Accounting Irregularities at L&L Energy

Author has posted a follow up to this post here.

L&L Energy, Inc, (NASDAQ: LLEN) is in the business of coal mining, washing, coking, and wholesaling. Although its operations are conducted in China, the company is headquartered in Seattle, WA. As of 5/20/11, the company had a market cap of $200 MM.

The stock has been volatile, and although off significantly from its 2010 highs, the stock is still up over 200% from its 2009 debut.

The company claims an impressive growth record.

It also has questionable accounting, puzzling acquisitions, and checkered senior management.

Today in part 1 of this series I am going to discuss the accounting irregularities I have found.

Accounting Irregularities

L&L’s SEC filings are riddled with accounting red flags, which is even more alarming as the CEO is a CPA, and the filings claim their business strategy is to “assign our US trained management team, including CPAs from the Seattle office to monitor and control the coal operations.”

Below is the actual balance sheet as reported on the 2010 10-K. Notice how the title omits the year, and 2009 is formatted as 2,009. The latter happens to me all the time… when I am creating a spreadsheet from scratch and excel assumes 2009 is the number 2,009 instead of the year.

LLEN Balance Sheet Errors

Below is a portion of the statement of cash flows, as presented in the 2010 10-K:

LLEN Cash Flow Statement

Notice the “beginning of period” cash balances provided for 2009 and 2008, and compare them to the figures on the Balance Sheet as reported in the 2008 10-K:

LLEN Cash Balances

To be fair, L&L did restate their 2008 results, but there was no mention of the cash restatement. The full disclosure in the 2009 10-K is as follows:

Subsequent to the issuance of the Company’s financial statements for the year ended April 30, 2008, the management of the Company determined that certain transactions and presentation in the financial statements for the year ended April 30, 2008 had not been accounted for properly.

Management became aware that there was more VAT tax payable in addition to what was recorded and reflected in the financial statements as of April 30, 2008. VAT tax payable was understated by $590,817 as of April 30, 2008. In addition, Management also determined that certain items in balance sheets of the Company as on April 30, 2008 were not properly classified in accordance with the US GAAP, specifically the allowance for bad debts.

The Company has restated its financial statements by recording the accrual for VAT taxes and bad debt allowance expenses, and reclassification as of April 30, 2008.

The effect of the correction of presentation is as follows:

LLEN Restated Balance Sheet

LLEN Restated Income Statement

The above constitutes the entire disclosure in the 2009 10-K.

No mention that the CASH at year end 2008 and 2007 was restated 28% and 93% lower than originally reported, respectively.

No disclosure that 2008 REVENUES were revised down by 27%, or that 2008 NET INCOME was revised down by 30%.

Note also that the restated balance sheet lists previously stated “total current assets” at $25,393,791, while the actual balance sheet as reported in 2008 (shown below) lists total current assets as $20,725,183.

LLEN 2008 Current Assets

Also notice that the restated “statement of operations” incorrectly calls it a statement for the year ended April 30, 2009 instead of 2008.

But most troubling is the cash discrepancy.

The 2008 10-K provided the following cash detail:

LLEN 2008 Cash Balances

 

And the 2009 10-K provided the following (which are the restated balances):

LLEN 2008 Restated Cash Balances

Notice again the restatement of the 2008 cash balance, which was quietly ignored in the restatement disclosure. Note that the restatement even includes a restatement of the cash balance LLEN claims as “cash in banks.”

Also notice that the 2009 cash balance of over $5 MM includes a surge to $4.5 MM of “cash on hand,” as distinguished from “cash in banks.” I guess this means they have suitcases full of cash.

I hope the auditor brought a money counter…

Auditing

Speaking of the auditor, don’t count of them to verify the books.

The company is audited by Kabani & Company, Inc of Los Angeles. In a July 2010 inspection, the Public Company Accounting Oversight Board (PCAOB) reviewed Kabani’s audit of 8 different issuers. According to the report, the PCAOB “identified in 5 of the audits reviewed [sic], deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

These deficiencies included failures to properly address:

  • in 2 of the 8 audits, departures from GAAP related to the treatment of minority interest
  • the reporting of a disposal group held for sale and discontinued operations
  • in 2 of the 8 audits, revenue testing
  • the functional currency of a consolidated subsidiary
  • valuation of acquired patents
  • failure to test whether advance payments represented probable future economic benefits

Summary

Alarming as this is, it is far from the only reason to have concerns about L&L Energy. I’ll be back soon to discuss the other giant red flags at this company.

Author Disclosure: Author has plans to enter a short position and/or purchase put options in L&L Energy at the time of writing.

9 Responses to Accounting Irregularities at L&L Energy

  1. Mark Jensen May 31, 2011 at 7:32 am #

    Aaron –
    We have emailed you at your firm email address. Can you please provide contact information. Also if you are a partner of the firm how come you are not on the website? We will email the other partners of the firm and see if they agree with your actions as you are using the waterstone firm name to add credibility to your research.

    We welcome you to short the stock based off 2007 and 2008 word smithing and errors that have previously been corrected. We have spent months on site in 2009, 2010 and as recently as 2011 – we put a little more value in our work then in your “analysis” of 2007 and 2008.

  2. John Doe May 31, 2011 at 8:35 am #

    Have you even tried to contact the company to ask your question?

  3. Gary Eelman May 31, 2011 at 10:11 am #

    Although I don’t often read the ‘blogs et all’ on a company I follow, this/your review, was forwarded to me by a shareholder and I wanted to contact you.

    One point is obvious, I know the company and management much better then yourself and find it interesting that you will look primarily at years old data from 2007-2009 yet not interview management ‘real time’, considering we are now in May 2011.

    I would like to speak with you to discuss staffing additions since the period in question, which include multiple persons from large accounting firms and the companies plan to move to a larger accounting firm soon.

    Regards,

  4. Guest May 31, 2011 at 1:19 pm #

    My attorney will be commencing legal proceedings against you and Waterstone Retail Development.

  5. Parker Peter May 31, 2011 at 5:04 pm #

    Sir,

    While I find your reading interesting, I wonder outloud if a conversation with the company would have answered the questions you pose in your article? Would that have been the next logical step?

    Thank-you.

    Parker

  6. Buyersstrike! June 1, 2011 at 12:23 pm #

    Very nice piece. You might be interested to know that the April 2008 financial statements provide a snapshot of the company when the esteemed G. Michael Bennett of CAGC fame, was the CFO of LLEN!

    http://buyersstrike.wordpress.com/2011/02/17/or-should-the-award-go-to-gene-michael-bennett-cagc/

    GMB’s very presence at a company, for even an instant, is a huge red flag. One of many at the reverse-merger known as LLEN.

  7. K.Zimmerman June 1, 2011 at 3:59 pm #

    Your analysis reveals a somewhat sloppy financial reporting/editing/translation, but not fraud. According to Mr Eelman, the company is addressing the issues. Obviously, you did not contact management before publishing this article.
    Disclosure: neither long nor short.

  8. valueinvestor June 1, 2011 at 10:31 pm #

    Given all the frauds in China of late it is clear that US listed companies operating in China have a higher hurdle to get over in regards to their accounting standards and transparency. The fact that L&L has had trouble in the past/employs a relatively small accounting firm etc. provides immense cover for the author. If L&L wants to avoid articles like this they should run the company better.

    The argument that this is old data is irrelevant in my opinion as it establishes a history on the part of the company in operating in a manner that is not transparent nor reassuring to shareholders.

Trackbacks/Pingbacks

  1. Congratulations Echo He! « BuyersStrike! - June 6, 2011

    […] odd and vaguely disturbing comments to Aaron Stackhouse on Aaron’s Totally Invested blog, see here, and his defense of G. Michael Bennett company L&L Energy (LLEN), see here, would surely make […]

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