrying amount of the asset may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows generated by those assets to the assets' net carrying value. The amount of impairment loss, if any, is measured as the difference between the net book value of the assets and the estimated fair value of the related assets.
Earning Per Common Share - The Company has adopted SFAS No. 128, Earnings per Share, which supersedes APB No. 15. Net profit per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share ("Basic EPS") is based upon the weighted average number of common shares outstanding. Diluted net profit per share ("Diluted EPS") is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants 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. Basic EPS differs from the primary EPS calculation in that basic EPS does not include any potentially dilutive securities. Diluted EPS must be disclosed regardless of the dilutive impact to basic EPS (see Note 20).
Contractual Obligations
For the year ended April 30, 2009, contractual obligations were as follows:
Rent expenses for the years ended April 30, 2009 and 2008 were in the amounts of approximately $48,735 per year. See Note 24 (Commitment and Contingencies) for additional details.
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