Our Investment in L&L Energy, Inc. (LLEN) and a public response to questions by ShareSleuth.com 2 comments
We recently received an email from Christopher Carey at ShareSleuth.com with a plethora of questions about our investment in one of our portfolio companies, L&L Energy, Inc. While the vast majority of the answers to Mr. Carey’s questions can be ascertained by reading further into the public filings, we felt it would greatly behoove the investment community to make our answers available to all to see. We have always been a great believer in transparency, and are happy to allow everyone to see our answers, rather than just ShareSleuth.com, who could potentially twist our factual answers in an attempt to manipulate the stock price through their typical negatively slanted articles.
We have been an investor in L&L Energy, Inc. (LLEN) for a number of years through a combination of primarily direct private equity investments in the company and warrant exercises with the company, which both coincide and are consistent with our filings and the company’s required filings. In advance of our first investment in 2008, and over this period of time, we had the opportunity to visit LLEN’s facilities in China numerous times, visited their facilities in Seattle, meet with management in both locations, meet with government officials in China, and meet with their competitors. Our investment philosophy is to be extremely selective in our investments, take a long-term approach, and be very careful with due diligence, and we believe, given the amount of time spent with the company, LLEN is no different. Principals of our firm have been owner/operators of coal mines in the U.S. and have also performed business due diligence on the production of LLEN and opportunity for expansion available to the company.
During this period of time since our investment in LLEN, we have bared witness to significant progression of the business, its status as a public company, the quality of its management team in the U.S. and its operational team in China. We believe this management team, lead by U.S. citizens of solid stature, are building a business that we believe is very solid and poised for growth. Unlike many growth companies we are pleased to see that L&L Energy has used its capital generated from free operating cash flow to expand its business in both China as well as in the U.S., which has served to minimize the dilution to shareholders and has helped to increase LLEN’s earnings per share in the past, present an hopefully future. The company has also expanded their financial team and operational team to meet standards that very few companies are able to achieve in such a short period of time, and we firmly believe that they, over the next three years, have the opportunity to build a significantly stronger and more valuable business for their shareholders.
We are very pleased with our position in the Company and believe that despite the current market environment for companies with operations in China, (including all the dishonest attempts at manipulation) that L&L should not be blindly grouped into this “fraud” category as they have many differentiating factors about them, some of which are:
- A management team comprised of U.S. citizens that operate under the U.S. legal system;
- A management team led by individual of high integrity (despite minor long-prior infractions that have been far overblown and exploited in the market);
- A board of directors of the highest quality and integrity; and
- A business strategy exploiting a market opportunity that is verifiable, solid and expected to grow dramatically over the next 15 years.
We recently have seen several attempts to illegally manipulate the shares of LLEN, for example through re-hashing already public and obvious facts (such as pointing out that the company has restated its financials in the past and had formatting errors) under the guise and implication that there is something larger to the story, when in fact there is not.
As mentioned above, ShareSleuth.com contacted us recently with questions around our involvement with LLEN. All our responses can be obtained in the public domain and we can only assume that ShareSleuth has ulterior motives to their questions (as even seen by the phrasing and slant of the questions). We figured we would respond publicly given they are inevitably going to try to spin certain items in a negative taint, as illustrated by their word choice and nature of their questions. Below you will see our responses.
1. How did T Squared come to receive so many warrants from L&L Energy? When did you enter into this agreement with the company, and what were the terms?
RESPONSE: Our investment philosophy always has been to invest in companies that have high potential for growth and management that conducts themselves and their business with the highest of integrity. Our investment structure is to fund the growth in stages: through a combination of upfront investment and tiered cash-pay warrants at successively higher prices to allow for further expansion capital at progressively less dilutive share prices. As a result our investment in L&L Energy has been over time (through this warrant structure), but initial investment was relatively small in August 2008.
2. Why was the agreement, or even a detailed description of it, never included in the company’s SEC filings? Were you aware that this information had been omitted? Did you ever push for its inclusion?
RESPONSE: Our investment has been described in the company’s 10K; we know that company sought proper counsel from its attorneys, advisors, and auditors regarding proper disclosure of the transaction based on a number of factors, including the amount of actual stock issued at time of investment.
3. Is L&L correct in saying that T Squared had exercised 4.25 million warrants? If not, what is the correct figure?
RESPONSE: We have exercised 100% of our warrants that we received from our investments in 2008 and 2009, all through a cash-pay exercise
4. If that 4.25 million figure is accurate, why does it not match up with the shareholdings that T Squared has reported in its 13-G filings? Were some warrants exercised cashlessly?
RESPONSE: All our warrants are cash-pay (ie, not cashless). All the warrants were not exercised at once, but rather over a period of time. We have also slowly dribbled shares into the market (following Rule 144) as needed to be in covenant with our agreements with the company (specifically the 4.99% ownership limitation or 9.99% ownership limitations, as the case may be).
5. T Squared said in its most recent 13G filing that the aggregate number of shares it beneficially owned was roughly 3.11 million. Is that figure still accurate?
RESPONSE: At the time of the filing, that number was correct. We do not comment on our positions to anyone outside of our investors but are in strict compliance with the SEC rules governing 13G filings.
6. Not counting warrants, how many shares has T Squared purchased from L&L through private placements?
RESPONSE: Not that we need to disclose this information further than what the Company has disclosed in its filings, but over the years 2008, 2009 and 2010 it was approximately 280,000 shares.
7. Has T Squared made any significant open-market purchases of L&L shares? Is so, approximately how much of T Squared’s holdings in the company does that represent?
RESPONSE: For the benefit of our investors we wish to not disclose our open market trading activities. However, the vast majority of our LLEN investment has come through either direct investment in the company or through the exercise of warrants, over a period of three years.
8. Has T Squared sold any of the shares it received throgh warrant exercises? Has it hedged against its long position in any way?
RESPONSE: Yes, over a period of three years we have sold shares in order to remain in covenant with our agreements with the company (specifically the 4.99% ownership limitation or 9.99% ownership limitation, as the case may be). As with all our investments, we are long-only and do not hedge.
9. L&L said in its annual filing for its 2010 fiscal year that it issued just under 3.5 million warrants on June 28, 2009, “pursuant to a stock purchase agreement.’’ Does this refer to the warrants issued to T Squared? If so, did T Squared receive all of these warrants, or were some issued to other parties that also had entered into stock purchase agreements?
RESPONSE: Yes this includes a majority of the warrants we received.
10. The same section of the above SEC filing referencing the roughly 3.5 million warrants said they had exercise prices ranging from $1 a share to $2.60 a share. The closing price of L&L’s stock on June 26, 2009 -- the trading day immediately prior to the issuance of those warrants – was $2.75. That suggests that all of the warrants were issued at a discount to the prevailing market price of the company’s stock. Were the warrants that L&L issued to T Squared issued at a price below the market? If so, what explanation can you offer for that?
RESPONSE: I believe you answered the question yourself. Given the very limited trading volume at the time, the uncertainty of the capital markets environment, and stage of the business at that time, we all believed it was fairly negotiated deal that provided the company the capital they needed to execute. We invested when nobody was willing to take risk. If you look at financings for small companies a majority of stock issuances, options, rights or warrants are issued at a discount to market. Ultimately this was an agreement that was negotiated and closed on that date and that happened to be the prevailing price. We believe the company used the proceeds in a very accretive manner, given, for example, the high growth in earnings per share of the company. We hope the company continues to do things in an accretive manner similar to what they have done in the past.
11. L&L’s 10-K for the 12 months that ended April 30, 2009 include the mention of 750,000 Class G warrants with a remaining life of 0.66 years and an exercise price of $1.80 a share. Did T Squared receive any of those warrants? If so, how many?
RESPONSE: Yes, 100%. They were tied to a small equity financing to help further expand the business in an accretive manner. The company’s advisors, auditors, and legal counsel opined on the required public disclosure.
12. In its annual filing for its 2010 fiscal year, L&L described a transaction in May 2009 in which received $100,000 in financing from an entity called Silver Rock II Ltd., which has invested alongside T Squared in at least two other deals. L&L said it issued Silver Rock II a convertible note, and that the debt was repaid with the issuance of stock in November 2009. Silver Rock received 160,000 shares, which translates to a conversion price of 65 cents a share. According to the filing, Silver Rock II also received warrants to buy 500,000 shares, exercisable at $1.40 a share. L&L’s SEC filings show that the company had more than $5 million in cash at April 30,2009 – less than two weeks before entering into the transaction with Silver Rock – and it does not appear that the company made any outlays that put a significant dent in its cash position in the months that followed. Was T Squared consulted about this financing? Did you offer an opinion on the necessity or terms?
RESPONSE: There would never be any requirement for the Company, other than its requirements of the SEC and US law, to consult with T Squared or any of its shareholders regarding an equity financing. If the company had accretive opportunities to invest the capital it was good for the company. We know Silver Rock and know that they are a very shareholder friendly investor. Given the benefit of knowing the current valuation and stock price, I would also say it was good investment for Silver Rock.
13. L&L’s closing share price on the day the deal with Silver Rock II was completed was $1.85 a share, meaning the conversion price of the note was less than 40 percent of the market price, and the exercise price of the warrants was less than 80 percent of the market price. As a major investor in L&L, what is your opinion on the fairness of that transaction to other shareholders?
RESPONSE: Our response in
#12 still applies. We like when our companies are able to grow their business in an accretive manner - we wish all companies would do this.
14. In its most recent proxy filing, L&L listed T Squared’s holdings as of July 31, 2010 at 2.97 million shares. It said in a footnote that the figure included exercisable warrants to buy 509,065 shares but excluded warrants to buy an additional 490,935 shares because of a prohibition that barred the exercise of warrants if it would result in T Squared or its affiliates beneficially owning more than 9.99 percent of the company’s outstanding common stock. Were those figures for T Squared’s share and warrant holdings correct?
RESPONSE: That is correct.
15. If the number of shares and warrants listed by L&L in the above-mentioned filing was correct, then T Squared’s total interest would have been roughly 3.47 million shares. Yet that figure is 750.000 shares lower than the total number of warrants that L&L said in the January 2011 S-1/A filing that T Squared had exercised. How would you explain that? Was T Squared granted additional warrants after July 2010, or did other previously granted warrants become exercisable?
RESPONSE: The filings are correct. We exercised additional warrants between July 31, 2010 and December 31, 2010, and sold some shares (pursuant to Rule 144) to stay in covenant of the agreements (as previously mentioned). All actions, of course, were in complete accordance with SEC regulations and laws.
16. Has L&L waived the prohibition on T Squared owning more than 9.99 percent of its outstanding shares? If would appear that such a move was necessary if T Squared has exercised warrants covering 4.25 million shares.
RESPONSE: No, the company has not waived that provision. See
#4. We are not an affiliate or insider of the business and have never been. Naturally, given the benefits of hindsight and the company’s development, it might have made sense to.
17. As you probably know from participating in company conference calls, some L&L investors have been pushing for the company to upgrade to one of the so-called “Big Four’’ auditors. Especially in light of the disclosure issues we’re exploring surrounding L&L’s share and warrant situation, what are your thoughts on the wisdom and necessity of doing so?
RESPONSE: This is clearly a loaded question as we don’t believe there to be any “disclosure issues”. All the answers we have provided would have been ascertained through the company filings or, if any further questions, though a conversation with management. Therefore we believe Share Sleuth is attempting to ask a slanted question, which frames their intent of these questions.
We agree that all companies (LLEN included) need to upgrade their service providers as they grow and expand to be more in-line with the company’s size and needs. We are confident that L&L will continue to upgrade all services providers as needed and available. Not everything can happen in the real world as fast as some would like, but we are fully confident that LLEN’s qualified board and management team will do what is in the best interest of its shareholders.
18. What else is important to mention regarding T Squared and its investment in L&L?
RESPONSE: We invest in companies that we believe possess and create future shareholder value for their shareholders. We have confidence that long term we will be rewarded for our investment and patience when investing in growth companies. Please see the introductory paragraphs for any further thoughts.
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