UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K

(Mark One)

x            Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended November 30, 2012.



o            Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.



Commission file number: 000-52409



CHINA ENERGY CORPORATION

(Exact name of registrant as specified
in its charter)



|NEVADA                                                                                              | 98-0522950                       
|--------------------------------------------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation or
organization)                                      | (IRS Employer Identification No.)
|                                                                                                    |                                  
|No. 57 Xinhua East Street
        Hohhot, Inner Mongolia, People’s
        Republic of China 010010
|(Address of principal executive offices) (Zip Code)                                                
|                                                                                                    |                                  
|+86-471-466-8870
        (Registrant’s telephone number, including
        area code)              
|                                                                                                   
|Securities registered under Section 12(b) of the Act:  None                                        
|                                                                                                    |                                  
|Securities registered pursuant to section 12(g) of the Act:                                        
|Common Stock, $0.001 par value Common                                                              
|(Title of class)                                                                                   



Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes o     No
x



Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     
No x



Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes x    No o



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes x   
No o



Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.  o



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):



|Large accelerated filer o | Accelerated filer o | Non-accelerated filer o                       | Smaller reporting company x
|------------------------- | ------------------- | --------------------------------------------- | ---------------------------
|                          |                     | (Do not check if a smaller reporting company) |                            



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.)  Yes o    
No x



The aggregate market value of the 18,070,893 shares of voting
and non-voting common equity stock held by non-affiliates of the registrant was approximately $5,059,850 as of May 31, 2012, the
last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the
registrant’s common stock on such date of $0.28 per share, as reported on the OTC Bulletin Board.



Indicate the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date: 45,060,000 as of March 14, 2013.



Documents incorporated by reference: None




















TABLE OF CONTENTS



|PART I  
|--------
|ITEM 1. 
|ITEM 1A.
|ITEM 1B.
|ITEM 2. 
|ITEM 3. 
|ITEM 4. 
|        
|PART II 
|ITEM 5. 
|ITEM 6. 
|ITEM 7. 
|ITEM 7A.
|ITEM 8. 
|ITEM 9. 
|ITEM 9A.
|ITEM 9B.
|        
|PART III
|ITEM 10.
|ITEM 11.
|ITEM 12.
|ITEM 13.
|ITEM 14.
|ITEM 15.



-2-







INTRODUCTORY NOTE



This report contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking
statements largely on our current expectations and projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including,
among other things:



| | · | general economic and business conditions, both nationally and in our markets,
| | - | -----------------------------------------------------------------------------



| | · | our expectations and estimates concerning future financial performance, financing plans and the impact of competition,
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | our ability to implement our growth strategy,
| | - | ---------------------------------------------



| | · | anticipated trends in our business,
| | - | -----------------------------------



| | · | advances in technologies, and
| | - | -----------------------------



| | · | other risks set forth herein.
| | - | -----------------------------



In addition, in this report, we use words such as “anticipates,”  ”believes,”
“plans,”  ”expects,” “future,”  ”intends,” and similar expressions
to identify forward-looking statements.



China Energy Corporation (including its subsidiaries, unless
the context indicates otherwise or otherwise stated, “CEC” or the “Company”) undertakes no obligation to
update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise after
the date of this annual report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed
in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking
statements.



-3-







|ITEM 1. | BUSINESS
|------- | --------



Company Overview



We are producer and processor of raw coal and provider of heating
and electricity services in the Inner Mongolia Autonomous Region of the PRC.  We also buy and sell coal as part of our
expanding proprietary coal trading activities.  Our coal is produced out of the Laiyegou coal mine in Dongsheng District
of Ordos City and is primarily used for domestic heating, electrical generation, and coking purposes for steel production. Our
heating and electricity provide services throughout Xuejiawan Town, the administrative center of Zhunger, one of the seven counties
of Ordos. For the fiscal year ended November 30, 2012, approximately 91.7% of our revenues ($225.6 million) were derived from our
coal segment and approximately 8.3% of our revenues ($20.5 million) were derived from our heating and electricity segment.



We are structured as a holding company that controls, through
contractual arrangements, two operating companies: Inner Mongolia Tehong Coal & Power Group Co., Ltd. (“Coal Group”)
which operates our coal segment and Inner Mongolia Zhunger Heat Power Co., Ltd. (“Heat Power,” and together  with
Coal Group, the “Operating Companies”), which operates our heating and electricity services segment.



Our Strengths and Strategy



| | · | Coal Consumption in China has been steadily rising; Inner Mongolia has the largest verified coal reserves in China
| | - | ------------------------------------------------------------------------------------------------------------------



According to the National Bureau of Statistics of China, consumption
of coal has been increasing in China, growing at a 3.8% annual growth rate from 3.52 billion tons in 2011 to 3.65 billion tons
in 2012.  According to the General Administration of Customs of China, demand for coal has been so strong in China that
China’s coal imports have increased from 40.4 and 130.0 million tons in 2008and 2009to 182.4 and 289 million tons in 2011
and 2012. According to Inner Mongolia Autonomous Region Department of Land and Resource, Inner Mongolia has the largest verified
coal reserves in China, amounting to 800 billion tons. According to Inner Mongolia Autonomous Region Bureau of Coal Industry, the
region produced 1.08 billion tons in 2012, representing a growth of 10% as compared to 2011.



The wide and varied uses of coal in China help us to maintain
a diverse customer base, including coal fired power plants, heating plants, steel manufacturing, and metallurgy of non-ferrous
metals. The government of Inner Mongolia is emphasizing six competitive industries: energy, chemicals, metallurgy, equipment manufacturing,
processing of farm (including dairy) produce and high technology products.  We believe that our coal production and trading
platforms are well-positioned in Inner Mongolia to capitalize on growth opportunities resulting from the region’s resources
and China’s demand for coal, while at the same time maintaining the diversification of risk associated with a steady, multi-faceted
customer base.



Because new and existing industrial facilities in Inner Mongolia
can be placed relatively close to sources of coal, we believe that Inner Mongolia’s coal resources are a significant driver
in the region for continued strong economic and industrial expansion. As with much of China, industrial expansion has led to a
boom in construction, including new commercial developments and large apartment complexes as wealth among the population increases
and more people move into cities. According to Bureau of Statistics of Inner Mongolia Autonomous Region, economic expansion within
Inner Mongolia continues to proceed at a rapid pace with the nominal GDP of the region growing to RMB1,598.8 billion (US$254 billion)
in 2012, a growth of 11.7% from 2011.  We believe that our expertise in the heat and power generation business will offer
us continued opportunities for expansion for our energy services platform in Ordos, as well as in other areas of the region.



| | Ÿ | Significant Reserves and High Coal Quality
| | - | ------------------------------------------



As of the end of fiscal 2012, recoverable
reserves at our Laiyegou coal mine were approximately 5.9 million metric tons, while the mine is capable of producing 800,000 metric
tons of coal per year.  The coal produced has a high level of heat and electricity generation power, with an energy producing
capability of 6,100 to 7,100 Kcal.  The coal produced at Laiyegou also contains low levels of potentially harmful particulate
matter, such as sulphur, ash and phosphorus, thereby meeting the stringent environmental requirements set by the PRC central government
and making the product more versatile because it can be used for more applications.



-4-







| | Ÿ | Superior, More Efficient and Safer Mining Technology
| | - | ----------------------------------------------------



Through infrastructure improvement program,
we made a significant capital investment of approximately $11 million in our Laiyegou mine to expand and improve our mining method
by installing equipment for longwall mining, a more efficient and safer mining method than room and pillar mining, the traditional
method of coal mining in China.  At Laiyegou, as a result of the installation of the longwall system, the coal recovery
rate has increased from 40% to as high as 80%.  The national average recovery rate in China is 30% (Source: 2007 China
Energy Development Report published by Chinese Academy of Social Sciences).



| | Ÿ | Sustainable Development Model for Coal and Energy Services
| | - | ----------------------------------------------------------



Coal Group has leased land surrounding the
Laiyegou coal mine and the mine itself for a period of approximately 50 years (through 2049), and holds mining rights for coal
extraction until the depletion of the mine.  New roads leading to our coal mine have been built in 2009, improving transportation.
In addition, a new railway from Inner Mongolia to the port of Caofeidian is under construction and is expected to be completed
in 2015.



With respect to Heat Power, we are the exclusive
operator and manager of the Zhunger Banner Heating Supply Station and the heating supply station of Ordos Xinsha Real Estate Development
Co., Ltd.  These stations supply heat in Xuejiawan within Zhunger County in Ordos.



| | Ÿ | Fragmented Coal Mining Industry Offers Acquisition Opportunities
| | - | ----------------------------------------------------------------



China’s coal industry traditionally
has been fragmented among large, state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines.  The
top four Chinese coal companies produce less than 20% of domestic coal, and the top eight produce less than 28%. (Source: China
National Coal Association).  In other coal producing countries, those percentages are much higher. For example, the eight
largest coal producers in U.S contributed to 58% of the country’s output. In India and Russia, the numbers are 77% and 95%,
respectively.  (Source: Energy Information Association).  Shenhua, the largest coal producer in the world,
accounted for less than 7% of China’s coal production in 2010 (Source: China National Coal Association).  Even
though smaller coal mines hold a sizeable portion of the market, many of them are inefficient, outdated and have poor safety records.  Chinese
government policy currently encourages industry consolidation and greater investment in new technologies to improve production
and safety.   In certain instances, the government also has required mines below a certain size threshold to close.  In
Inner Mongolia, for example, all coal mines with an annual production of less than 300,000 tons have been required to cease operations
since September 2005.  According to the Inner Mongolia Autonomous Region Bureau of Coal Industry, from 2000 to 2009,
the number of coal mines fell from 2,000 to 501 as a result of consolidation and shut-downs.  In Shanxi province, from
2008 to 2009, the number of coal mines fell from 2,600 to 1,053.  We believe that this consolidation trend will lead
to valuable, reasonably-priced acquisition opportunities for us in the marketplace.



| | Ÿ | Dynamic Coal Trading Platform
| | - | -----------------------------



Each year the PRC government regulates
the amount of coal we and other coal producers are able to sell by allocating space to coal mines in Inner Mongolia to ship their
coal on rail cars to the port in Qinhuangdao, where regional users come to buy coal on the open market.  In order to
capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal
from other coal producers in Inner Mongolia and then pay to have that coal delivered by rail from their mine to the Qinhuangdao
port.   Our official confirmed quota decreased from 760,000 tons in 2011 to 590,000 tons in 2012 from a local rail
road bureau. Occasionally the government grants a discretionary increase in the quota depending upon business conditions.  Parties
are awarded additional quotas based on their successful use of the quotas in the previous year.  Private parties also trade
unused quotas. We received a quota of 590,000 tons in 2013 from the local rail road bureau, the same as in 2012.  Our ability
to use any or our entire quota in 2013 will vary with market conditions and depends on our ability to source commercially acceptable
coal purchases and subsequent trades.



-5-







Corporate Structure



We control the Operating Companies through China Tehong Energy
Corporation (“TehongBVI”), our subsidiary organized in the British Virgin Islands, China Tehong Energy Corporation
HK Limited (“Tehong HK”), our subsidiary organized  in the Hong Kong Special Administrative Region, Beijing
Tehong Energy Technology Consulting Co., Ltd. (“Tehong Consulting”), our subsidiary organized in the PRC, and through
contractual arrangements commonly known as “VIE” or “variable interest entity” arrangements on the mainland
in the PRC.  Our current corporate structure is set forth below:







We own directly 100% of the equity interests of TehongBVI, which
owns directly 100% of the equity interests of Tehong HK, which owns directly 100% of the equity interests of Tehong Consulting.



Our businesses in China are operated through the contractual
arrangements among Tehong Consulting, the Operating Companies and the registered equity owners (the “Registered Owners”)
of the Operating Companies.  Pursuant to the contractual arrangements, Tehong Consulting exercises control over, and
derives substantially all of the economic benefits from, the Operating Companies, and holds contractual rights to acquire registered
ownership of the Operating Companies, to the extent possible under applicable PRC law.



Contractual Arrangements



Exclusive Business Cooperation Agreements.    Pursuant
to the exclusive business cooperation agreements executed by Tehong Consulting with each of the Operating Companies on November
30, 2010, Tehong Consulting provides technical and consulting services related to the business operations of each of the Operating
Companies. As consideration for such services, each of the Operating Companies has agreed to pay an annual service fee to Tehong
Consulting in an amount equal to 100% of the Operating Companies’ net income for such year.  The term of each of
these agreements is 10 years from the date thereof.  Tehong Consulting may terminate the agreements at any time upon
giving 30 days’ prior written notice to each of the Operating Companies.



-6-







Exclusive Option Agreements.    Tehong
Consulting entered into option agreements on November 30, 2010 with each of the Operating Companies, and each of the Registered
Owners of the Operating Companies, pursuant to which Tehong Consulting has an exclusive option to purchase, or to designate another
qualified person (s) to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity
interests in each of the Operating Companies owned by each of the Registered Owners of the Operating Companies.  To the
extent permitted by the PRC laws, the purchase price for the entire equity interest is RMB1.00 Yuan or the minimum amount required
by PRC law or government practice. Each of the exclusive option agreements has a 10 year term, with renewal for an additional 10
years at the option of Tehong Consulting.



Powers of Attorney.    Each of the
Registered Owners of the Operating Companies signed a power of attorney dated November 30, 2010 providing Tehong Consulting with
the power to act as his/her or its exclusive agent with respect to all matters related to his/her or its ownership interest in
each of the Operating Companies, including the right to attend shareholders’ meetings of each of the Operating Companies
and the right to exercise voting rights to which he/she or it is entitled under PRC law.



Equity Interest Pledge Agreements.    Pursuant
to equity interest pledge agreements dated November 30, 2010, each of the Registered Owners of the Operating Companies pledged
his/her or its equity interest in the Operating Companies to Tehong Consulting to secure obligations of each of the Operating Companies
under the exclusive business cooperation agreements as described above. In addition, the Registered Owners of the Operating Companies
agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in the Operating Companies that
would affect Tehong Consulting’s interests. The equity interest pledge agreements will expire when each of the Operating
Companies fully performs its obligations under the exclusive business cooperation agreements described above. All the equity interest
pledges became effective on November 30, 2010 upon their registration with the competent administration of industry and commerce.



In addition to the Contractual Arrangements, Coal Group is also
the direct registered owner of 51% of the equity interests of Heat Power.



Majority Shareholder.   Fortune Place
Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“Fortune Place”), owns 60%
of our common stock.  Pursuant to a Share Transfer Agreement dated November 30, 2010 (the “Share Transfer Agreement”)
between Wenxiang Ding, our President and Chief Executive Officer, and Ninghua Xu, the shareholder of Fortune Place, Wenxiang Ding
purchased 100% of the equity interests of Fortune Place at certain prices that vary depending upon whether we achieved certain
revenue targets.  See the section entitled “Transactions with Related Persons, Promoters and Certain Control Persons,”
below.  Ms. Xu has also entrusted control over the shares of our common stock held by Fortune Place to Wenxiang Ding
pursuant to an entrustment agreement dated November 30, 2010 between her and Wenxiang Ding. On August 8, 2012, Mr. Ding exercised
the option to purchase the last 1/3 of the outstanding shares of Fortune Place Holdings Limited pursuant to such Share Transfer
Agreement and thus replaced Ninghua Xu and became the sole shareholder of Fortune Place Holdings Limited.



Corporate History



We were incorporated in the State of Nevada on October 11, 2002
for the purpose of producing coal to meet the increasing demand in power and heating industries and also to provide heat and electricity
to networks in rural developments. We were considered a shell company until we entered into a share exchange agreement (the “Exchange
Agreement”) to acquire our Operating Companies on November 30, 2004 (the “2004 Share Exchange”).  Wenxiang
Ding, President and Chief Executive Officer of the Company, and his family owned substantially all of the shares of Coal
Group and held an indirect majority interest in Heat Power.  Although we were the legal survivor of this acquisition
and the registrant with the Securities and Exchange Commission, under accounting principles generally accepted in the United States,
the transaction was accounted for as a reverse merger, whereby Coal Group was considered our “acquirer” for financial
reporting purposes as its shareholders, through us, control a majority of the post transaction combined company.



-7-







On September 8, 2006, new regulations came into effect concerning
the merger and acquisition of domestic PRC companies by foreign investors (“New Regulations”) promulgated by the PRC’s
Ministry of Commerce and other regulatory departments.  We determined that, under the New Regulations, we were required
to undergo an application process to convert each of Coal Group and Heat Power from a domestic PRC company to a Foreign Invested
Enterprise (“FIE”) pursuant to which a FIE business license would be obtained. In doing so, the acquisition of both
the companies by us under the New Regulations would be classified as an “Equity Acquisition” pursuant to which the
Company, being the foreign investor, would obtain the equity interest of both Operating Companies with the acquisition price to
be determined by and based on an asset valuation of both companies prepared by a qualified PRC asset valuation company as approved
by the Ministry of Commerce. Pursuant to the New Regulations, the acquisition price should not be lower than the asset valuation.  Compliance
with the New Regulations was deemed to be required to complete the formal transfer of registered ownership of the Operating Companies
on the records of applicable PRC regulatory authorities to the name of China Energy Corporation from the former PRC shareholders
of the Operating Companies (the “PRC Shareholders”).



In connection with the FIE plan, on December 31, 2007, our former
direct, wholly owned subsidiary, Pacific Projects Inc., a Nevada corporation (“PPI”) entered into a trust agreement
with all the PRC Shareholders, pursuant to which all the PRC Shareholders agreed to hold their interests in Coal Group and Heat
Power (represented by their registered paid up capital contributions to date) in trust for PPI for an eight year term, extendable
for five additional years. Under the plan contemplated by the trust agreement, PPI planned to raise the monies required by the
New Regulations to convert each of Coal Group and Heat Power to a FIE eligible business pursuant to which a FIE business license
would be issued.   PPI intended to fund the acquisition price by funds raised pursuant to a share trust agreements dated
January 3, 2008 with Georgia Pacific Investments Inc. (“GPI”) and Axim Holdings Ltd. (“Axim”).



In connection with the foregoing, the four family members of
Mr. Wenxiang Ding (the “Ding Family”) entered into trust arrangements with GPI and Axim pursuant to which they deposited
30,589,107 shares of our common stock (the “Subject Shares”), into the GPI and Axim trusts.  According to
the terms of these trusts, GPI and Axim planned to sell the Subject Shares in order to fund the FIE plan; however, no Subject Shares
were in fact sold under these arrangements.



On November 30, 2010, we consummated a corporate restructuring
(the “Corporate Restructuring”).  The objective of the Corporate Restructuring was to (i) terminate the PPI
trust arrangement pursuant to which we controlled the Operating Companies prior to the Corporate Restructuring, and (ii) control
the Operating Companies on a going-forward basis through “variable interest entities” or VIEs, with the objective of
mitigating any PRC regulatory risks that could potentially arise from our pre-Restructuring foreign ownership structure.  Pursuant
to the Corporate Restructuring, we permitted formal registered ownership of Coal Group and Heat Power to be held by certain
individuals and corporations domiciled in, or citizens of, the PRC and we caused Tehong Consulting, our indirect, wholly-owned
PRC subsidiary to enter into the contractual arrangements with the Registered Owners of the Operating Companies pursuant to which
Tehong Consulting exercises control over the Operating Companies, is the beneficiary of the economics of ownership of the Operating
Companies, and holds contractual rights to acquire registered ownership of the Operating Companies (other than the equity interest
of Heat Power held by Coal Group), to the extent possible under applicable PRC law.



Concurrently with the Corporate Restructuring, the Ding Family
terminated the two trust arrangements with GPI and Axim (the “Trust Termination”).  In connection with the
termination of those trust arrangements, GPI and Axim transferred the Subject Shares to Fortune Place  (together with
the Trust Termination, the “Family Restructuring”).



In connection with the Corporate Restructuring and the Family
Restructuring, PPI was merged with and into China Energy Corporation in November 2010.



Operating Companies



Coal Group



Coal Group, organized in China on July 20, 2000, produces coal
from the Laiyegou coal mine located in Ordos City, Inner Mongolia, PRC.  Since the acquisition of Laiyegou in 1999, Coal
Group’s principal activities consist of the production of “powdered” coal and “lump” coal from raw
coal and the sale of products to heating and power industries, distributors and coking factories for steel production.  Coal
Group also buys, sells, and transports coal,  as part of its proprietary coal trading activities.



-8-







The following table reflects the tonnage of coal produced by
us and coal purchased from external sources by the Coal Group in the past 5 years:



| | Year |         |  | Tons Produced |  |           | Purchased from  Third Parties** | 
| | ---- | ------- |  | ------------- |  | --------- | ------------------------------- | 
| |      | 2008*   |  |               |  | 264,098   | *                               | 
| |      | 2009    |  |               |  | 453,430   |                                 | 
| |      | 2010    |  |               |  | 820,303   |                                 | 
| |      | 2011    |  |               |  | 1,080,833 |                                 | 
| |      | 2012*** |  |               |  | 905,928   | ***                             | 








*           Production
levels dropped in 2008 due to the closing of the mine for three months to complete our mine expansion and also due to an additional
shut down for two months mandated by the PRC government during the 2008 summer Olympics.



**           For
the year 2008 the amounts purchased from third parties represents coal purchased from a third party as part of our transportation
quota trading as described below.



***        Production
levels dropped in 2012 due to a decline in demand and increased competition from both domestic coal producers and importers of
coal.



Coal Trading



Each year the PRC government regulates the amount of coal we
and other coal producers are able to sell in the open market at the port in Qinhuangdao by allocating rail space to coal mines
in Inner Mongolia to ship their coal to the port.  In order to capitalize on excess quota for rail space that we may
have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then paid
to have that coal delivered by rail from the other producers’ mine to the Qinhuangdao port.   Prior to 2009,
our coal trading activities consisted of transportation quota trading in which we purchased coal from one or more third party coal
producers without sufficient rail space allocation to ship their coal, arranged and paid for the rail transportation of such coal,
and then sold the coal back to the original coal producer at the port for a fixed profit.  In 2009, we were able to expand
our coal trading business as a result of our receipt of increased quota from the local railway bureau.  Due to the increased
quota, we were able to buy excess coal from other coal producers in Inner Mongolia, transport the coal from the other companies’
mines to be sold in the open market at the Qinhuangdao port.  Parties are awarded additional quotas based on their successful
use of the quota in the previous year. Private parties also trade unused quotas.  Our official confirmed quota increased
from 500,000 tons in 2009 to 660,000 tons in 2010, and 760,000 tons in 2011, but decreased to 590,000 tons in 2012.  In
addition, occasionally the government grants a discretionary increase in the quota depending upon business conditions. We also
purchase quotas from other parties to meet our trading requirements.   Our ability to use any or our entire quota in
2013 will vary with market conditions and depends on our ability to source commercially acceptable coal purchases and subsequent
trades. Coal that we produce and sell directly to our customers is customarily transported at the buyer’s expense and therefore
does not count against our quota.



The following table reflects the tonnage of coal resold by the
coal trading segment in the past 5 years (the years prior to 2009 reflect the sales made from transportation quota trading):





|Year |  | Sales Volume |          
|---- |  | ------------ | ---------
|2008 |  |              | 51,313   
|2009 |  |              | 296,919  
|2010 |  |              | 702,876  
|2011 |  |              | 1,376,599
|2012 |  |              | 2,471,433





-9-







Coal Production



Laiyegou coal mine and related Mining Rights



Most land in China is owned by the state or collectives.  Land
use right acquisition in the PRC is primarily through 40, 50 or 70 year lease agreements. Coal Group acquired the rights to the
Laiyegou coal mine and the land surrounding the mine in September 1999 for a period of 50 years. Coal Group’s State Owned
Land Usage Certificate covers the land and allows the Company to use the storage facility, office and “dormitory” for
such period. In addition, Coal Group has all six required governmental permits necessary to mine the reserves in the Laiyegou coal
mine.



The regulatory body responsible for approving the rights to
the mine is the Provincial Bureau of National Land and Resource, a division of the Inner Mongolia provincial government. In December
2005, in accordance with governmental policy, Coal Group’s mining right was assessed to have a value of approximately $3.7
million. This mining right is regarded as an intangible asset currently being amortized using the units of production methodology.
As of November 30, 2008, we have fulfilled our obligations and have made full payment for the right.



The Laiyegou coal mine is capable of producing 800,000 metric
tons of coal per year after undergoing a two year infrastructure expansion and improvement program which was completed in 2008.  Our
coal license permits us to produce up to 600,000 metric tons of coal on an annual basis.  Notwithstanding such license,
the local government has, since 2009, allowed us to produce up to 800,000 metric tons of coal on an annual basis.  Full
production resumed in 2009 following the 2008 adjustments made to the facility.  The cost of the expansion and improvements
was approximately $10 million and was financed through shareholder and bank loans.  The expansion included the installation
of “longwall” mining equipment, the construction of wider laneways for access to the mine and from the mine to coal
field, construction of seven work stations and emergency exits and improvements to the draught system.



The raw coal produced is non caking coal which does not fuse
together or cake when heated but burns freely and is used mainly for heating and electric power generation.  It has a
high ash melting point with high thermal value used almost exclusively as fuel for steam-electric power.  It has low
sulphur, low ash and low phosphorus content with heating capability 6,100-7,100 K.cal. With such minimal harmful chemical content,
it meets the stringent environmental standards set by the central PRC government.



As is shown below, the location intersects with national highways
making access to the mine central to regional areas through No. 210 National Highway. The distance from Laiyegou to each of the
following locations is as follows:



| | · | Dongsheng – 70km                     
| | - | -------------------------------------
| | · | Baotou City – 170km                  
| | · | Xuejiawan Town – 145km               
| | · | Yulin City, Shaanxi Province – 215 km
| | · | Wuhai City – 370km                   



-10-











In addition, the BaoShen Railway crosses Dongsheng where Dongsheng
Coalfield and Shenfu Coalfield are located. These mines are 35 km away from a railway collection station and therefore a convenient
location where Coal Group is able to purchase raw materials and transport coal to customers.



Access to our property is monitored strictly by mine managers.
Prior to entering the premises, mine managers assess condition and safety reports from the previous day and determine location
and safety parameters for employees. Condition and safety reports are prepared on a daily basis and serve as a basis for permitting
entry to the mine and locations where employees are assigned to work.



Reserves Survey



The following definitions apply to our mining operations as
described in Industry Guide 7 of the Securities Act Industry Guides:





-11-









| | · | Reserve. That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · | Proven (Measured) Reserves.Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Probable (Indicated) Reserves.Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measure) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A survey of the district of Hongjingta was performed by No.
153 Exploration Team of Inner Mongolia Coalfield Geological Bureau in 2005, covering an area of 7,800 hectares (approximately 19,266
acres) (the “2005 Survey”). The Laiyegou coal mine included in the Hongjingta district is located at the Dongsheng
Coalfield near Dongsheng City, southeast of Bianjia road, the administrative center of the prefectural region of Ordos in Inner
Mongolia.  The Laiyegou mine represents approximately 3% of the total survey area (or 230.3 hectares; approximately 569
acres).



The 2005 Survey established that the Laiyegou mine has recoverable
reserves (see definition below) of 11.34 million metric tons as of 2005.  Recoverable reserves represent coal that is,
or can be, extracted from a coal bed during mining.  The recoverable reserves in the mine decreased gradually from
2005 to approximately 5.9 million metric tons as of the end of 2012:



|                   |  |                               |            |  | Recoverable Reserves2 | 
|------------------ |  | ----------------------------- | ---------- |  | --------------------- | 
|                   |  | Total Mine Lifetime Reserves1 |            |  | 2005                  | 
|                   |  |                               |            |  |                       | 
|Proven reserves3   |  |                               | 21,160,000 |  |                       | 
|                   |  |                               |            |  |                       | 
|Probable reserves3 |  |                               | 4,930,000  |  |                       | 
|                   |  |                               |            |  |                       | 
|Total reserves     |  |                               | 26,090,000 |  |                       | 










(1) “Total Mine Lifetime Reserves” represent the
aggregate amount of reserves at the mine site at the initiation of mining activity at the site prior to 2005, as set forth by the
2005 Survey. At the time of the 2005 Survey, 6,590,000 metric tons included in the 21,160,000 Total Mine Life Proven Reserves
had already been extracted from the mine.



(2) “Recoverable Reserves” are that portion of proven
and probable reserves adjusted downward for (i) reliability of recovery of probable reserves, (ii) non-minable reserves constituting
permanent protective coal pillars (located at the rim of the mine and separating the coal mine from others) and laneway protective
coal pillars (located within the coal mine and used for coal transportation and for the entry and exit of miners), and (iii) recovery
rate (actual production volume, taking into account reserves lost in the ordinary course of the mining process).  As
a result of the installation of the longwall mining equipment, our current recovery rate is approximately 80%.



(3) Proven and probable reserve figures for Total Mine Lifetime
Reserves and 2005 recoverable reserves are derived from the 2005 Survey. The portions of the total recoverable reserves for 2012
shown as proven and probable represent management’s good faith estimates based on the actual extractions from the mine since
2005 and assuming the same proportion in 2012 between proven and probable reserves as reflected in the 2005 Survey results.



-12-







The risks associated with proven reserves are less than of probable
reserves due to the assumption of continuity of coal layers between sample points for probable reserves.



All reported reserves will be mined out within the period of
the existing 50 year permit.



Coal Specifications



Coal produced from the Laiyegou coal mine does not undergo
any washing or any other preparation prior to the sale to customers as its raw form is satisfactory in meeting the needs and requirements
of such customers. As a result, the Laiyegou coal mine does not have wash plant facilities nor it is necessary to account for dilution
of its products. Below is a summary of the specifications of the coal we produce.



|          |  | Proximate Analysis                                  |  |                                                        |  |                                                                            
|--------- |  | --------------------------------------------------- |  | ------------------------------------------------------ |  | ---------------------------------------------------------------------------
|Coal Bed  |  | Moisture in
        Air of Dry Coal
        (Mad %) |  | Ash Content in
        Fully Dried Coal
        (Ad %) |  | Volatile Matter
        Content in Dry –
        Free Coal (Vdaf
        %)
|4-1       |  | 8.88-9.90                                           |  | 11.92-13.54                                            |  | 36.87-38.41                                                                
|4-2 Upper |  | 8.48-9.80                                           |  | 6.56-8.50                                              |  | 36.92-37.68                                                                
|4-2       |  | 8.30-8.62                                           |  | 7.78-12.94                                             |  | 36.69-37.05                                                                
|6-2       |  | 7.34-8.36                                           |  | 4.78-15.28                                             |  | 33.80-36.47                                                                



Mining Method



Coal Group currently uses the “longwall” production
of mining whereby large rectangular blocks of coal are defined during the development stage of the mine and are then extracted
in a single continuous operation. Each defined block of coal, known as a panel, is created by driving a set of headings from main
or trunk roadways in the mine, some distance into the panel.  The panel or block of coal up to 1,000 feet wide and two
or three miles long is completely extracted. The working area is protected by movable hydraulic powered roof supports called
shields. The longwall employs a shearer, with two rotating cutting drums, which is dragged mechanically back and forth across the
coal face. The coal which is cut falls onto a heavy chain conveyor which delivers it to a belt conveyor system for removal
out of the mine. The longwall shields advance with the machine as mining proceeds and provide not only high levels of production
but also increased miner safety.



Longwall mining systems employ sensors to detect how much coal
remains in the seam being mined as well as robotic controls to enhance efficiency. Microprocessors record seam data as a longwall
miner makes its initial pass, subsequent passes then follow the previous route resulting in high efficiencies.



With the use of a longwall system, the amount of coal which
is recovered in a given area increases from 40% to as much as 80%. The carefully planned longwall process has a positive influence
on minimizing the effects of subsidence. Gradual or occasionally abrupt collapse of rock layers sometimes occurs between an underground
mine and the surface. With the longwall operation, such ground movements are completed in a shorter period of time and the settling
process occurs in a more uniform and predictable manner helping to minimize surface impacts. Our change to a longwall system has
led to a significant increase in our efficiency and production.



Coal Products



Coal Group’s main products are “powdered”
coal and “lump” coal, representing approximately 70% and 30%, respectively, of Coal Group’s production volume.



| | · | Lump Coal.  We sell lump coal to local customers that resell to distributors or end-users for heating purposes.
| | - | ---------------------------------------------------------------------------------------------------------------



-13-







| | · | Powdered Coal.  We sell powdered coal principally to distributors that resell the products to power stations for electricity and heat generation purposes.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



Screening, Crushing and Loading Facilities



We use an automatic conveyor system to filter and divide the
coal into powdered and lump coal.  We do not have crushing facilities.  We also do not have washing facilities
and therefore do not incur losses of product from this process.  Our loading facilities consist of equipment leased from
a contractor.  We require the use of four loaders with a capacity of 1.5 tons each.



Transportation Infrastructure



Customers who purchase coal from the Laiyegou coal mine provide
their own transportation of goods from production to their desired location.  Coal sold as part of our trading activities,
which is subject to the quota requirements, is transported at our expense using third party contractors.



Resources and Utilities



The source of water for the mine is Zhunger Keyuan Water Supply
Co., Ltd., a public utility company owned by the government.  Electric power is sourced by Agricultural Supply Bureau
and the Ordos Power Industry Bureau, both utilities owned by the government.



Pricing



The following are annual production volumes and weighted average
prices per ton received in the past five years:



|Year |  | Tons Produced |           |    | Weighted Average Price |  
|---- |  | ------------- | --------- | -- | ---------------------- | -
|     |  |               |           |    |                        |  
|2008 |  |               | 264,098   | *  |                        | $
|     |  |               |           |    |                        |  
|2009 |  |               | 453,430   |    |                        | $
|     |  |               |           |    |                        |  
|2010 |  |               | 820,303   |    |                        | $
|     |  |               |           |    |                        |  
|2011 |  |               | 1,080,833 |    |                        | $
|     |  |               |           |    |                        |  
|2012 |  |               | 905,928   | ** |                        | $





*            Production
levels dropped in 2008 as a result of the mine being shut down for three months due to expansion efforts and for an additional
two months due to a PRC government mandated shut down during the 2008 summer Olympics.

**          Production
levels dropped in 2012 as a result of our decline in coal sales, which was in turn caused by increased competition from both
domestic coal producers and coal importers combined with decreased demand of coal for electricity generation.



Competition



The overall demand for coal in China has been flat in 2012
compared with 2011 primarily due to the electricity consumption and generation in China have been flat. Electricity
generation consumes the most coal in China. The increase in the amount of coal imported from overseas producers has also
helped to turn the Chinese coal market to a buyer’s market in 2012. According to the data from General Administration
of Customs of the PRC, China imported approximately 290 million tons of coal from overseas, a 29.8% increase over a year ago.
Our competition  is not only from imported coal. There are approximately 30,000 coal mining companies throughout China. There
is no sign that the growth of production capacity of coal has been slowing down from previous years. Our direct competitors
currently include Inner Mongolia Yitai Group Co., Ltd., Inner Mongolia Manshi Coal Group Co., Ltd., Inner Mongolia Yidong
Coal Group Co., Ltd. and Inner Mongolia Huineng Coal & Power Group Co., Ltd.



-14-







There are also concerns that the PRC government is stepping
up its push for using clean and other alternative energies instead of burning coal due to environmental concerns. Even though coal
reserves in China are abundant and less expensive than other energy sources, the pressure for switching to other forms of resources
to generate energy is higher than ever before due to the more frequent occurrences of high profile environmental incidents throughout
China.



Customers



The following table shows each of our customers who account
for greater than 5% of sales of Coal Group:



|                                                           |  | 2012     |       
|---------------------------------------------------------- |  | -------- | ------
|Name                                                       |  | ($ ‘000) |       
|Zhonghai Jiaye (Tianjin) International Trading Limited     |  |          | 36,508
|Shanxi Hengyuan Coal and Electricity Group Company Limited |  |          | 20,635



Regulatory Compliance



In order to maintain our business license, we are required to
pass random periodic safety inspections which check for gas and water seepage, ventilation, communication methods between in and
outside of mine, any breach of environmental laws and certifications of employees who work in the mine. Mine managers and staff
must be trained and have mine management qualification certificates obtained through the Coal Safety Production Bureau. To date,
we have not breached any of the rules and regulations which would render our mine unsafe. Mine managers on site perform daily safety
inspections.



Future Demand for Coal



The growth for demand for coal in China has been slowing down.
In 2012, the coal market has turned into a buyer’s market in China. With many uncertainties in the global and Chinese economies,
we do not anticipate any change to the flat coal market in China soon. The increasing volume in imported coal and the PRC government’s
policy of stepping up efforts to curtail pollution create downward pressure on the Chinese coal market.



Diesel and natural gas are alternative competing energy sources
to coal. Currently they are not widely used as most energy generation plants and users are only equipped to receive coal as a raw
material. The use of diesel is also not cost effective as it is four times higher in price when compared to coal products; however,
diesel’s energy rate is approximately 10,000Kcal/kg, which is higher than coal. The supply of natural gas in China is anticipated
to grow thanks to discovery of new reverses and more importantly the fast development of exploration technologies in the industry.



Heat Power



Heat Power offers two distinct services to its Xuejiawan customers.  Heat
Power supplies (i) heating and (ii) electricity to end users.  In 2003, the Zhunger local government transferred the
operation and management of the Zhunger Banner Heating Supply Station and the heating supply station of Ordos Xinsha Real Estate
Development Co., Ltd. to Heat Power.  The transfer station supplies heat to the entire Xuejiawan district. In order to
have sufficient heating supply, in 2004 Heat Power began construction on a thermoelectric plant which was completed in September
2006. Heat Power also buys steam from third parties to ensure a stable and reliable heat supply as we increased our service coverage
area.  In conjunction with the thermoelectric plant, Heat Power also owns and operates 32 heat transfer stations.  The
transfer stations are located on property owned by the residential community.



-15-







Heat Power is a regulated utility company and meets the current
regulatory requirements applicable to such Company. Heat Power supplies electricity to its customers through a government
controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd. (“Electric Power Group”) in accordance with
the Purchase and Sale of Electricity Contract dated September 15, 2009.  Electric Power Group is also subject to regulated
utility company rules and regulations consisting of compliance with safety and environmental standards. In addition, the prices
that we charge are set by the local government. The government reviews the price of heating and electricity from time to time
as market conditions change. We purchase coal from suppliers to fuel our boilers at market prices; therefore, we bear the risk
that market prices for raw materials exceed the regulated prices paid by end users.  We expect to receive governmental
subsidies from time to time to offset this risk.



Heat Power was founded in September 2003 in Xuejiawan, the administrative
center of Zhunger, one of the seven counties of Ordos, Inner Mongolia.  The prefectural administrative region of Ordos
occupies 86,752 square KMs, and is one of 12 prefectural administrative regions of Inner Mongolia.  Ordos is comprised
of one district, Dongsheng, the administrative center of the region, and seven counties, including Zhunger.  Through
Heat Power, we provide heating and electricity requirements to all of Xuejiawan.  Since its inception, Heat Power operated
an existing heat power plant in Xuejiawan as part of its agreement with the Zhunger County government to phase out the existing
heating plant for development of a more efficient and effective plant with heating and electricity generation capabilities
pursuant to the terms of its license granted by the government.



In the Xuejiawan area, few families own a home boiler. Accordingly,
Heat Power supplies heat through its closed pipeline system to residents that do not have a home heating system. Water is first
heated in our thermoelectric plant using coal burning boilers and then piped directly to private dwellings, businesses and municipal
facilities.  The water is then piped back to the thermoelectric plant with the process repeating again. The following
diagram illustrates the heat supply pipeline system:



Process of generating electricity during the non-heating
season







-16-







Process of generating electricity and
supplying heat within heating season







Heat Power obtains its supply of powdered coal required to generate
heat production principally from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”), an unrelated third party vendor.
It also obtains coal from various other coal mines in the area. We do not supply Heat Power with coal for fuel because our thermoelectric
plant operates efficiently on coal of a lesser quality, and at a lower cost, than the coal we produce.



As part of our agreement with the Zhunger government, we constructed
a new, more efficient thermoelectric plant, which became operational in September 2006, to serve Xuejiawan.  Our plant
generates centralized heat and electricity supply of 10,400,000 MJ and 144 MW, respectively.  Heat Power supplies heat
by sending steam through its closed pipeline system to customers who do not otherwise have a home or commercial heating system.  The
plant also uses powdered coal as 95% of its raw material, which is regarded as environmentally friendly coal.



Heat Supply License



On July 29, 2003, Heat Power entered into an agreement with
the Zhunger County government, pursuant to which the operation and management of the Zhunger Banner Heating Supply Station and
the heating supply station of Ordos Xinsha Real Estate Development Co., Ltd. was transferred to Heat Power.  The agreement
enables Heat Power to provide centralized heating service to the entire Xuejiawan area, including the Donghua and Yinze residential
areas. The agreement is for an undetermined period of time provided that Heat Power maintains production capabilities and predetermined
prices set by the Zhunger County government.  Heating requirements are supplied throughout the Xuejiawan area through
underground pipelines. New pipelines are added as additional residential areas are added in the service coverage area.



Heating Pricing Regulated by local Pricing Bureau



The price charged to supply heating to end-users is regulated
and controlled by  the Inner Mongolia Zhunger  Pricing Bureau, which means that the supplier of such heat may
not be able to recoup increases in the cost of raw materials or expenses for an undetermined period of time until application to
increase prices is approved. For example, the pricing structure for the Xuejiawan area as of  February 2013 is approximately
as follows per square meter per month (excluding any applicable government subsidies):



Residential: $0.40

Non-residential: $0.67



These prices have been effective since the second quarter of
2009.



-17-







Thermoelectric Plant



Heat Power completed construction of a thermoelectric plant
in December 2005 which was put into operation effective September 2006. The thermoelectric plant allows for a centralized heat
and electricity supply in the area with 10,400,000 MJ and 144 MW, respectively, generated per year.



Heat Power has two distinct operations: it supplies steam heating
directly to end users throughout the Xuejiawan district in Ordos City, Inner Mongolia, and it also supplies electricity through
Electric Power Group.  Heat Power has also constructed additional heat transfer stations, totaling 32 as of November
30, 2012, to improve the efficiencies and reliability of the thermoelectric plant. Heat Power also buys steam from third parties
to ensure a stable and reliable heat supply as we increased our service coverage area.



Heat Power requires approximately 170,000 metric tons of powdered
coal per year to sustain current operations.



Supply of Powdered Coal



The powdered coal required to generate heating is supplied principally
by Guanbanwusu and has a heating capability of 4,600-4,900 Kcal and is low sulphur, low phosphorus, medium ash, with a high ash
melting point, which satisfies the government Environmental Protection Standard and is regarded as environmentally friendly coal.
The coal must have a minimum heating capacity of 4,600 Kcal or reduction of price per ton is implemented. Guanbanwusu is responsible
for transporting coal to the plants.



Heat Power also obtains its supply of powdered coal from other
suppliers, with which it has no formal agreement. Suppliers are hesitant to enter into agreements for a fixed price as a result
of the price of coal generally increasing.



Competition



Heat Power does not have competition as it holds an exclusive
right to supply heating and electricity to serviced areas. We were granted the right to supply the heating and electricity for
an undetermined period of time given that production capabilities and prices are maintained. As long as heat is supplied to
the specified area, we expect that the agreement will not be terminated.



Tax Exemption



The Ministry of Finance and National Tax Administration Bureau
has granted Value Added Tax (“VAT”) exemptions for residential heat supply industries operating in certain Chinese
provinces where VAT applicable on revenue will not be required to be remitted or withheld, respectively. The exemption is effective
through December 31, 2015. Therefore, we will continue to enjoy the tax exemption benefit through December 31, 2015.



Employees



As of November 30, 2012, Heat Power employs approximately 213
full-time employees and 94 part-time employees, while Coal Group employs 91full-time employees and subcontracts approximately 162
laborers from a third-party provider. All of the Company’s employees are employed by the Company’s subsidiaries.  Management
believes that relations with its employees are good.



Research and Development



We do not devote significant resources to research and development.



Intellectual Property



We do not have any trademarks on our trade name or logo or patents
on our products or production processes.



-18-







Insurance



The Coal Group maintains insurance to cover work-related injuries
to our employees as per government regulations and damage to our vehicles in amounts customary to the industry.   Heat
Power maintains insurance to cover damage to our vehicles and machinery in amounts customary to the industry. We maintained director
and officer’s liability insurance until the end of July 2012.



Legal Proceedings



We are not currently a party to any material legal proceedings.
However, we may become subject to legal proceedings, investigations and claims incidental to the conduct of our business from time
to time.



Government Regulation



Coal Group



Coal Law



On August 29, 1996, the PRC government promulgated the
People’s Republic of China Coal Law (the “Coal Law”), which became effective on December 1, 1996. The Coal Law
sets forth requirements for all coal mines, including state-owned mines and privately owned mines, mainly providing for resource
exploitation planning, approval of new mines, the issuance of mining and safety production permits, implementation of safety standards,
processing of coal, business management, protection of mine areas from destructive exploitation, and safety protection for miners
and administrative supervision.



According to the Coal Law, entities seeking to establish mining
enterprises must apply to the relevant government office and obtain all necessary approvals. Upon obtaining such approvals, the
entities concerned will be granted a Exploitation License from the Ministry of Land and Resources. Thereafter, an entity must obtain
a coal production permit and a coal operation permit and other related quality permits in order to commence coal production and
sell coal products in the PRC. The PRC government is in the process of amending the Coal Law, in response to concerns over the
lack of a well-coordinated development plan for mining, which contributed to a significant amount of waste of valuable coal resources.
The lack of effective penalty provisions or the lenient enforcement of existing provisions in the Coal Law has been cited
as another important reason for the current rulemaking effort.



Mining activities in the PRC are also subject to the People’s
Republic of China Mineral Resources Law (“Mineral Resources Law”), promulgated by the PRC Government on March 19,
1986 and amended on August 29, 1996. The Mineral Resources Law regulates matters relating to the planning or engaging in the
exploration, exploitation and mining of mineral resources. According the Mineral Resources Law all mineral resources, including
coal, are owned by the state. Except under limited circumstances, any enterprise planning to engage in the exploration, exploitation
and mining of mineral resources must first apply for and obtain exploration rights and mining rights before commencing the relevant
activities. The Mineral Resources Law prohibits the transfer of exploration and exploitation rights in general unless the transfer
falls within certain specified circumstances.



We are principally subject to governmental supervision and regulation
by the following agencies of the PRC government:



|· | the State Council, which is the highest level of the executive branch, is responsible for the examination and approval of major investment projects specified in the 2004 Catalogue of Investment Projects released by the PRC Government;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | the National Development and Reform Commission (“NDRC”) and its local counterparts, which formulate and implement major policies concerning China’s economic and social development, examine and approve investment projects exceeding certain capital expenditure amounts or in specified industry sectors, including examination and approval of foreign investment projects, oversees reform of state-owned enterprises and formulates industrial policies and investment guidelines for the natural resource industries, such as coal production. In addition, the NDRC administers coal export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the price-linking mechanism between the prices of coal and power;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-19-







|· | the Ministry of Land and Resources (“MLR”) and its local counterparts, which have the authority to grant land use licenses and mining right permits, approves transfer and lease of mining rights, and reviews mining rights premium and reserve valuation;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | the State Administration of Coal Mine Safety (“SACMS”), which is responsible for the implementation and supervision of the relevant safety laws and regulations applicable to coal mines and coal mining operations;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | the State Environmental Protection Administration of China (“SEPA”) and its local counterparts, which supervise and control environmental protection and monitors China’s environmental system at the national level; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | the Ministry of Construction (“MOC”) and its local counterparts, which are responsible for the management of survey and design of construction projects, including but not limited to the survey and design of coal mines.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following is a brief summary of the principal laws, regulations,
policies and administrative directives to which we are subject.



Pricing



Until 2002, the production and pricing of coal was largely subject
to close control and supervision by the PRC government, which centrally manages the production and pricing of coal. Previously,
the price of coal was determined based on a government-devised pricing guideline which set out the suggested prices for coal. However,
to effectuate the transformation from planned economy to market economy practices, from January 1, 2002 China eliminated the state
guidance price for coal and allowed prices for all types of coal to be determined in accordance with market demand. However, as
the PRC government continues to maintain control over the national railway system, which is the primary means for coal transportation
in China, the PRC government still may exert influence over the pricing of coal through its allocation of railway transportation
capacity for coal.  The local government increased our annual quota from 760,000 metric tons in 2011, and770,000 metric
tons in 2012.



In addition, under the Price Law of the PRC, promulgated December 29,
1997, effective May 1, 1998, in the event of an actual increase or potential increase in the prices of important products such
as coal, the State Council and the provincial governments, autonomous regions and municipalities directly under the PRC Government
may adopt intervention measures, such as restricting the ratio of price differentials or of profits, and imposing price limits,
etc. In August 2004, the NDRC issued a notice setting forth temporary measures to be imposed on thermal coal prices for certain
regions. In December 2004, the NDRC issued a notice setting forth guidelines for pricing of thermal coal sales in 2005. Under these
guidelines, the coal suppliers and their customers may not negotiate for the sale of coal at prices exceeding the government suggested
price range.



Similar to coal pricing, the production and supply of coal,
which is dictated by the PRC government’s annual state coal allocation plan, has been gradually liberalized and largely subject
to market forces. Major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate
and discuss the price and quantity of coal to be supplied and purchased for the coming year through the signing of letters of intent
and short and long-term supply contracts.



On December 18, 2006, the National Development and Reform
Committee issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (FaGai Yun
Xing (2006) (No. 2867). According to the notice, in 2007, policies were required to be implemented to encourage the reform
of the market system for determining coal prices by allowing parties to determine prices through discussions in accordance with
market demand, and to encourage price determination based on quality. On December 27, 2006, the relevant government departments
and units, such as the National Development and Reform Committee for railway operations, and the Transportation Department, convened
a 2007 coal industry video and telephone conference. This symbolized the end of the Annual National Coal Trading Convention that
has been in place for over 50 years. Under the State’s macroeconomic controls, the new mechanism for enterprises to
freely determine prices through negotiations was put in place.



-20-







On December 6, 2010, the NDRC issued a notice asking certain
coal mining companies in China to maintain 2010 prices as a means to ensure sufficient supplies of electricity during 2011.  We
do not believe that the requirement will have a material impact on us, as spot coal market sellers such as China Energy were not
included in the directive.



Fees and Taxes



There are various taxes and fees that are imposed upon coal
producers in the Inner Mongolia Autonomous Region, as well as statutory reserves which coal producers required to set aside.
Such taxes, fees and statutory reserves as applicable to Laiyegou at November 30, 2012 are as follows:



|Item                                             |  | Base                                    |  | Rate           
|------------------------------------------------ |  | --------------------------------------- |  | ---------------
|Enterprise income tax                            |  | Taxable income                          |  | 25%            
|VAT                                              |  | Value addition to a material or product |  | 17%            
|Urban maintenance and construction tax           |  | Amount of turnover tax                  |  | 5%             
|Education surcharge                              |  | Amount of turnover tax                  |  | 3%             
|Local education surcharge                        |  | Amount of turnover tax                  |  | 2%             
|Water conservancy construction fund              |  | Proceeds from the sale of coal          |  | 0.1%           
|Resource tax                                     |  | Volume of sale of coal produced         |  | RMB3.2 per ton 
|Compensation for the depletion of coal resources |  | Volume of sale of coal produced         |  | RMB2.86 per ton
|Adjustment fund                                  |  | Volume of raw coal produced             |  | RMB15 per ton  
|Mine maintenance fund                            |  | Volume of raw coal produced             |  | RMB7 per ton   
|Safety fund                                      |  | Volume of raw coal produced             |  | RMB3 per ton   



Under the Mineral Resources Law, if mining results in damage
to arable land, grasslands or forest areas, the mining enterprise must take effective measures to return the land to an arable
state, plant trees or grass or take other specific measures. The Mineral Resources Law and other applicable laws and regulations
also state that anyone who causes others to suffer loss in terms of production or in terms of living standards is held liable for
the loss under the law and is required to compensate the persons affected and to remedy the situation. In addition, the Mineral
Resources Law also provides for (i) regulations concerning labor safety and hygiene and (ii) environmental protection.



All coal producers are subject to PRC environmental protection
laws and regulations which currently impose fees for the discharge of waste substances, require the payment of fines for serious
pollution and provide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring
it to cease or cure operations causing environmental damage. All environmental protection facilities must be inspected and
certified by relevant governmental authorities as being in compliance with PRC environmental protection laws and regulations.



Domestic Trading of Coal



Pursuant to the Measures for the Regulation of Coal Operations
promulgated by the NDRC on December 27, 2004, the state implemented a system to examine coal operation qualifications in respect
of coal operations, including the wholesale and retail of raw coal and processed coal products, and the processing and distribution
of coal for civilian use. Before an enterprise can engage in coal operations, it must obtain a coal operation qualification certificate.
A coal production enterprise that deals in coal products which it did not itself produce and process is required to obtain coal
operation qualifications. The enterprise is also prohibited from dealing in coal products produced and/or processed by a coal mine
enterprise that does not have a coal production permit. An enterprise is also prohibited from selling coal products to a coal operation
enterprise that does not have coal operation qualifications.  Our Coal Operation License expires on April 30, 2013 but
it is expected that it will be renewed in time.



-21-







Although the PRC government indirectly influences coal prices
through its broad regulation of electricity prices and control over the allocation of national railway capacity, domestic coal
prices have mainly been market-driven since 2002, when the PRC government eliminated the price control measures for coal used in
electric power generation. Prior to 2006, however, the PRC government continued to implement temporary measures to prevent and
control any unusual fluctuations in thermal coal prices. This, among other reasons, has caused thermal coal contract prices for
major users to be generally lower than spot market prices during this period. On January 1, 2006, the NDRC announced the elimination
of such temporary intervention practices on thermal coal price, thus completely removing control over thermal coal prices, including
contract prices for major users.



Environmental Protection Laws and Regulations



Pursuant to the Environmental Protection Law, SEPA is empowered
to formulate national environmental quality and discharge standards and to monitor China’s environmental system at the national
level for the purpose of preventing and eliminating environmental pollution and damage to ecosystems. Environmental protection
bureaus at the county level and above are responsible for environmental protection within their areas of jurisdiction.



Environmental regulations require companies to file an environmental
impact report with the relevant environmental authority for approval before undertaking the construction of a new production facility
or any major expansion or renovation of an existing production facility. New facilities built pursuant to this approval are not
permitted to operate until the relevant environmental authority has performed an inspection and has found that the facilities are
in compliance with environmental standards.



Mining operations, including both open pit mines and underground
mines, may result in disturbances of surface and underground land and cause water pollution, landslides and other types of environmental
damage. To manage the adverse effects that the coal industry has on the environment, China promulgated a series of laws and regulations.
Through these laws and regulations, China established national and local environmental protection legal frameworks and issued standards
applicable to emission controls, discharges of wastes and pollutants to the environment, generation, handling, storage, transportation,
treatment and disposal of waste materials by production facilities, land rehabilitation and reforestation.



The Environmental Protection Law, promulgated by the National
People’s Congress December 26, 1989, is the cardinal law for environmental protection in China. The law establishes
the basic principle for coordinated advancement of economic growth, social progress and environmental protection, and defines the
rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the
national standards and enterprises are required to comply with the stricter of the two sets of standards. The Environmental Protection
Law requires any entity operating a facility that produces pollutants or other hazards to incorporate environmental protection
measures into its operations and to establish an environmental protection responsibility system, which must adopt effective measures
to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials.



New construction, expansion or reconstruction projects and other
installations that directly or indirectly discharge pollutants to the environment shall be subject to relevant state regulations
governing environmental protection for such projects. Entities undertaking such projects must submit a pollutant discharge declaration
statement detailing the amount, type, location and method of treatment to the competent authorities for examination. The authorities
will allow the construction project operator to release a certain amount of pollutants into the environment and will issue a pollutant
discharge license for that amount of discharge subject to the payment of discharge fees. The release of pollutants is subject
to monitoring by the competent environmental protection authorities. If an entity discharges more than the amount permitted by
the pollutant discharge license, the local environmental protection bureau can fine the entity up to several times the discharge
fees payable by the offending entity for its allowable discharge, require the offending entity to close its operations, or take
other measures to remedy the problem.



In the environmental impact statement of a construction project,
the project operator shall make an assessment regarding the pollution and environmental hazards the project is likely to produce
and its impact on the ecosystem, and measures for their prevention and control. The operator shall submit the statement according
to the specified procedure to the competent environmental protection authority for examination and approval. The building of sewage
outlets within any water conservancy projects, such as canals, irrigation channels and reservoirs, shall be subject to the consent
of the competent authority in charge of water conservancy projects.



-22-







The facilities for the prevention and control of pollution must
be designed, constructed and put into use or operation simultaneously with the main part of a construction project. Such facilities
must be inspected by the competent environmental protection authority. If they do not conform to the specified requirements, the
operator shall not be permitted to put the new facility into operation or use.



The rehabilitation of mining sites is another important issue
the PRC government has sought to address. Under the Law of Land Administration of the People’s Republic of China, promulgated
on June 25, 1986, and amended on August 28, 2004, and the Land Rehabilitation Regulations, issued by the State Council
in 1988 and effective January 1, 1989, coal producers must undertake measures to restore the mining site to its original state
within a prescribed time frame if mining activities result in damage to arable land, grassland or forest. The rehabilitated land
must meet rehabilitation standards, as required by law from time to time, and may only be subsequently used upon examination and
approval by the land authorities. A coal producers’ failure to comply with this requirement or its failure to return the
mining site to its original state will result in the imposition of fines, rehabilitation fees and/or rejection of applications
for land use rights by the local bureau of land and resources.



Emissions of waste water by coal mines and coking plants are
regulated by the Law on Prevention and Control of Water Pollution of the PRC, promulgated by the National People’s Congress
in 1984 and effective as amended in 1996, and the Administrative Regulations on the Levy and Use of Discharge Fees, issued by the
State Council on January 2, 2003 and effective July 1, 2003. Any new construction projects, such as coal mines and coking
plants, must submit an environmental impact statement, which shall include an assessment on the water pollution hazards the project
is likely to produce and its impact on the ecosystem. The environment impact statement must also contain measures to prevent and
control the water pollution hazards. Every new production facility must be equipped with waste water processing facilities which
must be put in use together with the production facilities. Construction projects that discharge pollutants into water shall pay
a pollutant discharge fee in accordance with state regulations.



Violators of the Environmental Protection Law and various environmental
regulations may be subject to warnings, payment of damages and fines. Any entity undertaking construction work or manufacturing
activities before the pollution and waste control and processing facilities are inspected and approved by the environmental protection
department may be ordered to suspend production or operations and may be fined. The violators of relevant environment protection
laws and regulations may be exposed to criminal liability if violations resulted in severe loss of property, personal injuries
or death.



In addition to the PRC environmental laws and regulations, China
is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1998 Kyoto Protocol, which propose emission
targets to reduce greenhouse gas emissions. The Kyoto Protocol came into force on February 16, 2005. At present, the Kyoto
Protocol has not set any specific emission targets for certain countries, including China.



Mineral Resources Laws and Regulations



Exploration, exploitation and mining operations must comply
with the relevant provisions of the Mineral Resources Law and other relevant regulations, and are under the supervision of the
Ministry of Land and Resources. Exploration and exploitation of mineral resources are also subject to examination and approval
by the Ministry of Land and Resources and relevant local authorities. Upon approval, a mining permit is issued by the relevant
administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdiction.
The holders of mining rights are required to file Annual Reports with the relevant administrative authorities.



The Mineral Resources Law governs, among other things, the assignment
of mining rights. If the entity holding the mining rights is to be changed due to a sale of enterprise assets or other circumstances
that may cause a change in the property rights to the assets of the enterprise, the enterprise may assign its mining rights, subject
to approval according to the Coal Law, the Mineral Resources Law and other laws and regulations.



-23-







The PRC government permits mine operators of collectively owned
mines to exploit mineral resources in designated areas and individuals to mine scattered mineral resources. Such mine operators
and individuals are subject to government regulation. Mining activities by individuals are restricted. Individuals are not permitted
to exploit mineral reserves allocated for exploitation by a mining enterprise or company or protected reserves. Indiscriminate
mining that damages mineral resources is prohibited.



It is unlawful for an entity or individual to conduct mining
operations in areas designated for other legal mining operators. A mining operator whose exploitation causes harm to others in
terms of production or in terms of living standards is liable for compensation and is required to take necessary remedial measures.
When a mine is closed, a mine closure report and information concerning the mining facilities, hidden dangers, remediation and
environmental protection must be submitted for examination and approval in accordance with the relevant law.



Mineral products illegally extracted and incomes derived from
such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious circumstances, criminal
liability.



Mining safety



On June 7, 2005, the State Council promulgated Several
Opinions on Promoting the Healthy Development of the Coal Industry (the “Opinions”), announcing the PRC Government’s
policies with respect to the development and restructuring of the coal industry. The Opinions resonated with the NDRC’s announcement
on the revision of the Coal Law and reiterated the PRC Government’s policies with respect to the administration of coal reserves,
enhancement of coal mine safety, encouragement of industry consolidation among coal producers, acceleration of the construction
of large coal production bases, improvement of mining techniques and equipment for coal production and the organization and regulation
of small coal mines.



The Measures for Implementing Work Safety Permits in Coal
Mine Enterprises



The State Administration of Work Safety and the SACMS issued
“The Measures for Implementing Work Safety Permits in Coal Mine Enterprises,” which came into effect on May 17,
2004. Pursuant to this document, a coal mine enterprise without a work safety permit may not engage in coal production activities.
Coal mining enterprises and their mines that do not satisfy the safety conditions set forth in this document, or those that violate
the provisions of this document, will be punished accordingly.  Our Safety Production License has been renewed and will
be valid through January 19, 2014.



Special Regulations by the State Council on Preventing Work
Safety Related Accidents in Coal Mines and Five Sets of Supplemental Rules and Regulations



The Special Regulations by the State Council on Preventing Work
Safety Related Accidents in Coal Mines were promulgated and entered into effect on September 3, 2005. This regulation specifies
that coal mine enterprises are responsible for preventing coal mine work safety-related accidents. If a coal mine has not
obtained, in accordance with the law, a mining right permit, work safety permit, coal production permit or business license and
if the mine manager has not obtained, in accordance with the law, a mine manager qualification certificate and a mine manager safety
qualification certificate, the coal mine may not engage in production. We have obtained our Exploration Rights License, Coal Production
License and Safety Production License which expire on October 17, 2015, May 31, 2024 and January 19, 2014, respectively.  A
coal mine should have adequate safety equipment, facilities and resources and should have in place measures to guard against the
occurrence of work safety related accidents, as well as a sound contingency plan to deal with emergencies. Coal mining enterprises
should establish a sound system for the detection, elimination, treatment and reporting of latent work safety-related dangers.
If a major latent work safety-related danger as specified exists in a coal mine, the enterprise should immediately suspend production
and eliminate the latent danger. Coal mining enterprises should provide their personnel working underground and their special operation
personnel with safety education and training in accordance with relevant state regulations. The person in charge of a coal mine
and the production and operation management personnel should go into mines and act as foremen on a rotating basis in accordance
with state regulations, while a file recording their entry into the mine should be maintained. In addition, the State Administration
of Work Safety issued five sets of supplemental measures:



-24-







(i)           The
Measures for Determining Major Latent Work Safety Related Dangers in Coal Mines (for Trial Implementation) stipulates the specific
criteria for determining major latent work safety-related dangers. It further defines each of the latent safety related dangers
specified in the Special Regulations of the State Council on Preventing Work Safety Related Accidents in Coal Mines, and lists
more than 60 major latent safety related dangers.



(ii)           The
Implementing Measures for the Detection and Elimination of Latent Dangers in Coal Mines and the Rectification and Closure of Such
Mines (for Trial Implementation) specifies that coal mining enterprises are responsible for the detection and elimination of latent
work safety-related dangers and that the main persons in charge of coal mining enterprises are fully responsible for the detection,
elimination and treatment of latent work safety-related dangers in their enterprises.



(iii)          The
Measures for the Supervision and Inspection of Coal Mine Safety Training (for Trial Implementation) specifies that coal mining
enterprises must arrange and provide safety education and training to all of their mining personnel in accordance with relevant
regulations; select and send their principal persons in charge, work safety management personnel and special operation personnel
to qualified coal mine safety training institutions for training in a timely manner; and obtain the corresponding qualification
certificates.



(iv)          The
Guiding Opinions on Persons in Charge of Coal Mines and Production and Operation Management Personnel Going into Mines as Foremen
requires the various types of coal mines to arrange for their persons in charge and production and operation management personnel
to go into the mines to act as foremen and to ensure that each shift has at least one such person on site directing the operations.
Coal mining enterprises are required to establish such procedures, clarify foremen’s duties and responsibilities and strictly
implement internal management and performance appraisal.



(v)          The
Measures for Rewarding the Reporting of Major Latent Work Safety Related Dangers in, and Violations of the Law by, Coal Mines (for
Trial Implementation) specifies that all units or individuals have the right to report major latent work safety-related dangers
in, and violations of law by, coal mines.



Circular on the Opinions of Further Strengthening the Works
of Shutting Down Coal Mines by State Administration of Work Safety and other relevant governmental authorities



The Circular on the Opinions of Further Strengthening the Works
of Shutting Down Coal Mines went into effect on September 28, 2006. This regulation set forth 16 standards by which small
coal mines would be shut down, including but not limited to the annual coal production capacity of 30,000 tons or less, as
well as those coal mines without proper licenses or permits. The objective of the regulation is to reduce both the high rate
of accidents and pollution in the PRC coal mining industry.  The regulation specifies that the Central Government
will support the development of large coal mining operations, defined as having annual coal production capacity of 300,000 tons
or more in Shanxi Province, Shaanxi Province, and Inner Mongolia, of 150,000 tons or more in Gansu Province, Qinghai Province and
six other regions, and of 90,000 tons or more in Southwest and Midwest region. The work of shutting down small coal mines is a
joint effort by several governmental authorities, includingNational Development and Reform Commission and the Ministry
of Land and Resources.



National Development and Reform Committee issued Guidance
Relating to Better Performance Coal Production Transportation Works



On December 14, 2009, the National Development and Reform Committee
issued Guidance Relating to Better Performance Coal Production Transportation Works (FaGai Yun Xing (2009) No. 3178). Pursuant
to which the railway bureau is encouraged to link up and cooperate with the coal mine operating entity for the railway capacity
and transportation relationship.  It is also required that the railway capacity shall be increased across the provinces
and coals from Shan Xi, Inner Mongolia and Shan‘xi are encouraged to be transported out of the provinces or autonomous regions.  In
addition, newly increased railway capacity shall be strengthened for the transportation of coals used for electricity and the supplying
and demanding enterprises shall enter into contracts based on the allocation intention framework of the railway capacities.  The
Guidance further promotes the price formation mechanism and encourages a marketing price mechanism and certain conditional competition,
which requires that the coal price shall be determined by quality and shall reflect marketing demand and supply.



-25-







Heat Power



Except for the construction and operation of small power grids
in Xizang, Xinjiang, and Hainan provinces, foreign investment in the construction and operation of any coal-fired condensing thermal
power station with single-machine capacity of no more than 300 MW or any thermal coal-fired condensing steam extraction of dual-use
cogeneration power plant with single machine capacity of no more than 100 MW is currently prohibited in the PRC. As a Nevada corporation,
we do not qualify to conduct such business under PRC regulations.  As a result, we operate the Heat Power business through
contractual arrangements.



Heating Supply Industry



Our heating supply business is mainly regulated by the Administrative
Measures for the Concession Operation of the Municipal Public Utilities effective in 2002 and latest amended in 2009 (the “Concession
Operation Measures”), the Circular on the Opinion of Promoting the Reform and Development of Municipal Public Utilities in
Our Region issued by the People’s Government of Inner Mongolia Autonomous Region in 2001 and the Administrative Measures
of Ordos for the Concession Operation of the Municipal Public Utilities promulgated on April 13, 2005.  Pursuant to these
regulations, companies which supply heat are deemed to be municipal public utilities and any entity proposing to engage in such
business need to enter into a concession agreement with the competent government authority. The heating supply operator must comply
with certain requirements set out by the government utility regulator and shall neither discharge the franchising agreement nor
shall cease the operation without prior approval of the competent government authority and/or the municipal or county government.  However,
the concession agreement and the corresponding concession right might be terminated by the competent government authority in light
of certain violation of such heating supply operator, including the transfer or lease of concession right without approval of government
authority, or the cease of operation without prior approval which causes materially adverse effect to the public interest and safety.



Electric Power Industry



Pursuant to the Electric Power Law effective on April 1, 1996
and amended in 2009, the Electric Power Business License Administration Regulation promulgated in 2005 (the “License Regulation”),
any entity engaging in the electric power industry, including electricity generation, electricity transportation, electricity supply,
shall apply and obtain a Electricity Power Business License. If any entity engages in two or more kinds of electricity power business,
then it shall apply for a separate Electricity Power Business License for each kind of electricity power business. Furthermore,
any entity who applies for the applicable Electricity Power Business License for electricity generation shall obtain the approvals
on the construction of the electricity generation plants, the operation capacity of electricity generation and complying with the
laws and regulations on environment made by related governmental authorities.  Our Electricity Power Business License
for electricity generation expires on December 30, 2028.  With respect to the price of electricity power which is mainly
regulated by the Electricity Power Law, the Reforming Plan of the Price of Electricity Power approved by the State Council in July
2003, the On-grid Power Price Administration Provisional Measures promulgated by the NDRC on March 28, 2005, the price of electricity
power shall be determined on the basis of the principles of reasonable compensation of cost and reasonable determination of profits,
legal incorporation of taxes, fairly shared burdens and promotion of electricity power construction, In addition, the price of
electricity power shall be proposed by electricity generation enterprise and electricity grid operation enterprise and approved
by the competent governmental authorities.



Reports to Security Holders



We file annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read
and copy these materials at the Securities and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street,
NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information
on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information regarding us and other companies that file materials
with the SEC electronically.



-26-







|ITEM 1A. | RISK FACTORS
|-------- | ------------



We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information under this item.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information under this item.



|ITEM 2. | PROPERTIES
|------- | ----------



Coal Group Principal Business Office



Our principal business office is located on the third floor
of No.57, Xinhua East Street, Hohhot City, Inner Mongolia, where our sales, legal, administration, accounting, finance and management
departments are located. The third floor is approximately 5,050 square feet.



The office building was purchased by our President, Wenxiang
Ding, in July 1998 on behalf of Coal Group and he subsequently transferred title to Coal Group once it obtained a business license.
The full purchase price has been paid and no amounts remain outstanding for this property. The building has three floors and is
14,674 square feet.



We occupy the third floor and the first and second floors are
occupied by XianGrong Commercial & Trade Co., Ltd. where they operate a restaurant. Coal Group provides this space in exchange
for property maintenance and catering services. Catering services and various banquets held throughout the year for promotion purposes
cost approximately $25,000.  We only pay for catering expenses exceeding $25,000.



The land on which the office building is situated is leased
from the PRC government or previous holders of the lease for a period of 50 years, expiring in 2048. A lease from the PRC government
grants use of land by obtaining a State Owned Land Usage Certificate and a lease obtained through previous lease holders grants
use of land by obtaining a Collective Land Usage Certificate. Land in China cannot be owned and the only form of ownership is by
way of lease for a period of up to 50 years. Coal Group is required to use  the land as specified in its business license.
Any changes in use must be approved by the PRC government.



In August 2005, Coal Group entered into an agreement with Deheng
Assets Management Co., Ltd. (“Deheng Assets”) to purchase two office buildings located at Building 3 in Hongqi Street
in Hohhot City (Property Certificate No. 2003001090) and Building 8 in Hongqi Street in Hohhot City (Property Certificate No. 2003002197).
 Coal Group holds this property as an investment and leases the units for commercial use.



Laiyegou Coal Mine



Please refer to the disclosure under Item 1 above with regard
to the location and description of the Laiyegou coal mine.



Heat Power’s office and Real Property



Heat Power’s Administration, Finance, and Heat Station
and Project Management Departments are located in newly constructed thermoelectric plant in Yingze Residential Area, Xuejiawan
Town, Zhunger County. The office space is approximately 24,272 square feet.



The 3.96 hectares land where the office building and our
thermoelectric plant are located is leased from the PRC government for a period of 50 years, expiring in 2053. Land in the PRC
usually cannot be directly owned by a private party and the only form of ownership is by way of lease for a period of up to 70
years. In order to maintain the lease, we must use the land as specified in the business license.



-27-







Please refer to the disclosure under Item 1 above for information
regarding the production, reserves, locations, development and the nature of our interests in such properties.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



Neither we nor any of our subsidiaries, nor any of our property
or the property of our subsidiaries, is currently subject to any material pending legal proceedings, other than ordinary routine
litigation incidental to our business. To the best of our knowledge, there are also not currently any material proceedings to which
any of our directors, officers or affiliates or five percent shareholders, or any associate of any such person, is a party adverse
to us or any of our subsidiaries or has a material interest adverse to us or our subsidiaries.



|ITEM 4. | MINE SAFETY DISCLOSURES
|------- | -----------------------



Not applicable.



-28-







PART II



|ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | -------------------------------------------------------------------------------------------------------------



Market Information



Our common stock is traded on the over-the-counter market and
quoted through the OTCBB under the symbol “CHGY.” The following table sets forth the high and low bid prices for our
common stock as reported by the OTCBB in U.S. dollars for the periods listed below.  These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.





|                                                     |  | High ($) |      |  | Low ($) | 
|---------------------------------------------------- |  | -------- | ---- |  | ------- | 
|Fiscal Year Ended November 30, 2011                  |  |          |      |  |         | 
|First Quarter (December 1, 2010–February 28, 2011)   |  |          | 1.91 |  |         | 
|Second Quarter (March 1, 2011–May 31, 2011)          |  |          | 1.32 |  |         | 
|Third Quarter (June 1, 2011–August 31, 2011)         |  |          | 0.55 |  |         | 
|Fourth Quarter (September 1, 2011–November 30, 2011) |  |          | 0.46 |  |         | 
|                                                     |  |          |      |  |         | 
|Fiscal Year Ended November 30, 2012                  |  |          |      |  |         | 
|First Quarter (December 1, 2011–February 29, 2012)   |  |          | 0.36 |  |         | 
|Second Quarter (March 1, 2012–May 31, 2012)          |  |          | 0.39 |  |         | 
|Third Quarter (June 1, 2012–August 31, 2012)         |  |          | 0.32 |  |         | 
|Fourth Quarter (September 1, 2012–November 30, 2012) |  |          | 0.20 |  |         | 
|                                                     |  |          |      |  |         | 
|Fiscal Year Ended November 30, 2013                  |  |          |      |  |         | 
|First Quarter (December 1, 2012–February 28, 2013)   |  |          | 0.15 |  |         | 





Holders



As of March 14, 2013, there were 317 holders of record of our
common stock, although we believe the number of beneficial holders is substantially greater. The transfer agent for our common
stock is QuickSilver Stock Transfer, LLC.  The transfer agent’s contact information is 6623 Las Vegas Blvd. South,
Las Vegas, NV 89119.  The transfer agent’s telephone number is +1 (702) 629-1883.



Dividend Policy



We do not anticipate paying cash dividends in the foreseeable
future. Presently, we intend to retain all of our earnings, if any, to finance development and expansion of our business.



We are a holding company incorporated in the State of Nevada
and do not have any assets or conduct any business operations other than our investments in our subsidiaries. As a result of our
holding company structure, we rely entirely on certain payments from the Operating Companies to Tehong Consulting, followed by
dividend payments from Tehong Consulting. PRC accounting standards and regulations currently permit payment of dividends only out
of accumulated profits, a portion of which is required to be set aside for certain reserve funds.  In addition, PRC capital
and currency regulations may limit our ability to pay dividends.  Our inability to receive all of the revenues from the
Operating Companies’ operations may provide an additional obstacle to our ability to pay dividends if we so decide in the
future.



-29-







Equity Compensation Plan Information



The following is a summary of all of our equity compensation
plans as of November 30, 2012.



Equity Compensation Plan Information



|Plan category                                                |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |         |  | Weighted-average exercise price of outstanding options, warrants and rights (b) |  |      | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)) | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------- | ------- |  | ------------------------------------------------------------------------------- |  | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------- | 
|Equity compensation plans approved by security holders       |  |                                                                                                 | 0       |  |                                                                                 |  | 0    |                                                                                                                                                 | 
|                                                             |  |                                                                                                 |         |  |                                                                                 |  |      |                                                                                                                                                 | 
|Equity compensation plans not approved by security holders 1 |  |                                                                                                 | 115,000 |  |                                                                                 |  | 1.24 |                                                                                                                                                 | 
|                                                             |  |                                                                                                 |         |  |                                                                                 |  |      |                                                                                                                                                 | 
|Total                                                        |  |                                                                                                 | 115,000 |  |                                                                                 |  | 1.24 |                                                                                                                                                 | 



1Included in this category are 115,000 shares of common stock
of the Company issuable upon the exercise of outstanding stock options for our independent directors as of November 30, 2012. All
those options outstanding for our independent directors have fully vested with an expiration period of ten years from the date
of grant.



Unregistered Sales of Equity Securities



The Company has not had any sales of unregistered securities
within the last three years.



Issuer Purchase of Securities



We did not repurchase any of shares of our common stock during
the fourth quarter of fiscal 2012.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information under this item.



|ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our operations and our present
business environment. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto included elsewhere in this annual report.



Overview



We are structured as a holding company that controls our two
PRC Operating Companies: Coal Group, which operates our coal segment, and Heat Power, which operates our heating and electricity
service segment.  Through Coal Group, we produce coal using the longwall method of mining at the Laiyegou coal mine located
in the Dongsheng coal field in the Dongsheng district of Ordos City, Inner Mongolia.



Coal Group is the major revenue and profit driver of the Company.
For the fiscal year ended November 30, 2012 and 2011, Coal Group contributed 92% and 88% of our total revenue, respectively, with
the balance attributable to Heat Power.  While the sales prices of heat and electricity units generated by Heat Power
are regulated by the government, sales prices of coal are market driven to a significant extent. Therefore, Coal Group enjoys a
higher gross margin.



-30-







Through Coal Group, we produced and sold 905,928.14 tons of
coal in 2012at our Laiyegou coal mine, representing a 16% decrease
over 2011 primarily caused by the dramatic decline in our coal sales in the second half of the year. The decline in coal sales
was in turn primarily caused by increased competition from both imported coal from overseas and domestic coal producers combined
with decreased demand of coal for electricity generation. However, we increased our coal trading volume by selling 2,471,433 tons
of coal in 2012, representing an 81% increase over 2011. Going forward, we plan to leverage on the rich coal reserves in Inner Mongolia
and acquire coal mine(s) if we can locate acceptable targets at reasonable prices, while continuing to  increase our
trading volume. We expect Coal Group to continue to be the key growth factor of the Company.



In addition to directly selling coal from our mine location,
Coal Group also buys, sells and transports coal as part of its expanding proprietary coal trading business.  Each year
the PRC government regulates the amount of coal we and other coal producers are able to sell in the open market at the port in
Qinhuangdao by allocating rail space to coal mines in Inner Mongolia to ship their coal to the port.  In order to capitalize
on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal
producers in Inner Mongolia and then paid to have that coal delivered by rail from the other producer’s mine to the Qinhuangdao
port.   The source of the coal sold by our trading business is either from the Laiyegou coal mine or from other
local coal producers.  Our official confirmed quota decreased from 760,000 tons in 2011 to 590,000 tons in 2012from a local railway bureau as a result of the overall decrease in transport capacity of local railway.  Our ability
to use any or all of our quota in 2013 will vary with market conditions and depends on our ability to source commercially acceptable
coal purchases and subsequent trades.  Coal that we produce and sell directly to our customers is customarily transported
at the buyer’s expense and therefore does not count against our quota.



Through Heat Power, we use our thermoelectric plant to generate
and provide heating and electricity to residential and commercial customers throughout Xuejiawan, the administrative center of
Zhunger, one of the seven counties of Ordos.



During 2012, Heat Power increased its coverage area from 4,000,000
m2to 4,200,000m2due to the development of the Xuejiawan area.  Electricity sales by Heat
Power in 2012 of approximately 106 million kWh were approximately 8% lower than our sales of approximately 115 million kWh in 2011as
a result of the longer down time caused by necessary repairs and maintenance in the plant and unexpected down time in the latter
half of the year.



Seasonality



Coal Group experiences lower sales volume in the first fiscal
quarter of each year due to the Chinese New Year holidays, when most businesses are closed. Heat Power provides heating from October
15th each year to April 15th of the next calendar year, resulting in higher sales and profit in the first fiscal quarter, lower
sales in the second and fourth fiscal quarter, and no sales from heating in the third fiscal quarter of each year.



Results of Operations



Fiscal Year Ended November 30, 2012 Compared to the Fiscal
Year Ended November 30, 2011



Revenues



Coal Group



|Coal Group       |  | 2012 |             |  | % Total Revenues |  |    | 2011 |  |   | % Total Revenues | 
|---------------- |  | ---- | ----------- |  | ---------------- |  | -- | ---- |  | - | ---------------- | 
|Revenues         |  | $    | 225,560,187 |  |                  |  | 92 | %    |  | $ | 138,857,447      | 
|Cost of Revenues |  |      | 188,033,148 |  |                  |  | 76 | %    |  |   | 87,926,121       | 
|Gross Profit     |  | $    | 37,527,039  |  |                  |  | 16 | %    |  | $ | 50,931,326       | 



-31-







Revenues for Coal Group were $225,560,187 in 2012 compared to
$138,857,447 in 2011. The $86,702,740, or 62%, increase was the result of an increase in our proprietary coal trading volume. 
We increased our proprietary coal trading volume by selling 2,471,433 tons of coal in 2012, as compared to 1,366,755 tons of coal
in 2011.  The weighted average price received per ton, however, decreased from $53 in 2011 to $51 in 2012.   
The decrease in our overall gross profit margin was primarily attributable to the fact that Coal Group purchased more coal from
third parties for its coal trading business during the second half year of 2012, which purchases were less profitable than coal
purchased from Laiyegou coal mine in terms of gross margin.



The following is a breakdown of the revenues for the Coal Group
for the years ended November 30, 2012 and November 30, 2011:



|Coal Trading     |  | 2012 |             |  | % Total Revenues |  |    | 2011 |  |   | % Total Revenues | 
|---------------- |  | ---- | ----------- |  | ---------------- |  | -- | ---- |  | - | ---------------- | 
|Revenues         |  | $    | 184,177,101 |  |                  |  | 75 | %    |  | $ | 106,181,593      | 
|Cost of revenues |  |      | 171,835,589 |  |                  |  | 70 | %    |  |   | 69,630,834       | 
|Gross Profit     |  | $    | 12,341,512  |  |                  |  | 5  | %    |  | $ | 36,550,759       | 



|Coal Production  |  | 2012 |            |  | % Total Revenues |  |    | 2011 |  |   | % Total Revenues | 
|---------------- |  | ---- | ---------- |  | ---------------- |  | -- | ---- |  | - | ---------------- | 
|Revenues         |  | $    | 41,383,086 |  |                  |  | 17 | %    |  | $ | 32,675,854       | 
|Cost of revenues |  |      | 16,197,558 |  |                  |  | 7  | %    |  |   | 18,295,287       | 
|Gross Profit     |  | $    | 25,185,528 |  |                  |  | 10 | %    |  | $ | 14,380,567       | 



The following is a breakdown of the
revenues for Heat Power for the years ended November 30, 2012 and November 30, 2011:



|Heat Power       |  | 2012 |            |   | % Total Revenues |  |    | 2011 |  |   | % Total Revenues | 
|---------------- |  | ---- | ---------- | - | ---------------- |  | -- | ---- |  | - | ---------------- | 
|Revenues         |  | $    | 20,502,660 |   |                  |  | 8  | %    |  | $ | 18,828,607       | 
|Cost of revenues |  |      | 21,092,411 |   |                  |  | 9  | %    |  |   | 17,007,589       | 
|Gross Profit     |  | $    | (589,751   | ) |                  |  | (1 | )%   |  | $ | 1,821,018        | 



Heat Power has two distinct operations: it supplies heating
directly to end users throughout the Xuejiawan district in Ordos City, Inner Mongolia, and it also supplies electricity through
Electric Power Group.  Revenues generated by Heat Power were $20,502,660 in 2012 compared to $18,828,607 in 2011. The $1,674,053
or 9% increase was a result of an increase in sales volume due to an over 5% increase in the coverage area of Heat Power’s
operations.



We also received government subsidies of $2,840,288 in 2012
compared to $1,060,309 in 2011, to compensate for lower government regulated heat prices and market-driven costs of coal used in
providing heat. This increase was mainly attributable to the fact that we had increased the coverage area of Heat Power’s
operation by 5%.



The following table describes the type of customer and identifies
the units of measurement that are associated with the revenues that are reported by Heat Power.



Heating Revenue



|                |  | Unit Price ($/sq meter month) |      |  | Area (‘000 sq meter range) |  |      | Revenue  ($) | 
|--------------- |  | ----------------------------- | ---- |  | -------------------------- |  | ---- | ------------ | 
|User            |  | 2012                          |      |  | 2011                       |  |      | 2012         | 
|                |  |                               |      |  |                            |  |      |              | 
|Residential     |  |                               | 0.40 |  |                            |  | 0.40 |              | 
|Non-residential |  |                               | 0.78 |  |                            |  | 0.67 |              | 
|                |  |                               |      |  |                            |  |      |              | 
|Total           |  |                               |      |  |                            |  |      |              | 



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The following table compares the quarterly revenue stream from
the Electric Power Group and the units of measurement that are associated with the revenues for such periods.



Electricity Revenue



|       |  | Unit Price ($/ k Wh) |      |  | Units of power supplied (1000 k Wh) |  |      | Revenue ($) | 
|------ |  | -------------------- | ---- |  | ----------------------------------- |  | ---- | ----------- | 
|Period |  | 2012                 |      |  | 2011                                |  |      | 2012        | 
|Q1     |  |                      | 0.04 |  |                                     |  | 0.03 |             | 
|Q2     |  |                      | 0.04 |  |                                     |  | 0.03 |             | 
|Q3     |  |                      | 0.04 |  |                                     |  | 0.04 |             | 
|Q4     |  |                      | 0.04 |  |                                     |  | 0.04 |             | 
|       |  |                      |      |  |                                     |  |      |             | 
|Total  |  |                      |      |  |                                     |  |      |             | 



Cost of Revenues



Details of the cost of revenues for the years 2012 and
2011 are as follows:



|                              |  | 2012 |             |  | 2011 |   |             | Variance | 
|----------------------------- |  | ---- | ----------- |  | ---- | - | ----------- | -------- | 
|Coal and freight              |  | $    | 191,015,024 |  |      | $ | 90,234,807  |          | 
|Depreciation and amortization |  |      | 7,216,527   |  |      |   | 5,471,679   |          | 
|Operating supplies            |  |      | 605,663     |  |      |   | 1,661,594   |          | 
|Utilities                     |  |      | 6,861,367   |  |      |   | 5,253,737   |          | 
|Salaries and benefits         |  |      | 1,499,804   |  |      |   | 1,421,505   |          | 
|Repairs                       |  |      | 907,615     |  |      |   | 439,531     |          | 
|Others                        |  |      | 1,019,559   |  |      |   | 450,857     |          | 
|                              |  |      |             |  |      |   |             |          | 
|Total                         |  | $    | 209,125,559 |  |      | $ | 104,933,710 |          | 



Coal & freight: Our cost of coal increased principally as
a result of increased coal purchases in connection with our trading business.



Depreciation & amortization: Increase in depreciation and
amortization was in line with the expanded heat supply area. We constructed more pipelines to supply heat to these areas. Increase
in depreciation & amortization was also attributable to the increase of production volume in our Laiyegou coal mine.



Operating
supplies.The reduction in operating supplies was primarily due to (i) the lower volume of coal produced at our Laiyegou
coal mine, and (ii) the longer breaking-down periods for repairs and maintenance of our power plant, during which periods the need
for operating supplies is substantially or completely eliminated.

Utilities. Utilities mainly represented the cost of electricity
consumed by 32 heat transfer stations of Heat Power. Increase in utility costs was in line with the expanded heating supply area.



Salaries and benefits: Salaries increased as a result of the
overall salaries of employees increased in line with the increase of the average salary in the local area.



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Selling expenses



For the year ended November 30, 2012, selling expenses increase
by approximately $1,945,642 as compared to 2011. This was mainly due to the increase of transportation and storage costs as we
purchased more coal from third parties.  Selling expenses are expected to increase in line with trading volume.



|                             |  | 2012 |           |  | 2011 |   |           | Variance | 
|---------------------------- |  | ---- | --------- |  | ---- | - | --------- | -------- | 
|Transportation & storage     |  | $    | 4,732,730 |  |      | $ | 4,366,273 |          | 
|Sales tax and other expenses |  |      | 3,202,176 |  |      |   | 2,169,241 |          | 
|Office                       |  |      | 512,551   |  |      |   | 388,307   |          | 
|Salaries and benefits        |  |      | 652,751   |  |      |   | 239,188   |          | 
|Depreciation                 |  |      | 34,697    |  |      |   | 26,254    |          | 
|                             |  |      |           |  |      |   |           |          | 
|Total                        |  | $    | 9,134,905 |  |      | $ | 7,189,263 |          | 



General and Administrative Expenses



Details of the general and administrative expenses of the years
2012 and 2011 are as follows:



|                            |  | 2012 |           |  | 2011 |   |           | Variance | 
|--------------------------- |  | ---- | --------- |  | ---- | - | --------- | -------- | 
|Professional and other fees |  | $    | 1,768,564 |  |      | $ | 2,716,528 |          | 
|Salaries and welfares       |  |      | 1,361,780 |  |      |   | 1,054,906 |          | 
|Office                      |  |      | 1,934,082 |  |      |   | 953,947   |          | 
|Depreciation                |  |      | 763,989   |  |      |   | 485,609   |          | 
|Travel                      |  |      | 527,045   |  |      |   | 439,086   |          | 
|Tax                         |  |      | 444,369   |  |      |   | 173,493   |          | 
|Repairs                     |  |      | 724,718   |  |      |   | 125,182   |          | 
|Stock based compensation    |  |      | 4,857     |  |      |   | 42,621    |          | 
|                            |  |      |           |  |      |   |           |          | 
|Total Expenses              |  | $    | 7,529,404 |  |      | $ | 5,991,372 |          | 



Professional and other fees. Fees were paid principally to various
professionals, including financial advisors, attorneys and accountants. These expenses decreased in the fiscal year ended
November 30, 2012 because we did not purchase director and officer insurance for our directors and officers, which caused
the increase in professional and other fees in 2011.



Salaries and benefits: At the beginning of the fiscal year,
we had an overall increase of the salaries of all employees.



Repairs. The increase in repairs was mainly due to the major
repairs to the power plant that were carried out in June and July this year. The plant is approximately ten years old and is entering
into a period when major repairs are expected.



Depreciation.   These expenses increased in the
fiscal year ended November 30, 2012 as the Company bought new vehicles and office equipment to adapt to the expanded coal trading
business.



Stock-based compensation. The decrease in stock-based compensation was
due to fewer options vesting in 2012 than 2011.



Non-Operating Income and Expenses



Non-operating income decreased from $1,669,503 in 2011 to $1,559,574
in 2012 as a result of increase in other financial expense in 2012. The company paid $201,368 to the bank as a financial consulting
fee in 2012. Non-operating expenses increased slightly from $281,440 in 2011 to $287,018 in 2012.



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Liquidity and Capital Resources



As of November 30, 2012 we had a working capital surplus of
approximately $40,076,446, compared with a working capital surplus of $ 23,522,306 as of November 30, 2011. The improvement in
liquidity was primarily due to the growth in revenues and there was still no stockholder distribution.



On March 31,
2011,Heat Powerentered into a Finance Leasing Contract (“Contract 1”) with a leasing
company covering itsthermoelectric plants, heat transfer stations, and machinery and equipment (“Transferred Assets
1”), having a gross value of US$19,392,298. Pursuant to Contract 1, Heat Power sold to the leasing
company its Transferred Assets 1 used for its operationsin exchange for US$9,261,260 in cash.
Under Contract 1, Heat Power leased back the Transferred Assets 1 with a quarterly installment payment ofUS$548,755until April 2016, when Contract 1 expires. Contract 1 is guaranteed by Coal Group and an unrelated third party. Upon the repayment
of all outstanding rental obligations, Heat Power may re-purchase the Transferred Assets 1 at a purchase price of RMB 900,000,
or RMB 1 if Heat Power timely pays the quarterly installments. Upon the execution of Contract 1, Heat Power paid a servicing fee
of US$502,337 and a refundable deposit of US$1,389,189 to the leasing company.



On March 28,
2012,Heat Powerentered into another Finance Leasing Contract (“Contract 2”) with
the same leasing company related to itsthermoelectric plants, heat transfer stations, and machinery and equipment (“Transferred
Assets 2”), with a gross value of US$8,211,468. Pursuant to Contract 2, Heat Power sold to the
leasing company its Transferred Assets 2 used for its operationsin exchange for US$7,537,215
in cash. Under Contract 2, Heat Power leased back the Transferred Assets 2 with a quarterly installment payment ofUS$450,471
until April 2017, when Contract 2 expires. Contract 2 is guaranteed by Coal Group and an unrelated
third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-purchase the Transferred Assets 2 at
a purchase price of RMB 720,000, or RMB 1 if Heat Power timely pays the quarterly installments. Included in the amount borrowed
is a servicing fee of US$379,897 and a refundable deposit of US$1,507,443.



We anticipate that the combination of our sales and collection
of accounts receivables with our longer accounts payable cycle, customer deposits and proceeds from bank and shareholder loans
will generate sufficient cash flow to sustain our working capital needs.



Sources of Capital



If additional capital is needed is in excess of our current
capital resources, we will explore financing options such as shareholder loans.  Shareholders loans have been granted
from time to time as required to meet current working capital needs. We have no agreement that ensures that we will receive such
loans and we cannot be certain that loans will be made available to us if or when required. We may exhaust this source of funding
at any time.  Existing shareholder loans are payable on demand and accrue interest of 7.32% per annum. The outstanding
balance of our shareholder loans as of November 30, 2012 was $10,034,579.



The outstanding balances and interest rate of short-term bank
loans obtained by the Company at November 30, 2012, were as follows:



|Bank name                  |  | From              |  | To                |  | Principal |            |  | Interest rate |  |       | Security
|-------------------------- |  | ----------------- |  | ----------------- |  | --------- | ---------- |  | ------------- |  | ----- | --------
|Agricultural Bank of China |  | December 15, 2011 |  | December 14, 2012 |  | $         | 12,848,310 |  |               |  | 7.216 | %       
|Agricultural Bank of China |  | January 13, 2012  |  | January 12, 2013  |  | $         | 9,636,232  |  |               |  | 7.21  | %       
|Agricultural Bank of China |  | October 27, 2012  |  | October 26, 2013  |  | $         | 24,090,581 |  |               |  | 6.6   | %       



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Cash Flows



Operating Activities:



Our cash flows provided by operating activities was $2,531,555
for the year ended November 30, 2012 as compared to $1,534,023 of cash flows used in operating activities for the year ended November
30, 2011. The following summarizes the inflow and outflow of cash for these periods:



|                                                             |  | Year Ended November
    30, |            
|------------------------------------------------------------ |  | --------------------------- | -----------
|                                                             |  | 2012                        |            
|Net income                                                   |  | $                           | 12,303,316 
|Depreciation and amortization                                |  |                             | 8,496,470  
|(Increase) in restricted cash                                |  |                             | (17,419    
|(Increase) in accounts receivable                            |  |                             | (1,891,298 
|(Increase) decrease in other receivables                     |  |                             | 19,926,225 
|(Increase) in prepaid expenses                               |  |                             | (355,330   
|(Increase) in advances to suppliers                          |  |                             | (33,273,927
|(Increase) decrease in inventory                             |  |                             | (3,922,277 
|(Increase) in loan to related parties                        |  |                             | (1,356,250 
|Increase in deferred income                                  |  |                             | 5,430,246  
|Increase (decrease)  in accounts payable                     |  |                             | (2,544,812 
|Increase(decrease) in advance from customers                 |  |                             | 2,262,158  
|Increase(decrease) in accrued liabilities and other payables |  |                             | (3,211,163 
|Others                                                       |  |                             | 685,616    
|Net cash (used in ) provided by operating activities         |  | $                           | 2,531,555  



Accounts receivable. For the year ended November 30, 2012 we
increased our coal trading volume by selling 2,471,433 tons of coal, representing an 81% increase over the same period in 2011.
Our operating assets, especially receivables due from customers, increased in line with the increase in our coal trading business
during 2012. The increase in accounts receivable is also attributable to an increase in Heat Power’s user fees made on account
and not from an extension of time for accounts receivable from prior periods. The current heating season is from October 15, 2012
to April 15, 2013; however, user fees will be collected after the end of the current heating season. Our heat service coverage
area was increased from approximately 4.0 million square meters to 4.2 million square meters.



Other receivables. The decrease in other receivables was mainly
due to the Company reducing its loans to its suppliers and other associated firms by a significant amount.



Advances to suppliers. Advances increased as a result of more
advances made for the purchase of coal and freight from third party suppliers, along with the increase of sales volume.



Inventory. Inventory mainly consists of coal for trading purposes.
The market price of coal has dropped dramatically since the third fiscal quarter. The Company had to reduce the trading volume
because the market price of coal was dropped too low to meet the Company’s margin threshold. Therefore, the inventory level
has increased in the second half of 2012.



Accounts payable. The decrease in accounts payable was due
to the Company paying some of its suppliers before the end of the fiscal year 2012.



Deferred income. Deferred income relates to the construction
of pipeline. Deferred income increased in 2012 in line with the expansion of the pipeline in 2012.



Advances from customers. Advances on sales of coal represent
the majority of customer advances received by the Company. Such advances are a normal business practice that ensures that the
customer obtains Coal Group’s products at the market price determined on the date of purchase. Coal Group’s advances
increased during 2012 as a result of more orders being received during the last several days of the fiscal year.  The
level of advances fluctuates depending partially upon how quickly Coal Group delivers coal to its customers.



-36-







Accrued liabilities and other payables. These amounts consist
of, among others, accruals made for loan interest, repairs and maintenance of heating plants, labor union fees, social insurance
and technical training for our employees. The decrease in accrued liabilities and other payables was mainly due to the decreased
balances of account payable from our customers which is offset by the increase in accrued liabilities mainly from our payroll,
welfare expenses.



Investing Activities:

Our cash flows used in investing activities were $43,207,923
for the year ended November 30, 2012 as compared to cash flows provided by investing activities were$1,027,476 for the year ended
November 30, 2011.



Financing Activities:

Our cash flows provided by financing activities were $19,670,633
for the year ended November 30, 2012 and cash flows provided by financing activities were $25,840,201 for the year ended November
30, 2011.



A substantial portion of the cost of construction of the thermoelectric
plant and of the costs of expansion projects at Heat Power and Coal Group was provided by shareholder loans.  The loans
are undocumented and payable on demand.  The outstanding balances and interest rate of shareholder loans at November 30,
2012, were as follows:



|                                       |  | Balance |            |  | Interest Rate | 
|-------------------------------------- |  | ------- | ---------- |  | ------------- | 
|Hangzhou Dayuan Group, Ltd.            |  | $       | 5,903,204  |  |               | 
|Inner Mongolia Duoyida Mining Co. Ltd. |  |         | 2,145,131  |  |               | 
|Ordos City YiYuan Investment Co., Ltd. |  |         | 1,986,244  |  |               | 
|                                       |  |         |            |  |               | 
|Total                                  |  | $       | 10,034,579 |  |               | 



Material Commitments



We have commitments to pay bank loans and shareholder loans
as mentioned above.  We have title to all our capital assets consisting of production equipment, automobiles, and office
equipment. The total amount of our material commitments is $38,590,954, which we anticipate to be funded by profits generated
by our operations.



Summary of Significant Accounting Policies



The consolidated financial statements of the Company as of
November 30, 2012 and 2011 and for the years ended November 30, 2012 and 2011 have been prepared in accordance with generally
accepted accounting principles in the United States and the rules and regulations of the SEC.



Basis of Consolidation



The consolidated financial statements include the accounts
of the Company’s Wholly Owned Foreign Enterprise (WFOE) in China, Tehong Consulting, Coal Group and Heat Power since they
are deemed variable interest entities and the Company is the primary beneficiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.



Prior to the Company’s restructuring in 2010, Coal Group
and Heat Power were subsidiaries of the Company whose accounts were included in the consolidated financial statements.



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Foreign Currency Translations



Substantially all Company assets are located in China.  The
functional currency for the majority of the Company’s operations is the Renminbi (“RMB”).  The Company
uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes.  The
financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with SFAS
No. 52, “foreign currency translation,” as codified in ASC 830 foreign currency matters.  All asset
and liability accounts have been translated using the exchange rate in effect at the balance sheet date.  Equity accounts
have been translated at their historical exchange rates when the capital transaction occurred.  Statements of operations
amounts have been translated using the average exchange rate for the year.   Adjustments resulting from the translation of
the Company’s financial statements are recorded as accumulated other comprehensive income.



The exchange rates used to translate amounts in RMB into US
dollars for the purposes of preparing the consolidated financial statements were as follows:



|                                                                                                                                                            |  |  | November
                                                                                                                                                              30, 2012 |  |  |  | November 30, 2011 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------- | 
|Balance sheet items, except for the registered and paid-up capital, additional paid-in
    capital, statutory reserve and retained earnings, as of year end |  |  | US$1=RMB6.2265                                                                                                                                                                  |  |  |  | US$1=RMB6.3765    | 
|                                                                                                                                                            |  |  |                                                                                                                                                                                 |  |  |  |                   | 
|Amounts included in the statements of operations, statements of changes in stockholders’
    equity and statements of cash flows for the year               |  |  | S$1=RMB 6.3183                                                                                                                                                                  |  |  |  | S$1=RMB 6.4882    | 



For the years ended November 30, 2012 and 2011, foreign currency
translation adjustments of approximately $2,205,864 and $2,891,182, respectively, were reported as accumulated other comprehensive
income in the consolidated statements of changes in stockholders’ equity and comprehensive income.



Although government regulations now allow convertibility of
RMB for current account transactions, significant restrictions still remain.  Hence, such translations should not be
construed as representations that RMB could be converted into US dollars at that rate or any other rate.



The value of RMB against the U.S. dollars and other currencies
may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.  Any
significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.



Cash and Cash equivalents



The Company considers all demand and time deposits and all
highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents.



Accounts Receivable



Accounts receivable is stated at cost, net of an allowance
for doubtful accounts.  The Company maintains allowances for doubtful accounts for estimated losses resulting from the
failure of customers to make required payments.  The Company reviews the accounts receivable on a periodic basis and
makes allowances where there is doubt as to the collectibility of individual balances.  In evaluating the collectibility
of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s
payment history, its current credit-worthiness and current economic trends.  For the years presented, the Company did
not write off any accounts receivable as bad debts.



-38-







Inventories



Inventories consisted of coal and operating supplies. Inventories
are valued at the lower of cost or market, using the weighted average cost method .  Provisions are made for excess,
slow moving and obsolete inventory as well as inventory whose carrying value is in excess of market. The Company did not record
any provisions for inventory valuation allowance for the years ended November 30, 2012 and 2011.



Property, Plant and Equipment



Property, plant and equipment are recorded at cost, less accumulated
depreciation and amortization.  Cost includes the prices paid to acquire or construct the assets, including capitalized
interest during the construction period, and any expenditures that substantially increase the assets value or extend the useful
life of an existing asset.  Depreciation is computed using the straight line method over the estimated useful lives
of property, plant and equipment, which are approximately five years for electrical and office equipment, ten years for transportation
equipment and pipelines, and 20 to 45 years for buildings.  Leasehold improvements are amortized over the lesser of
their estimated useful lives or the term of the lease.  Capitalized costs related to assets under construction are not
depreciated until construction is complete and the asset is ready for its intended use.  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.



Costs of mine development, expansion of the capacity of or
extending the life of the mine (“Mining Structures”) are capitalized and amortized using the units-of-production (“UOP”)
method over the productive life of the mine based on proven and probable reserves.  Mining Structure includes the main
and auxiliary mine shafts, underground tunnels, ramps, and other integrant mining infrastructure.



Investment Property



Investment property represents rental real estate purchased
by the Company for investment purposes.  Depreciation is computed using the straight line method over the estimated
useful life of 45 years.  The related rental income is included in non-operating income in the accompanying consolidated
statements of operations.



Mining Right



To extract resources from land, the Company is required to
obtain a mining right.  The Company’s Coal Group acquired its mining right from the Provincial Bureau of National
Land and Resource in November of 2005.  The price of the mining right, which represents the acquisition cost of the
mine, was assessed by the Bureau to be $3,656,731.  The mine acquisition cost which was payable in installments over
a six year period from the date the mining right was granted has been fully paid.



Long-Term Investment



We had no long-term Investments in 2012 and 2011.



Restricted Cash



Long-term restricted cash represents the bank deposits placed
as guarantee for the future payments of rehabilitation costs as required by the PRC government. As long-term deposits, the restricted
cash earned an interest rate of 0.50% per annum in fiscal year 2012 and 0.50% per annum in fiscal year 2011.



-39-







Advance from Customers



Advance from customers primarily consists of payments received
from customers by the Coal Group and Heat Power prior to the delivery of goods and services.



Deferred Income



Deferred income represents reimbursements received by Heat
Power from various real estate development companies for the cost of constructing pipelines to connect to rural areas being developed.  The
income is recognized on a straight line basis over the estimated useful life of the pipelines of ten years.



Impairment of Long-lived Assets



The Company applies SFAS No. 144, ”Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), as codified in FASB ASC 360, “Property,
Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition
and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. The Company may
recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash
flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying
amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value.
No impairment of long-lived assets was recognized for the years ended November 30, 2012 and 2011.



Recognition of Revenue



Revenues from sales of products are recognized when the products are
delivered and the title is transferred, the risks and rewards of ownership have been transferred to the customer, the price is
fixed and determinable and collection of the related receivable is reasonably assured.



Revenue associated with sales of coal is recognized when the
title to the goods has been passed to customers, which is the date when the goods are delivered to designated locations
and accepted by the customers.



Heat Power supplies heat to users directly and supplies electricity
through a government controlled intermediary. Revenue from sales of heat and electricity represents the amount of tariffs billed
for heat and electricity generated and transmitted to the users and government controlled intermediary, respectively.



Resource Compensation Fees



In accordance with the relevant regulations, a company that
is engaged in coal production business is required to pay a fee to the Inner Mongolia National Land and Resources Administration
Bureau as the compensation for the depletion of coal resources. Coal Group was required to pay resource compensation fees
of $467,099 and $463,947 for the years ended November 30, 2012 and 2011, respectively, which is included in cost of goods sold
in the statements of operations. Coal Group expenses such costs when incurred.



Environmental Costs



The PRC has 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 consolidated financial position
of the Company.



Fair Value of Financial Instruments



Financial instruments include accounts receivable, advances
to suppliers and other current assets, short term bank loans, accounts payable, advance from customers, other current liabilities
and shareholders’ loan. As of November

30, 2012 and 2011, the carrying values of these financial instruments
approximated their fair values.



-40-







Income Taxes



Coal Group and Heat Power generate their income in China where
Value Added Tax, Income Tax, City Construction and Development Tax and Education Surcharge taxes are applicable. Coal Group and
Heat Power do not conduct any operations in the U.S.; therefore, are not subject to U.S. taxes.



The Company accounts for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes,” (“SFAS 109”), now codified as FASB ASC 740, “Income
Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the
basis of assets and liabilities for financial statement and income tax purposes.  Deferred tax assets and liabilities
represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities
are recovered or settled.  Deferred taxes are also recognized for operating losses that are available to offset future
taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized.



Use of Estimates



The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. The application of GAAP involves the exercise of varying degrees of judgment. The resulting accounting estimates will
not always precisely equal the actual results. Management considers an accounting estimate to be critical if:



| | · | assumptions
                                                                                                               are required to
                                                                                                               be made; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | changes in
                                                                                                               estimates could
                                                                                                               have a material
                                                                                                               effect on our financial
                                                                                                               statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net Income Per Share



The Company computes net income (loss) per common share in
accordance with SFAS No, 128 “Earnings Per Share” (“SFAS 128”), as codified in FASB ASC 260,
“Earning Per Share” (“ASC 260”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  Under
the provisions of ASC 260 and SAB 98, basic and diluted net income per common share are computed by dividing the amount available
to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period.  Accordingly,
the number of weighted average shares outstanding as well as the amount of net income per share are presented for basic and diluted
per share calculations for all periods reflected in the accompanying consolidated financial statements.



Statutory Reserves



Pursuant to corporate law of the PRC, the Company is required
to maintain statutory reserves by appropriating from its after-tax profit before declaration or payment of dividends.  The
statutory reserves, representing restricted retained earnings, consist of the following funds:



Surplus Reserve Fund:We are required to transfer 10%
of our net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve
balance reaches 50% of our registered capital. The surplus reserve fund is non-distributable other than during liquidation
and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share
capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of
the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered
capital.



Common Welfare Fund:Common welfare fund is a voluntary
fund to which we can elect to transfer 5% to 10% of our net income, as determined under PRC accounting rules and regulations. This
fund can only be utilized on capital items for the collective benefit of our employees, such as construction of dormitories, cafeteria
facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.



-41-







Non-Surplus Reserve Fund (Safety and Maintenance):According
to ruling No. 119 (2004) issued on May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of Finance
regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine Maintenance
and Improvement,” the Company is required to set aside to a safety fund of RMB 6 per ton of raw coal mined for 2011 and
2010, respectively, and RMB 10.5 per ton for a maintenance fund.  As defined under U.S. GAAP, a liability for safety
and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or
to provide services as a result of any past transactions. Therefore, for financial reporting purposes, this reserve has been
recorded as an appropriation of retained earnings.



The statutory reserves consist of the following:



|                               |  | November
    30, 2012 |           |  | November 30, 
2011 |  
|------------------------------ |  | --------------------- | --------- |  | ------------------ | -
|                               |  |                       |           |  |                    |  
|Statutory surplus reserve      |  | $                     | 2,447,598 |  |                    | $
|Welfare fund                   |  |                       | —         |  |                    |  
|Safety and maintenance reserve |  | $                     | 6,847,018 |  |                    |  
|Total statutory reserves       |  | $                     | 9,294,616 |  |                    | $



Stock Options



Stock options are accounted for upon issuance at fair market
value.  Such value is determined at the date a commitment is made for issuance.  The value of options is included
in a separate part of stockholders’ equity.  Upon exercise or cancellation, the value of such options is transferred
to paid-in capital.



Asset Retirement Cost and Obligation



The Company has adopted SFAS No. 143, “Accounting
for Asset Retirement Obligations.”(“SFAS 143”), now codified as FASB ASC 410, “Asset Retirement
and Environmental Obligations” (“ASC 410”). ASC 410 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
are incurred at the time development of a mine commences for underground mines or construction begins for support facilities,
refuse areas and slurry ponds. 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.  The related asset is amortized using the UOP method over
the productive life of the mine based on proven and probable reserves.  The Company did not incur and does not anticipate
incurring any material dismantlement, restoration and abandonment costs given the nature of its producing activities and the current
PRC regulations surrounding such activities.



Vulnerability Due to Operations in PRC



The Company’s operations may be adversely affected by
significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform
policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or
that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption
or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that
the PRC government’s pursuit of economic reforms will be consistent or effective.



All of the Company’s businesses are transacted in RMB,
which is not freely convertible. The People’s Bank of China or other banks are 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 institutions requires submitting a payment application form together with suppliers’ invoices, shipping
documents and signed contracts.



-42-







Since the Company has its primary operations in the PRC, the
majority of its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist
in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside
of China may be limited.



All of the Company’s bank accounts are in banks located
in PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.



The Company’s mining operations are subject to extensive
national and local governmental regulations in China, which regulations may be revised or expanded at any time.  Generally,
compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies.  Certain
permits require periodic renewal or review of their conditions.  The Company cannot predict whether it will be able
to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew
permits or the imposition of additional conditions could have a material adverse effect on the Company’s ability to develop
and operate its mines.



Off Balance Sheet Arrangements



We have no off balance sheet arrangements.



Inflation



We experienced increased coal prices in our coal trading business
and Heat Power business. We were also able to increase our selling price for coal. The increase in our coal purchase and sale
prices may be due to inflation and/or other factors. The PRC government has adopted various measures to control inflation.



| | ITEM 7A. | QUANTITATIVE
                                                                                                                              AND
                                                                                                                              QUALITATIVE
                                                                                                                              DISCLOSURE
                                                                                                                              ABOUT
                                                                                                                              MARKET
                                                                                                                              RISK
| | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information under this item.



| | ITEM 8. | FINANCIAL
                                                                                                                             STATEMENTS
                                                                                                                             AND
                                                                                                                             SUPPLEMENTARY
                                                                                                                             DATA
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our consolidated financial statement and the notes thereto
begin on page F-1 of this Annual Report on Form 10-K.



| | 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’s Chief Executive Officer, who is the principal
executive officer, and the Acting Chief Financial Officer, who is the principal financial officer, have evaluated the effectiveness
of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934)
as of the end of the period covered by this Report. Based on that evaluation, and solely as a result of the material weaknesses
and significant deficiencies in internal control over financial reporting described below, the Company’s Chief Executive
Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were ineffective.



-43-







Material Weaknesses and Significant Deficiencies in Internal
Control Over Financial Reporting



Management did identify material weaknesses and significant
deficiencies. A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility
that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected
on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material
weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. 
With respect to material weaknesses, we believe the Company must improve its internal accounting and bookkeeping personnel and
procedures. With respect to significant deficiencies, we rely very much on the expertise and knowledge of external financial advisors
in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. To remediate
this situation, we continue to seek to recruit experienced professionals to augment and upgrade our financial staff to improve
our internal accounting and bookkeeping personnel and practices as well as improve our issues of timeliness and completeness in
US GAAP financial reporting.  We are continuing to work closely with external financial advisors to document the existing
financial processes, risk assessment and internal controls systematically.



Report on Internal Control Over Financial Reporting



Management recognizes its responsibility for establishing and
maintaining adequate internal control over financial reporting and has designed internal controls and procedures to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related
notes in accordance with generally accepted accounting principles in the United States of America. Management assessed the effectiveness
of its internal control over financial reporting as of November 30, 2012. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.Based on that assessment, our management concluded that solely as a result of the material weaknesses and significant deficiencies
in internal control as described above, the Company did not maintain effective internal control over financial reporting as of
November 30, 2012.



Changes in Internal Control Over Financial Reporting



No change in the Company’s internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of
2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.



Limitations on Effectiveness of Controls and Procedures.
Our management, including our Chief Executive Officer and Acting Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the control. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



| | ITEM 9B. | OTHER
                                                                                                                              INFORMATION
| | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------



None.



-44-







PART III



| | ITEM 10. | DIRECTORS,
                                                                                                                              EXECUTIVE
                                                                                                                              OFFICERS
                                                                                                                              AND
                                                                                                                              CORPORATE
                                                                                                                              GOVERNANCE
| | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Directors, Executive Officers and Certain Significant Employees



As of the date of this annual report, our directors, executive
officers and significant employees are as follows:



|Name          |  | Age |  | Position                                                                                                  
|------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------
|Wenxiang Ding |  | 57  |  | Chief Executive Officer, President, Treasurer & Director; General Manager of Coal Group
    and Heat Power
|Yanhua Li     |  | 55  |  | Vice General Manager of Coal Group, Director                                                              
|Fu Xu         |  | 49  |  | Acting Chief Financial Officer                                                                            
|Shiwen Zhou   |  | 48  |  | Director                                                                                                  



Wenxiang Ding has been our CEO, President, Director,
and Treasurer since November 5, 2004. Wenxiang Ding is responsible for implementing our investment projects, financial budgets
and forecasts, overseeing research and development and human resources and marketing. Wenxiang Ding is also responsible for our
overall direction and various initiatives as needed from time to time in maintaining the health of the Company. Wenxiang Ding
is currently overseeing our marketing and public relations efforts in maintaining current customers and attracting new customers
and also initiating contracts with sectors of the Inner Mongolia government for expansion of electrical and heating networks.
In August, 2000, Wenxiang Ding became the Executive Director and General Manager of Coal Group where he brought his experience
in the coal industry from serving as the Chief Accountant and, Operations Director of Inner Mongolia Coal of the People’s
Republic of China General Political Department. Wenxiang Ding also founded Heat Power in September 2003 where he served as the
General Manager until November 2004.  In 1993, Wenxiang Ding obtained training in coal mine management from the Beijing
Coal Management Institute. During 2002, he obtained further training in coal mine production and public utility management from
the Inner Mongolia Coal Industry Bureau and Urdos City Construction Bureau, respectively. Wenxiang Ding is the founder of the
Company and has more than 10 years of experience in running the business operations of the Company. We believe that Wenxiang Ding
brings essential knowledge of the coal and heat provision industries and Company operations to the Board of Directors.



Yanhua Libecame a director on November 5, 2004. She
is employed as the Vice General Manager of the Coal Group, a position she has held since 2000. Her responsibilities include overseeing
our finance and human resources departments. Ms. Li is also the General Manager of Inner Mongolia XiangRong Commercial and Trade
Co., Ltd. where she oversees the finance department and is responsible for operations management and has been for the past 5 years.
Ms. Li has more than 10 years of experience in running the business operations of the Company and we believe that she brings essential
knowledge of our operations to the Board of Directors. Ms. Li is married to Wenxiang Ding.



Fu Xu became our Acting Chief Financial Officer on February
26, 2012. From February 2008 to December 2009, Mr. Xu served as Chief Financial Officer of the Company. Mr. Xu obtained his diploma
in Financial Management from the Inner Mongolia Finance and Economics Academy in 1989. Mr. Xu brings his experience in financial
management and internal audit from his work from previous companies of which he was appointed CFO. From 1989 until 2000, Mr. Xu
was the CFO of Inner Mongolia Foreign Trade Group Co., Ltd. From 2000 until 2007, Mr. Xu was the CFO of Inner Mongolia XiRiMu
Dry Goods Co., Ltd.



Shiwen Zhou joined the Company as a director on September
21, 2012. She was appointed by the Company’s board of directors to serve as a director for a term expiring at the next annual
meeting of shareholders. Ms. Zhou is an associate professor of law at the School of Law of South China University of Technology
located in Guangzhou, China, where she teaches Intellectual Property Law and other commercial law subjects. Before she began teaching
at the School of Law in 2004, Ms. Zhou was an attorney at a Guangzhou law firm where she handled foreign economic, business, civil,
maritime and intellectual property law matters. Before her private practice, Ms. Zhou had been a judge at the High People’s
Court of Guangdong Province from 1987 to 2000. Ms. Zhou is experienced with corporate governance, general business affairs and
foreign trade matters. She fills a non-employee director vacancy on the Board that was created when Mr. Tiening Ge resigned as
a director in July 2012.



-45-







Term of Office



All directors hold office until the next annual stockholders’
meeting or until their death, resignation, retirement, removal, disqualification or until their successors have been elected and
qualified. All officers serve at the pleasure of the board of directors.



Family Relationships



Mr. WenXiangDing, our CEO, President, Treasurer
and director and General Manager of Coal Group and Heat Power, and Ms. Yanhua Li, a director of our company and Vice General Manager
of Coal Group, are married to each other. There are no other family relationships among our executive officers, directors and
significant employees.



Legal Proceedings



To the best of our knowledge, there have been no events under
any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control person of our Company during the past ten years.



Corporate Governance



Board of Directors



In determining whether our directors are independent we comply
with the rules of the NYSE Amex (formerly the American Stock Exchange LLC).  The board of directors will also consult
with counsel to ensure that the board of director’s determinations are consistent with those rules and all relevant securities
and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of
2002 with respect to the independence of audit committee members.  The NYSE Amex listing standards define an “independent
director” generally as a person, other than an officer or employee of a company, who does not have a relationship with the
company that would interfere with the director’s exercise of independent judgment.  One of our directors, Ms.
Zhou, is “independent” as that term is defined by Section 803 of the NYSE Amex Company Guide.  All actions
of the board of directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is
present.



Board Committees



Our board of directors has appointed Shiwen Zhou, our sole
independent director, to serve as a Special Committee of the Board to evaluate, review and approve, if appropriate, various strategic
alternatives to take the Company private. Our board of directors does not currently have any other committees.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), requires our executive officers and directors and every person who is directly or indirectly
the beneficial owner of more than 10% of any class of security of our company to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons also are required to furnish our company with copies of all Section
16(a) forms they file. Based solely on our review of copies of such forms received by us, we believe that during the fiscal year
2012, the executive officers and directors of the Company and every person who is directly or indirectly the beneficial owner
of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange
Act.



-46-







Code of Ethics



We adopted a Code of Business Conduct and Ethics in February
2010. The Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, constitutes
our Code of Ethics for our principal executive officer, our principal financial and accounting officer and our other senior financial
officers. The Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with
laws as well as other matters. A printed copy of the Code of Ethics may be obtained free of charge by writing to China Energy
Corporation, No.57, Xinhua East Street, Hohhot City, Inner Mongolia. The Code of Ethics is available on our English internet website
at: http://www.ceccec.com/en/InvestorView.aspx?ID=130.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



Compensation Discussion and Analysis



We strive to provide our named executive officers with a base
salary that we believe is market-rate for comparable public companies based in our area of China, and which is in line with 
the executive’s  roles and responsibilities.  We believe that other peer companies in China which are listed on
U.S. stock markets would be the most appropriate to use for salary comparison purposes. However, none of our direct competitors
are public companies in the U.S. We believe that the compensation of our executive officers is appropriate.



It is not uncommon for companies with operations primarily
in China to have base salaries and bonuses as the sole form of compensation. The base salary level is established and reviewed
based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions
of the individual. The base salary is compared to similar positions within comparable peer companies and with consideration of
the executive’s relative experience in his or her position. Based on an evaluation of available information with respect
to the base salaries of executives of our competitors located in China, the base salary and bonus paid to our named executive
officers is in line with our domestic competitors, such as Inner Mongolia Yitai Group Co., Ltd., Inner Mongolia Manshi Coal Group
Co., Ltd., Inner Mongolia Yidong Coal Group Cp., Ltd. And Inner Mongolia Huineng Coal & Power Group Co., Ltd. Base salaries
are reviewed periodically and at the time of promotion or other changes in responsibilities.



We will consider other elements of compensation, including
without limitation, short-and long-term compensation, cash and non-cash, and other equity-based compensation. We believe our current
compensation package is comparable to our peers in the industry and is aimed to retain and attract talented individuals.



Executive Compensation



The following table sets forth, for the years indicated, all
compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by our
chief executive officer, chief financial officer and all other executive officers who received or are entitled to receive remuneration
in excess of $100,000 during the stated periods; the information contained below represents compensation paid to our officers
for their work related to us and the Operating Companies. These officers are referred to herein as the “named executive
officers.”



Summary Compensation Table



The table below summarizes all compensation awarded to, earned
by, or paid to our executive officers by any person for all services rendered in all capacities to us for the fiscal years ended
November 30, 2012 and 2011.



|Name and Principal Position                |  | Year |  | Salary ($) |        |  | Bonus  ($) |  |   | Stock Awards ($) |  |  | Option  Awards  ($) |  |  | NonEquity Incentive Plan Compensation
    ($) |   |  | Nonqualified Deferred Compensation
    Earnings ($) |  |   | All Other  Compen- sation 
    ($) |  |  | Total  ($) | 
|------------------------------------------ |  | ---- |  | ---------- | ------ |  | ---------- |  | - | ---------------- |  |  | ------------------- |  |  | --------------------------------------------- | - |  | --------------------------------------------------- |  | - | ---------------------------------- |  |  | ---------- | 
|Wenxiang Ding, President, CEO              |  | 2012 |  |            | 12,000 |  |            |  |   |                  |  |  |                     |  |  |                                               |   |  |                                                     |  |   |                                    |  |  |            | 
|                                           |  | 2011 |  |            | 12,000 |  |            |  | — |                  |  |  | —                   |  |  |                                               | — |  |                                                     |  | — |                                    |  |  | —          | 
|Yanhua Li, Coal Group Vice General Manager |  | 2012 |  |            | 11,200 |  |            |  |   |                  |  |  |                     |  |  |                                               |   |  |                                                     |  |   |                                    |  |  |            | 
|                                           |  | 2011 |  |            | 11,200 |  |            |  | — |                  |  |  | —                   |  |  |                                               | — |  |                                                     |  | — |                                    |  |  | —          | 
|Fu Xu,  Acting CFO(1)                      |  | 2012 |  |            | 9,524  |  |            |  |   |                  |  |  |                     |  |  |                                               |   |  |                                                     |  |   |                                    |  |  |            | 
|                                           |  | 2011 |  |            | 9,524  |  |            |  | — |                  |  |  | —                   |  |  |                                               | — |  |                                                     |  | — |                                    |  |  | —          | 



---

(1) Mr. Xu became our Acting CFO on February 26, 2012.



-47-







Employment Agreements



None.



Outstanding Equity Awards at Fiscal Year-end



None.



Director Compensation



The following table provides summary information concerning
compensation awarded to, earned by, or paid to any of our directors for all services rendered to us in all capacities for the
fiscal year ended November 30, 2012.



|Name and               |  | Fees Earned and Paid in |        |  | Stock    |  |   | Option   |  |  | Non-Equity Incentive Plan |  |  | Change in Pension Value and Non- qualified
    Compensation |   |  | All other    |  |   |       | 
|---------------------- |  | ----------------------- | ------ |  | -------- |  | - | -------- |  |  | ------------------------- |  |  | ----------------------------------------------------------- | - |  | ------------ |  | - | ----- | 
|Principal              |  | Cash                    |        |  | Award(s) |  |   | Award(s) |  |  | Compensation              |  |  | Earnings                                                    |   |  | Compensation |  |   | Total | 
|Position               |  | ($)                     |        |  | ($)      |  |   | ($)      |  |  | (#)                       |  |  | ($)                                                         |   |  | ($)          |  |   | ($)   | 
|Stephen Markscheid (1) |  |                         | 6,600  |  |          |  | - |          |  |  | 1,766                     |  |  |                                                             | - |  |              |  | - |       | 
|Paul Li (1)            |  |                         | 12,600 |  |          |  | - |          |  |  | 1,766                     |  |  |                                                             | - |  |              |  | - |       | 
|Tieming Ge (1)         |  |                         | 4,000  |  |          |  | - |          |  |  | 1,325                     |  |  |                                                             | - |  |              |  | - |       | 
|Shiwen Zhou (2)        |  |                         | 4,762  |  |          |  | - |          |  |  |                           |  |  |                                                             | - |  |              |  | - |       | 

_________________________________

(1) Messrs. Stephen Markschied, Paul Li and Teiming Ge, our
former directors, resigned in July, 2012.

(2) Ms. Zhiwen Zhou was appointed a director by our board of
directors on September 21, 2012.



We do not pay compensation to our employee directors.



Pursuant to one year agreements effective as of May 31, 2010,
Mr. Markscheid was entitled to a fee of $10,000 per year for the term of his agreement, while Mr. Li will receive an annual
fee of $15,000 for the term of his agreement.  Pursuant to their agreements, Messrs. Markscheid and Li were each awarded
(i) a 10-year option to purchase up to 20,000 shares of our common stock at an exercise price of $2.02 per share, such
option vesting in equal, quarterly installments over the term of their respective agreements, commencing August 31, 2010, so long
as each director is, respectively, serving as a member of the Board of Directors at each such time.  We also agreed
to (i) pay each such independent director $800 for each board or committee meeting attended by telephone, (ii) pay each such independent
director $2,500 for each board or committee meeting attended in person and (iii) reimburse each such independent director for
expenses related to his attending meetings of the board, meetings of committees of the board, executive sessions and stockholder
meetings.



-48-







On September 15, 2011, the Company and Mr. Tieming Ge entered
into a director agreement (the “Agreement”). The Agreement provides that Mr. Ge will receive cash compensation of
$7,500 during the term of the Agreement, as well as an option to purchase up to 15,000 shares of the Company's common stock with
an exercise price of $0.47 per share. Additionally, Mr. Ge will receive RMB800 for each board or committee meeting that he attends,
and he will be reimbursed for his expenses incurred while attending such meetings. The option will vest in equal, quarterly installments
on the last of the Company’s fiscal quarter during the term of the Agreement (beginning with the fiscal quarter ending November
30, 2011). The term of the Agreement is from September 1, 2011 to May 31, 2012.



Pursuant to one year agreements effective as of June 1, 2011,
Messrs. Markscheid and Li were each awarded (i) a 10-year option to purchase up to 20,000 shares of our common stock at an exercise
price of $0.39 per share, such option vesting in equal, quarterly installments over the term of their respective agreements, commencing
August 31, 2011, so long as each director is, respectively, serving as a member of the Board of Directors at each such time. Mr.
Li is entitled to a fee of $22,000 per year for the term of his agreement, while Mr. Markscheid will receive an annual fee of
$10,000 for the term of his agreement. Pursuant to their agreements, we also agreed to (i) pay each such independent director
$800 for each board or committee meeting attended by telephone, (ii) pay each such independent director $2,500 for each board
or committee meeting attended in person and (iii) reimburse each such independent director for expenses related to his attending
meetings of the board, meetings of committees of the board, executive sessions and stockholder meetings.



Ms. Zhou and the Company do not have a written agreement but
the Company has agreed to pay Ms. Zhou $4,762 per year for her appointment as a director.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS
|-------- | --------------------------------------------------------------------------------------------------



The following table sets forth as of February 28, 2013 the
number of shares of our common stock beneficially owned by (i) each person who is known by us to be the beneficial owner of more
than five percent of our common stock; (ii) each director; (iii) each of the named executive officers in the Summary Compensation
Table; and (iv) all directors and executive officers as a group.  As of February 28, 2013, we had 45,060,000 shares
of common stock issued and outstanding.



Beneficial ownership is determined in accordance with SEC rules
and generally includes voting or investment power with respect to securities. Unless otherwise indicated, the stockholders listed
in the table have sole voting and investment power with respect to the shares indicated. Unless otherwise noted, the principal
address of each of the stockholders, directors and officers listed below is No. 57 Xinhua East Street, Hohhot, Inner Mongolia,
People’s Republic of China, 010010.



All share ownership figures include shares of our common stock
issuable upon securities convertible or exchangeable into shares of our common stock within sixty (60) days of February 28, 2013,
which are deemed outstanding and beneficially owned by such person for purposes of computing his or her percentage ownership,
but not for purposes of computing the percentage ownership of any other person.



|Name and Address of Beneficial Owner and Office,
    if any |  | Amount and Nature
    of Beneficial Ownership (1) |            |     | Percent of Class
    (1) | 
|----------------------------------------------------------- |  | ------------------------------------------------- | ---------- | --- | ------------------------ | 
|Wenxiang Ding, CEO, President, Director, and Treasurer      |  |                                                   | 26,989,107 | (2) |                          | 
|Yanhua Li, Director                                         |  |                                                   | 0          |     |                          | 
|Fu Xu, Acting Chief Financial Officer                       |  |                                                   | 0          |     |                          | 
|Shiwen Zhou, Director                                       |  |                                                   | 0          |     |                          | 
|Fortune Place Holdings Limited                              |  |                                                   | 26,989,107 | (2) |                          | 
|Officers and Directors as a Group                           |  |                                                   | 26,989,107 |     |                          | 

---

Less than one percent.



-49-







(1)Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to securities anticipated to be exercisable or convertible at or within 60 days
of the date hereof, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not
deemed outstanding for computing the percentage of any other person. The indication herein that shares are anticipated to be beneficially
owned is not an admission on the part of the listed stockholder that he, she or it is or will be a direct or indirect beneficial
owner of those shares. The business address of each holder is the principal address of the Company.



(2)         Mr.
WenXing Ding, our CEO and President, holds all of the shares through Fortune Place. Pursuant to the Share Transfer Agreement,
as of August 8, 2012, Wenxiang Ding purchased 100% of the equity interests of Fortune Place at certain prices that vary depending
upon whether we achieved certain revenue targets becoming the sole holder of the equity interests of Fortune Place.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



Shareholder Loans to the Company



Our shareholders have advanced the following amounts to Heat
Power for the purposes of satisfying working capital needs as of November 30, 2012 and 2011:



|                                        |  | 2012 |            |  | 2011 |  
|--------------------------------------- |  | ---- | ---------- |  | ---- | -
|Hangzhou Dayuan Group, Ltd.             |  | $    | 5,903,204  |  |      | $
|Inner Mongolia Duoyida Mining Co., Ltd. |  |      | 2,145,131  |  |      |  
|Ordos City YiYuan Investment Co. Ltd.   |  |      | 1,986,244  |  |      |  
|                                        |  |      |            |  |      |  
|Total                                   |  | $    | 10,034,579 |  |      | $



During fiscal 2012, the largest aggregate amount of the shareholder
loans at any given point in time was $5,903,204. These loans are payable upon demand and interest is charged at 5.31% and 7.32%
per annum on balances owing. We have no formalized agreements with our shareholders guaranteeing that certain amounts of funds
will be available to us in the future. We may exhaust this source of funding anytime.



Other Transactions with Control Persons



Share Option Agreement and Entrustment Agreement



On November 30, 2010, Wenxiang Ding and Ninghua Xu entered
into the Share Transfer Agreement pursuant to which Wenxiang Ding, in consideration of his contributions to the Company and as
an incentive to him to continue his commitment to the Company and its affiliates, was granted options to purchase up to 100% of
the common shares of Fortune Place from Ninghua Xu.  On August 22, 2011, March 26, 2012 and August 8, 2012 Mr. Ding exercised
each of his three options respectively and purchased 100% of the outstanding shares of Fortune Place Holdings Limited pursuant
to such share transfer agreement.



On November 30, 2010, Wenxiang Ding and Ninghua Xu entered
into an entrustment agreement, pursuant to which NinghuaXu entrusts Wenxiang Ding to manage Fortune Place, the Company and its
affiliates as the exclusive agent of NinghuaXu with respect to all matters concerning Ninghua Xu’s shareholding in Fortune
Place, including attending shareholders’ meeting, exercising shareholder’s rights (including voting rights), and designating
and appointing legal representatives and certain other senior officers.  The term of aforesaid entrustment agreement
is 10 years, during which, except as otherwise provided by applicable laws, this entrustment agreement shall not be rescinded
or terminated by any party unless agreed upon mutually.



-50-







VIE Contractual Arrangements



On November 30, 2010, Tehong Consulting and each of the Operating
Companies entered into exclusive business cooperation agreements, pursuant to which Tehong Consulting provides technical and consulting
services related to the business operations of each of the Operating Companies. As consideration for such services, each of the
Operating Companies has agreed to pay an annual service fee to Tehong Consulting in an amount equal to 100% of its net income
for such year.  The term of each of these agreements is 10 years from the date thereof.  Tehong Consulting
may terminate the agreements at any time upon giving 30 days’ prior written notice to each of the Operating Companies.



Tehong Consulting entered into option agreements on November
30, 2010 with each of the Operating Companies, and each of the Registered Owners of the Operating Companies, pursuant to which
Tehong Consulting has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted
by PRC law and foreign investment policies, part or all of the equity interests in each of the Operating Companies owned by each
of the Registered Owners of  the Operating Companies.  To the extent permitted by the PRC laws, the purchase
price for the entire equity interest will be RMB1.00 or the minimum price required by PRC law or government practice. Each of
the exclusive option agreements has a 10 year term.



On November 30, 2010, each of the Registered Owners of the
Operating Companies issued a power of attorney providing Tehong Consulting the power to act as his/her or its exclusive agent
with respect to all matters related to his/her or its ownership interest in each of the Operating Companies, including the right
to attend shareholders’ meetings of each of the Operating Companies and the right to exercise voting rights to which he/she
or it is entitled under PRC law.



Tehong Consulting entered into equity interest pledge agreements
on November 30, 2010 with each of the Operating Companies, and each of the Registered Owners of the Operating Companies, pursuant
to which each of the Registered Owners of the Operating Companies pledged his/her or its equity interest in the Operating Companies
to Tehong Consulting to secure the obligations of each of the Operating Companies under the exclusive business cooperation agreements
as described above. In addition, the Registered Owners of the Operating Companies agreed not to transfer, sell, pledge, dispose
of or create any encumbrance on any equity interests in the Operating Companies that would affect Tehong Consulting’s interests.
Each of the equity interest pledge agreements will expire when each of the Operating Companies fully performs its obligations
under the exclusive business cooperation agreements described above. All the equity interest pledges became effective on November
30, 2010 upon their registration with the competent administration of industry and commerce.



Review, Approval or Ratification of Transactions with Related
Parties



Our audit committee, which was comprised of three independent directors, was responsible for reviewing
and approving any related party transactions under its charter.  The audit committee approved our entering into the VIE
contractual arrangements.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



Below is the aggregate amount of fees billed for professional
services rendered by our principal accountants with respect to the Company’s last two fiscal years:



|                   |  | 2012 |         |  | 2011 |  
|------------------ |  | ---- | ------- |  | ---- | -
|Audit fees         |  | $    | 180,000 |  |      | $
|Audit-related fees |  |      | -       |  |      |  
|Tax fees           |  |      |         |  |      |  
|All other fees     |  |      | -       |  |      |  
|Total              |  | $    | 180,000 |  |      | $



All of the professional services rendered by principal accountants
for the audit of the our annual financial statements and quarterly reviews of financial statements that are normally provided
by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by
our board of directors.



-51-







| | ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| | -------- | ------------------------------------------



|(a) | The following are filed with this Annual Report:
|--- | ------------------------------------------------



| | (1) | Financial Statements: Consolidated Financial Statements start on page F-1.
| | --- | --------------------------------------------------------------------------



| | (2) | Not applicable.
| | --- | ---------------



| | (3) | See exhibits referred to below.
| | --- | -------------------------------



|(b) | The exhibits listed below are filed as part of this Annual Report.
|--- | ------------------------------------------------------------------



|(c) | Not applicable.
|--- | ---------------



|Exhibit
        Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                            
|---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1                    |  | Restated Articles Of Incorporation (2)                                                                                                                                                                                                                                                                                                                                                                                 
|3.2                    |  | Bylaws of China Energy Corporation (2)                                                                                                                                                                                                                                                                                                                                                                                 
|10.1                   |  | Employment Agreement dated December 14, 2009, by and between the Company and Jessie International
    Inc. (3)                                                                                                                                                                                                                                                                                                         
|10.4                   |  | Independent Director Agreement with Stephen Markscheid dated May 31, 2010 (3)                                                                                                                                                                                                                                                                                                                                          
|10.5                   |  | Independent Director Agreement with Paul Li dated May 31, 2010 (3)                                                                                                                                                                                                                                                                                                                                                     
|10.6                   |  | Office Building Lease for the Company’s office space (2)                                                                                                                                                                                                                                                                                                                                                               
|10.7                   |  | Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology
    Consulting Co., Ltd. and Inner Mongolia Tehong Coal Power Group Co., Ltd., dated November 30, 2010 (5)                                                                                                                                                                                                                    
|10.8                   |  | Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting
    Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated
    November 30, 2010 (5)                                                                                                                                                               
|10.9                   |  | Form of Equity Interest Pledge Agreementby and among Beijing Tehong Energy
    Technology Consulting Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi
    Ding and Biao Ding, dated November 30, 2010 (5)                                                                                                                                                          
|10.10                  |  | Form of Power of Attorney by and betweenBeijing Tehong Energy Technology Consulting
    Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (5)                                                                                                                                                                                                                             
|10.11                  |  | Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology
    Consulting Co., Ltd. and Inner Mongolia Zhunger Heat Power Co., Ltd., dated November 30, 2010 (4)                                                                                                                                                                                                                         
|10.12                  |  | Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting
    Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., and Inner Mongolia
    Duoyida Mining Co., Ltd., dated November 30, 2010 (5)                                                                                                                                
|10.13                  |  | Form of Equity Interest Pledge Agreementby and among Beijing Tehong Energy
    Technology Consulting Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co.,
    Ltd., Inner Mongolia Yiduoda Mining Co., Ltd., dated November 30, 2010 (5)                                                                                                                               
|10.14                  |  | Form of Power of Attorney by and betweenBeijing Tehong Energy Technology Consulting
    Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., Inner Mongolia Duoyida Mining Co., Ltd., dated November 30,
    2010 (5)                                                                                                                                                                                         
|10.15                  |  | Termination and Restructuring Agreement by and among the Company, Inner Mongolia Tehong
    Coal And Power Group Co., Ltd., Inner Mongolia Heat Power Co., Ltd., the Beijing Tehong Energy Technology Consulting Co.,
    Ltd., Pacific Projects Inc. and the respective stockholders of Inner Mongolia Tehong Coal And Power Group Co., Ltd., and Inner
    Mongolia Heat Power Co., Ltd., dated November 30, 2010 (5)



-52-







|10.16 |  | Termination and Transfer Agreement by and between Georgia Pacific Investments
    Inc., Wenxiang Ding, Yanhua Li, Fortune Place Holdings Limited, and NinghuaXu dated November 30, 2010 (5)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Termination and Transfer Agreement among Axim Holdings Ltd., Yi Ding, Biao Ding, Fortune
    Place Holdings Limited, and NinghuaXu dated as of November 30, 2010 (5)                       
|10.18 |  | Termination Agreement among the Company, Georgia Pacific Investments Inc. and Axim Holdings
    Ltd. dated as of November 30, 2010 (5)                                                     
|10.19 |  | Entrustment Agreement between Wenxiang Ding and NinghuaXu  dated November
    30, 2010 (5)                                                                                                 
|10.20 |  | Share Option Agreement between Wenxiang Ding and NinghuaXu dated November 30, 2010
    (5)                                                                                                 
|10.21 |  | Independent Director Agreement by and between the Company and Tieming Ge dated September
    15, 2011 (6)                                                                                  
|10.22 |  | Independent Director Agreement with Stephen Markscheid dated September 5, 2011 (1)                                                                                                         
|10.23 |  | Independent Director Agreement with Paul Li dated September 5, 2011 (1)                                                                                                                    
|21.1  |  | Subsidiaries of China Energy Corporation (2)                                                                                                                                               
|31.1* |  | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002                                                                                    
|31.2* |  | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002                                                                                    
|32.1* |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     
|32.2* |  | Certification of Chief FinancialOfficer, pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                      

---

|*   | Filed herewith                                                                                       
|--- | -----------------------------------------------------------------------------------------------------
|    |                                                                                                      
|(1) | Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March
    14, 2012.



|(2) | Incorporated by reference to our Annual Report on Form
        10-K filed with the SEC on March 1, 2011.
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|(3) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December
    18, 2009.



|(4) | Incorporated by reference to our Current Report on Form 8-K filed with
    the SEC on June 4, 2010.
|--- | ---------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to our Current Report on Form 8-K filed with
    the SEC on December 6, 2010.
|--- | -------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to our Current Report on Form 8-K filed with
    the SEC on September 21, 2011.
|--- | ---------------------------------------------------------------------------------------------------------



-53-









CHINA ENERGY CORPORATION

AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2012 AND 2011

AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To Board of Directors and Stockholders of China Energy Corporation



We have audited the accompanying consolidated
balance sheets of China Energy Corporation and subsidiaries (the “Company”) as of November 30, 2012 and 2011, and the
related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the
years ended November 30, 2012 and 2011. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of the China Energy
Corporation and subsidiaries as of November 30, 2012 and 2011, and the consolidated results of their operations and their cash
flows for each of the two years ended November 30, 2011, in conformity with accounting principles generally accepted in the
United States of America.



New York, New York

April 5, 2013











CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS



|                                                                                                                                                    |  | November 30, |            
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -----------
|                                                                                                                                                    |  | 2012         |            
|                                                                                                                                                    |  | (U.S.$)      |            
|ASSETS                                                                                                                                              |  |              |            
|Current assets:                                                                                                                                     |  |              |            
|Cash and cash equivalents                                                                                                                           |  | $            | 11,815,027 
|Accounts receivables, net of allowance for doubtful accounts of $295,356 and $11,251, respectively                                                  |  |              | 18,972,155 
|Other receivables                                                                                                                                   |  |              | 4,636,311  
|Inventories, net of reserve for write down to market of $210,672 and $0, respectively                                                               |  |              | 14,018,922 
|Prepaid expenses                                                                                                                                    |  |              | 678,402    
|Advance to suppliers                                                                                                                                |  |              | 60,837,720 
|Loan to related party                                                                                                                               |  |              | 37,590,281 
|                                                                                                                                                    |  |              |            
|Total current assets                                                                                                                                |  |              | 148,548,818
|                                                                                                                                                    |  |              |            
|Fixed assets, net                                                                                                                                   |  |              | 67,758,295 
|                                                                                                                                                    |  |              |            
|Other assets:                                                                                                                                       |  |              |            
|Investment property, net of accumulated depreciation of $662,496 and   $475,649, respectively                                                       |  |              | 5,612,099  
|Mining right, net of amortization of $2,060,999 and $1,635,072, respectively                                                                        |  |              | 2,779,505  
|Restricted cash                                                                                                                                     |  |              | 590,961    
|Other long term assets                                                                                                                              |  |              | 6,147,833  
|                                                                                                                                                    |  |              |            
|Total other assets                                                                                                                                  |  |              | 15,130,398 
|                                                                                                                                                    |  |              |            
|TOTAL ASSETS                                                                                                                                        |  | $            | 231,437,511
|                                                                                                                                                    |  |              |            
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                |  |              |            
|Current liabilities:                                                                                                                                |  |              |            
|Short term bank loans                                                                                                                               |  | $            | 46,575,122 
|Accounts payable                                                                                                                                    |  |              | 23,455,106 
|Advances from customers                                                                                                                             |  |              | 12,584,079 
|Accrued liabilities                                                                                                                                 |  |              | 1,235,599  
|Other payables                                                                                                                                      |  |              | 9,310,598  
|Stockholder loans                                                                                                                                   |  |              | 10,034,579 
|Current portion of finance obligation                                                                                                               |  |              | 3,237,653  
|Current portion of deferred income                                                                                                                  |  |              | 2,039,636  
|                                                                                                                                                    |  |              |            
|Total current liabilities                                                                                                                           |  |              | 108,472,372
|                                                                                                                                                    |  |              |            
|Non-current liabilities                                                                                                                             |  |              |            
|Finance obligation, net of current portion                                                                                                          |  |              | 10,889,281 
|Deferred income, net of current portion                                                                                                             |  |              | 13,528,969 
|                                                                                                                                                    |  |              |            
|Total non-current liabilities                                                                                                                       |  |              | 24,418,250 
|                                                                                                                                                    |  |              |            
|Total liabilities                                                                                                                                   |  |              | 132,890,622
|                                                                                                                                                    |  |              |            
|Commitments and contingencies                                                                                                                       |  |              | -          
|                                                                                                                                                    |  |              |            
|Stockholders’ equity:                                                                                                                               |  |              |            
|Preferred stock:  no par value; 5,000,000 shares authorized; none issued and outstanding shares                                                     |  |              | -          
|Common stock: $0.001 par value; 195,000,000 shares authorized; 45,060,000 shares issued and outstanding at November 30, 2012 and 2011, respectively |  |              | 45,060     
|Additional paid-in capital                                                                                                                          |  |              | 10,625,225 
|Retained earnings                                                                                                                                   |  |              | 68,859,933 
|Statutory reserves                                                                                                                                  |  |              | 9,294,616  
|Accumulated other comprehensive income                                                                                                              |  |              | 9,722,055  
|                                                                                                                                                    |  |              |            
|Total stockholders’ equity                                                                                                                          |  |              | 98,546,889 
|                                                                                                                                                    |  |              |            
|TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                          |  | $            | 231,437,511



See notes to the consolidated financial
statements.



F-1







CHINA
ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF Income And
OTHER comprehensive income

FOR THE
YEARS ENDED NOVEMBER 30, 2012 AND 2011



|                                           |  | 2012    |              |   | 2011    |  
|------------------------------------------ |  | ------- | ------------ | - | ------- | -
|                                           |  | (U.S.$) |              |   | (U.S.$) |  
|                                           |  |         |              |   |         |  
|Revenues                                   |  | $       | 246,062,847  |   |         | $
|Cost of revenues                           |  |         | (209,125,559 | ) |         |  
|                                           |  |         |              |   |         |  
|Gross profit                               |  |         | 36,937,288   |   |         |  
|                                           |  |         |              |   |         |  
|Operating expenses:                        |  |         |              |   |         |  
|Selling and marketing                      |  |         | 9,134,905    |   |         |  
|General and administrative                 |  |         | 7,529,404    |   |         |  
|                                           |  |         |              |   |         |  
|Total operating expenses                   |  |         | 16,664,309   |   |         |  
|                                           |  |         |              |   |         |  
|Income from operations                     |  |         | 20,272,979   |   |         |  
|                                           |  |         |              |   |         |  
|Other income (expenses):                   |  |         |              |   |         |  
|Finance expenses, net                      |  |         | (2,795,296   | ) |         |  
|Government subsidies                       |  |         | 756,501      |   |         |  
|Non-operating income                       |  |         | 1,559,574    |   |         |  
|Non-operating expenses                     |  |         | (287,018     | ) |         |  
|Income before provision for income taxes   |  |         | 19,506,740   |   |         |  
|                                           |  |         |              |   |         |  
|Provision for  income taxes                |  |         | (7,203,424   | ) |         |  
|                                           |  |         |              |   |         |  
|Net income                                 |  |         | 12,303,316   |   |         |  
|                                           |  |         |              |   |         |  
|Other comprehensive income:                |  |         |              |   |         |  
|Foreign currency translation adjustment    |  |         | 2,205,864    |   |         |  
|                                           |  |         |              |   |         |  
|Total comprehensive income                 |  | $       | 14,509,180   |   |         | $
|                                           |  |         |              |   |         |  
|Net (loss) income per common share         |  |         |              |   |         |  
|Basic and diluted                          |  | $       | 0.27         |   |         | $
|                                           |  |         |              |   |         |  
|Weighted average common shares outstanding |  |         |              |   |         |  
|Basic and diluted                          |  |         | 45,060,000   |   |         |  



See notes
to the consolidated financial statements.



F-2







CHINA
ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For
the YEARs Ended NOVEMBER 30, 2012 AND 2011





|                                                                          |  | Common Stock |            |  | AdditionalPaid-in |   |        | Retained |  |   | Statutory  |  |  | Accumulated
                           Other
        Comprehensive |            |   | Total
        Stockholders’ |  
|------------------------------------------------------------------------- |  | ------------ | ---------- |  | ----------------- | - | ------ | -------- |  | - | ---------- |  |  | ------------------------------------------------------------------ | ---------- | - | --------------------------- | -
|                                                                          |  | Shares       |            |  | Amount            |   |        | Capital  |  |   | Earnings   |  |  | Reserves                                                           |            |   | Income                      |  
|                                                                          |  |              |            |  | (U.S.$)           |   |        | (U.S.$)  |  |   | (U.S.$)    |  |  | (U.S.$)                                                            |            |   | (U.S.$)                     |  
|                                                                          |  |              |            |  |                   |   |        |          |  |   |            |  |  |                                                                    |            |   |                             |  
|Balance as of November 30,
    2010                                       |  |              | 45,000,000 |  |                   | $ | 45,000 |          |  | $ | 9,070,007  |  |  | $                                                                  | 29,642,370 |   |                             | $
|                                                                          |  |              |            |  |                   |   |        |          |  |   |            |  |  |                                                                    |            |   |                             |  
|Net income                                                                |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | 27,635,227 |   |                             |  
|Other comprehensive income                                                |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | -          |   |                             |  
|Stock-based compensation – shares
    issues for consulting services      |  |              | 60,000     |  |                   |   | 60     |          |  |   | 121,740    |  |  |                                                                    | -          |   |                             |  
|Stock-based compensation – shares
    transferred for consulting services |  |              | -          |  |                   |   | -      |          |  |   | 1,386,000  |  |  |                                                                    | -          |   |                             |  
|Stock-based compensation                                                  |  |              | -          |  |                   |   | -      |          |  |   | 42,621     |  |  |                                                                    | -          |   |                             |  
|Appropriation of statutory
    reserves                                   |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | (459,219   | ) |                             |  
|                                                                          |  |              |            |  |                   |   |        |          |  |   |            |  |  |                                                                    |            |   |                             |  
|Balance as of November 30, 2011                                           |  |              | 45,060,000 |  |                   |   | 45,060 |          |  |   | 10,620,368 |  |  |                                                                    | 56,818,378 |   |                             |  
|                                                                          |  |              |            |  |                   |   |        |          |  |   |            |  |  |                                                                    |            |   |                             |  
|Net income                                                                |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | 12,303,316 |   |                             |  
|Other comprehensive income                                                |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | -          |   |                             |  
|Stock-based compensation                                                  |  |              | -          |  |                   |   | -      |          |  |   | 4,857      |  |  |                                                                    | -          |   |                             |  
|Appropriation of statutory
    reserves                                   |  |              | -          |  |                   |   | -      |          |  |   | -          |  |  |                                                                    | (261,761   | ) |                             |  
|                                                                          |  |              |            |  |                   |   |        |          |  |   |            |  |  |                                                                    |            |   |                             |  
|Balance as of
    November 30, 2012                                       |  |              | 45,060,000 |  |                   | $ | 45,060 |          |  | $ | 10,625,225 |  |  | $                                                                  | 68,859,933 |   |                             | $



See notes to the consolidated financial
statements.



F-3







CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED NOVEMBER 30, 2012
AND 2011





|                                                                                            |  | 2012    |             |   | 2011    |  
|------------------------------------------------------------------------------------------- |  | ------- | ----------- | - | ------- | -
|                                                                                            |  | (U.S.$) |             |   | (U.S.$) |  
|                                                                                            |  |         |             |   |         |  
|Cash flows from operating activities:                                                       |  |         |             |   |         |  
|Net income                                                                                  |  | $       | 12,303,316  |   |         | $
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |         |             |   |         |  
|Bad debt expenses                                                                           |  |         | 284,105     |   |         |  
|Depreciation and amortization                                                               |  |         | 8,496,470   |   |         |  
|Stock-based compensation                                                                    |  |         | 4,857       |   |         |  
|Interest accrued on shareholder loans                                                       |  |         | 396,481     |   |         |  
|Loss on disposal of property, plant and equipment                                           |  |         | 173         |   |         |  
|Changes in operating assets and liabilities:                                                |  |         |             |   |         |  
|(Increase) in restricted cash                                                               |  |         | (17,419     | ) |         |  
|(Increase) in accounts receivables                                                          |  |         | (1,891,298  | ) |         |  
|Decrease (increase) in other receivables                                                    |  |         | 19,926,225  |   |         |  
|(Increase) in prepaid expense                                                               |  |         | (355,330    | ) |         |  
|(Increase) in advance to suppliers                                                          |  |         | (33,273,927 | ) |         |  
|(Increase) in inventories                                                                   |  |         | (3,922,277  | ) |         |  
|(Increase) in loan to related party                                                         |  |         | (1,356,250  | ) |         |  
|Increase in deferred income                                                                 |  |         | 5,430,246   |   |         |  
|(Decrease) increase in accounts payable                                                     |  |         | (2,544,812  | ) |         |  
|Increase in advances from customers                                                         |  |         | 2,262,158   |   |         |  
|(Decrease) increase in accrued liabilities and other payables                               |  |         | (3,211,163  | ) |         |  
|                                                                                            |  |         |             |   |         |  
|Net cash provided by (used in) operating activities                                         |  |         | 2,531,555   |   |         |  
|                                                                                            |  |         |             |   |         |  
|Cash flows from investing activities:                                                       |  |         |             |   |         |  
|Purchase of property, plant and equipment                                                   |  |         | (5,936,892  | ) |         |  
|Increase in construction in progress                                                        |  |         | (124,261    | ) |         |  
|Proceeds from disposal of property, plant and equipment                                     |  |         | -           |   |         |  
|Payments made on other long term assets                                                     |  |         | (912,739    | ) |         |  
|Loan to related party                                                                       |  |         | (36,234,031 | ) |         |  
|Collection of notes receivable                                                              |  |         | -           |   |         |  
|                                                                                            |  |         |             |   |         |  
|Net cash (used in) provided by investing activities                                         |  |         | (43,207,923 | ) |         |  
|                                                                                            |  |         |             |   |         |  
|Cash flows from financing activities:                                                       |  |         |             |   |         |  
|Proceeds from short term bank loans                                                         |  |         | 45,898,422  |   |         |  
|Principal payments made on short term bank loans                                            |  |         | (29,406,644 | ) |         |  
|Proceeds from lease finance obligation                                                      |  |         | 5,583,780   |   |         |  
|Repayment of lease finance obligation                                                       |  |         | (2,357,444  | ) |         |  
|Repayment of stockholder loans                                                              |  |         | (47,481     | ) |         |  
|                                                                                            |  |         |             |   |         |  
|Net cash provided by financing activities                                                   |  |         | 19,670,633  |   |         |  
|                                                                                            |  |         |             |   |         |  
|Effect of exchange rate changes on cash                                                     |  |         | 1,813,493   |   |         |  
|                                                                                            |  |         |             |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |         | (19,192,242 | ) |         |  
|Cash and cash equivalents, beginning of year                                                |  |         | 31,007,269  |   |         |  
|                                                                                            |  |         |             |   |         |  
|Cash and cash equivalents, end of year                                                      |  | $       | 11,815,027  |   |         | $
|                                                                                            |  |         |             |   |         |  
|Supplemental disclosure of cash flow information                                            |  |         |             |   |         |  
|                                                                                            |  |         |             |   |         |  
|Cash
    paid for interest                                                                  |  | $       | 2,122,808   |   |         | $
|Cash paid for income taxes                                                                  |  | $       | 9,091,585   |   |         | $
|                                                                                            |  |         |             |   |         |  
|Supplemental disclosure of non-cash financing and investing activities:                     |  |         |             |   |         |  
|                                                                                            |  |         |             |   |         |  
|Value of shares issued/transferred for consulting services                                  |  | $       | -           |   |         | $
|Service fee and refundable deposit borrowed under financing leases                          |  | $       | 1,887,340   |   |         | $





See notes to the consolidated financial
statements.



F-4







CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE
YEARS ENDED NOVEMBER 30, 2012 AND 2011



| | 1. | Organization and Business
| | -- | -------------------------



Organization of the Company



China Energy Corporation (the “Company”)
is a Nevada corporation, formed on October 11, 2002 under the name Omega Project Consultations, Inc. The name was changed to China
Energy Corporation on November 3, 2004. On November 30, 2004, the Company entered into a share exchange agreement with Inner Mongolia
Tehong Coal Group Co., Ltd. (“Coal Group”), and Inner Mongolia Zhunger Heat Power Co. Ltd. (“Heat Power”)
and their respective shareholders. The transaction was accounted for as a reverse merger, a procedure that treats the transaction
as though Coal Group had acquired the Company. Under the accounting for a reverse merger, the assets and liabilities of the Company,
which were nil at the time, were recorded on the books of Coal Group, the continuing company, and the stockholders’ equity
accounts of Coal Group were reorganized to reflect the shares issued in this transaction.



The share exchange agreement, which resulted
in the Company’s acquisition of the Coal Group and Heat Power, was governed by and valid under Nevada law and was not perfected
under the then People’s Republic of China (“PRC”) law. It was not until certain changes in PRC law, which became
definitive in 2006, made clear that a series of procedures of governmental approvals and certain additional corporate actions would
be condition precedents to that perfection. The Company does not believe the lack of perfection impairs its ability to exercise
control over the Coal Group and Heat Power as it continues to exercise control over them, consistent with the intent of the original
shareholders.



On July 13, 2009, the Company entered into
a framework agreement which detailed the actions contemplated for the restructuring of the Company, Coal Group and Heat Power under
a "variable interest entity" (“VIE”) structure to meet the current requirements of applicable PRC law.



On November 30, 2010, the Company entered
into a series of contractual arrangements pursuant to which the control and the economic benefits and costs of ownership of its
two operating companies: Coal Group and Heat Power (collectively, the “Operating Companies”) in the PRC would flow
directly to Beijing Tehong Energy Technology Consulting Co., Ltd. (the “WFOE”), wholly owned through subsidiaries of
the Company.



The Company first entered into a Termination
And Restructuring Agreement with the Operating Companies, the WFOE, Pacific Projects Inc. (“PPI”) and the respective
stockholders of the Operating Companies (collectively, the “PRC Shareholders”) dated November 30, 2010 pursuant to
which the parties agreed (i) to terminate the Trust Agreement dated as of December 31, 2007 under which the PRC Shareholders agreed
to hold their equity interests in the Operating Companies in trust for PPI, (ii) to the merger of PPI into the Company and (iii)
to enter into Management and Control Agreements.



On November 30, 2010, the WFOE entered
into (i) an Exclusive Business Cooperation Agreement with Coal Group, (ii) an Equity Interest Pledge Agreement and an Exclusive
Option Agreement with Coal Group and the stockholders of Coal Group and (iii) a Power of Attorney, with each of the stockholders
of the Coal Group.  The WFOE also entered into (i) an Exclusive Business Cooperation Agreement with Heat Power, (ii)
an Equity Interest Pledge Agreement and an Exclusive Option Agreement with Heat Power and the stockholders of Heat Power and (iii)
a Power of Attorney with each of the stockholders of Heat Power.  The foregoing agreements are herein collectively referred
to as the “Management and Control Agreements.”



The Management and Control Agreements described
below allow the WFOE to exercise control over, and derive all economic benefits from Coal Group and Heat Power.



F-5







Exclusive Business Cooperation Agreements:Pursuant to the Exclusive Business Cooperation Agreements, the WFOE provides technical and consulting services related to the
business operations of Coal Group and Heat Power. In consideration for such services, Coal Group and Heat Power has agreed to pay
an annual service fee to the WFOE in an amount equal 100% of Coal Group and Heat Power’s annual net income, respectively.  Each
Exclusive Business Cooperation Agreement has a term of 10 years, which automatically renews unless terminated by the WFOE.  The
WFOE may terminate the agreements at any time upon 30 days’ prior written notice to Coal Group or Heat Power, as the case
may be.



Exclusive Option Agreements:Pursuant
to the Exclusive Option Agreements, the WFOE has an exclusive option to purchase, or to designate another qualified person to purchase,
to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in the Coal Group and Heat
Power held by the stockholders. To the extent permitted by the PRC laws, the purchase price for the entire equity interest is RMB1.00
or the minimum amount required by PRC law or government practice. Each of the exclusive option agreements has a term of 10 years,
with renewal for an additional 10 years at the option of the WFOE.



Powers of Attorney: Each of
the stockholders of the Coal Group and Heat Power, executed a Power of Attorney that provides the WFOE with the power to act as
such stockholder’s exclusive agent with respect to all matters related to such stockholder’s ownership interest in
Coal Group and Heat Power, respectively, including the right to attend stockholders’ meetings and the right to vote, dispose
or pledge such shares.



Equity Interest Pledge Agreements:Pursuant
to such agreements, each of the stockholders of Coal and the Heat Power pledged their shares in Heat Power and Coal Group, to the
WFOE, to secure the obligations of Coal Group and Heat Power under the Exclusive Business Cooperation Agreements.  In
addition, the stockholders of Coal Group and the Heat Power agreed not to transfer, sell, pledge, dispose of or create any encumbrance
on any equity interests that would affect the WFOE’s interests. The Equity Interest Pledge Agreement expires when Coal Group
and Heat Power, fully perform their obligations under the Exclusive Business Cooperation Agreements.



Termination of Trust Arrangements:Prior
to entering into the Management and Control Agreements, the Company controlled Coal Group and Heat Power through a series of trust
agreements which were terminated contemporaneously with the execution of the Management and Control Agreements.  In connection
with the termination of such trust arrangements, ownership of 68% of the shares of the Company previously held by Georgia Pacific
Investments Inc. and Axim Holdings Ltd. was transferred to Fortune Place Holdings Ltd. (“Fortune Place”).



Entrustment Agreement and Share Option
Agreement:Ninghua Xu, owner of 100% equity interests of Fortune Place, entered into an entrustment agreement with Wenxiang
Ding, the Chief Executive Officer, pursuant to which Mr. Ding was entrusted to manage the Operating Companies and related entities
as provided in the agreement as the agent of Mr. Xu.  The agreement also appoints Mr. Ding as the exclusive agent
with respect to all matters concerning 100% of Mr. Xu’s equity interest in Fortune Place. In addition, Mr. Xu and Mr. Ding
entered into a share option agreement pursuant to which Mr. Ding has the option to purchase all of the shares of Fortune Place
from Mr. Xu upon the achievement of certain performance targets by the Operating Companies and related entities.



Revised Corporate Structure:As
a result of the entry into the foregoing agreements, and the termination of the trust arrangements, the Company has a revised corporate
structure which is set forth below:



F-6











Business



The Company’s business is made up
of three segments: Coal Production, Coal Trading and Heat Power.



Coal Production: Coal Production
has mining rights to a coal mine in the Inner Mongolia District from which it mines coal. Coal Production supplies the majority
of its coal to the Coal Trading segment.



Coal Trading: Coal Trading was organized
in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia
Tehong Coal & Power Group Co. Ltd. It also buys, sells, and transports coal, serving the Inner Mongolia District.



Heat Power:During 2003, Heat Power
was granted a license, to supply heating to the entire XueJiaWan area. To provide for this requirement, construction began in 2004
on a thermoelectric plant, which was completed in September 2006. Heat Power supplies heating directly to users and supplies electricity
within the XueJiaWan area through a government controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd. (“Electric
Power Group”).



The Coal Production and Coal Trading segments
do not sell any coal to Heat Power.



F-7







| | 2. | Summary of Significant Accounting Policies
| | -- | ------------------------------------------



Basis
of Accounting and Presentation



The consolidated financial statements of
the Company as of November 30, 2012 and 2011 and for the years ended November 30, 2012 and 2011 have been prepared in accordance
with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and
Exchange Commission (the “SEC”). All consolidated financial statements and notes to the consolidated financial statements
are presented in U.S. dollars.



Basis of Consolidation



Pursuant to Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Company is required to include
in its consolidated financial statements, the financial statements of variable interest entities. ASC Topic 810 requires a variable
interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities
are those entities in which the Company, through contractual arrangements, bear the risk of, and enjoys the rewards normally associated
with ownership of the entity, and therefore the Company is the primary beneficiary of the entity.



The consolidated financial statements include
the accounts of the Company’s WFOE, Coal Group and Heat Power since they are deemed variable interest entities and the Company
is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.



Recently
Issued Accounting Standards



In May 2011, the FASB issued ASU No. 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs” (“ASU
No. 2011-04”) that provides clarification about the application of existing fair value measurements and disclosure requirements
and expands certain other disclosure requirements. ASU No. 2011-04 amends U.S. GAAP to provide common fair value measurements and
disclosure requirements with International Financial Reporting Standards. The amendments in this ASU are effective prospectively
for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The adoption of this standard
did not have a material impact on consolidated financial statements.



In June 2011, the FASB issued Accounting
Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which improves
the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other
comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes
in stockholders’ equity. The amendments in this standard require that all nonowner changes in stockholders’ equity
be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently
in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments
to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU 2011-12”),
which indefinitely defers the requirement in ASU 2011-05 to present on the face of the financial statements reclassification adjustments
for items that are reclassified from OCI to net income (loss) in the statement(s) where the components of net income (loss) and
the components of OCI are presented.



The amendments in these standards do not
change the items that must be reported in OCI, when an item of OCI must be reclassified to net income (loss), or change the option
for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-05 and ASU 2011-12
are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption
of ASU 2011-05 and ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements.



In December 2011, the FASB issued ASU No.
2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”).
The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users
of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to
apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
The adoption of ASU No. 2011-11 is not expected to have a significant impact on the consolidated financial statements.



F-8







In July 2012, the FASB issued an authoritative
pronouncement related to testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the pronouncement,
entities testing indefinite-lived intangible assets for impairment would have the option of performing a qualitative assessment
before calculating the fair value of the asset. If an entity determines, on the basis of qualitative factors, that the indefinite-lived
intangible asset is not more likely than not impaired, a quantitative fair value calculation would not be needed. The amendments
are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption
is permitted. The adoption of this pronouncement does not have a significant impact on the Company’s consolidated financial
condition or results from operations.



Foreign Currency Translation



Substantially all Company assets are located
in China. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company
uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes.
The financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with FASB
ASC 830, “Foreign Currency Matters.”All asset and liability accounts have been translated using the exchange
rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital
transaction occurred. Consolidated statements of operations and comprehensive income (loss) amounts have been translated using
the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial
statements are recorded as other comprehensive income.



The exchange rates used to translate amounts
in RMB into US dollars for the purposes of preparing the consolidated financial statements were as follows:



|                                                                                                                                                                     |  |  | November 30, 2012 |  |  |  | November 30, 2011 | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----------------- |  |  |  | ----------------- | 
|Balance sheet items, except for common stock, additional paid-in capital, statutory reserves, and retained earnings, as of year end                                  |  |  | US$1=RMB 6.2265   |  |  |  | US$1=RMB 6.3765   | 
|                                                                                                                                                                     |  |  |                   |  |  |  |                   | 
|Amounts included in the statements of income and other comprehensive income, statements of changes in stockholders’ equity and statements of cash flows for the year |  |  | US$1=RMB 6.3183   |  |  |  | US$1=RMB 6.4882   | 



For the years ended November 30, 2012 and
2011, foreign currency translation adjustments of $2,205,864 and $2,891,182, respectively, have been reported as other comprehensive
income.



Although government regulations now allow
convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should
not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.



The value of RMB against the US dollar
and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.
Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.



Cash and Cash equivalents



The Company considers all demand and time
deposits and all highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash
equivalents.



Accounts Receivable



Accounts receivable is stated at cost,
net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting
from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and provides
an allowance where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual
receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history,
its current credit-worthiness and current economic trends. As of November 30, 2012 and 2011, the balance of the allowance for doubtful
accounts was $295,356 and $11,251 respectively. For the years presented, the Company did not write off any accounts receivable
as bad debts.



F-9







Accounts receivable include amounts due
from an entity affiliated with the Company through a family member of the Company’s Chairman of $0 and $1,712,113 as of November
30, 2012 and 2011, respectively.



Inventories



Inventories consist of coal and operating
supplies. Inventories are valued at the lower of cost or market, using the weighted average cost method. Provisions are made for
excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of market. As of November 30,
2012 and 2011, the reserve for write down to market was $210,672 and $0, respectively.



Fixed Assets



Fixed assets are recorded at cost, less
accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including capitalized interest during
the construction period, and any expenditure that substantially increase the asset’s value or extend the useful life of an
existing asset. Depreciation is computed using the straight line method over the estimated useful lives of property, plant and
equipment, which are approximately five years for electrical and office equipment, ten years for transportation equipment and pipelines,
and 20 to 45 years for buildings. Leasehold improvements are amortized over the lesser of their estimated useful lives or the term
of the lease. Capitalized costs related to assets under construction are not depreciated until construction is complete and the
asset is ready for its intended use. 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,
plant 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.



Costs of mine development, expansion of
the capacity of or extending the life of the mine (“Mining Structures”) are capitalized and amortized using the units-of-production
(“UOP”) method over the productive life of the mine based on proven and probable reserves. Mining Structures includes
the main and auxiliary mine shafts, underground tunnels, ramps, and other integrant mining infrastructure.



Investment Property



Investment property represents rental real
estate purchased or constructed by the Company for investment purposes. Depreciation is computed using the straight line method
over the estimated useful life of 45 years. The related rental income and expenses are included in non-operating income and expenses
in the accompanying consolidated statements of operations and other comprehensive income (loss).



Mining Right



All land in China belongs to the government.
To extract resources from the land, the Company was required to obtain a mining right. The Company’s Coal Group acquired
its mining right from the Provincial Bureau of National Land and Resource in November of 2005. The price of the mining right, which
represents the acquisition cost of the mine, was assessed in 2005 by the Bureau to be $3,656,731. The mine acquisition cost was
payable in instalments over a six year period from the date the mining right was granted. The mine acquisition cost is amortized
using the UOP method over the productive life of the mine based on proven being probable reserves.



F-10







Restricted Cash



Long-term restricted cash represents the
bank deposits held as a guarantee for the future payments of rehabilitation costs as required by the PRC government. The long-term
deposits earn an interest rate of 0.50% per annum, which is determined by the PRC government.



Advances from Customers



Advances from customers primarily consist of payments received
from customers by the Coal Group and Heat Power prior to the delivery of goods and services.



Deferred Income



Deferred income represents reimbursements
received by Heat Power from various real estate development companies for the cost of constructing pipelines to connect to rural
areas being developed. The income is recognized on a straight line basis over the estimated useful life of the pipelines of ten
years.



Impairment of Long-lived
Assets



The Company utilizes FASB ASC 360, “Property,
Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition
and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. The Company may recognize
impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable
to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset,
a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. No impairment of long-lived
assets was recognized for the years ended November 30, 2012 and 2011.



Revenue Recognition



Revenues from sales of products are recognized
when the products are delivered and the title is transferred, the risks and rewards of ownership have been transferred to the customer,
the price is fixed and determinable and collection of the related receivable is reasonably assured.



Revenue associated with sales of coal is
recognized when the title to the goods has been passed to customers, which is the date when the goods are delivered to designated
locations and accepted by the customers and the previously discussed requirements are met.



Heat Power supplies heat to users directly
and supplies electricity through a government controlled intermediary. Revenue from sales of heat and electricity represents the
amount of tariffs billed for heat and electricity generated and transmitted to the users and the government controlled intermediary,
respectively.



Resource Compensation Fees



In accordance with the relevant regulations
in the PRC, a company that is engaged in coal production is required to pay a fee to the Inner Mongolia National Land and Resources
Administration Bureau as compensation for the depletion of coal resources. Coal Group was required to pay the resource compensation
fees of $467,099 and $463,947 for the years ended November 30, 2012 and 2011, respectively, which is included in cost of revenues
in the consolidated statements of operations and other comprehensive income (loss).



Environmental Costs



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



F-11







Fair Value of Financial
Instruments



FASB ASC 820, “Fair Value Measurements
and Disclosures,” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques
reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs).
In accordance with ASC 820, the following summarizes the fair value hierarchy:



Level
1 Inputs – Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has
the ability to access.



Level 2 Inputs
– Inputs other than the quoted prices in active markets that are observable either directly or indirectly.



Level
3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair
value measurements.



ASC 820 requires the use of observable
market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels
of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant
to the fair value measurement.



The Company did not identify any assets
or liabilities that are required to be presented at fair value on a recurring basis at November 30, 2012 and 2011.



Income Taxes



Coal Production, Coal Trading and Heat
Power generate their income in China where a Value Added Tax, Income Tax, City Construction and Development Tax and Education Surcharge
taxes are applicable. The Company, Coal Group and Heat Power do not conduct any operations in the U.S. and therefore, are not subject
to U.S. taxes.



The Company accounts for income taxes in
accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred
income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred
tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available
to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized.



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 certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.



Net Income (Loss) Per Share



The Company computes net income (loss)
per common share in accordance with FASB ASC 260, “Earnings Per Share” (“ASC 260”) and SEC Staff
Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of ASC 260 and SAB 98, basic net income (loss) per common
share is computed by dividing the amount available to common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted income per common share is computed by dividing the amount available to common shareholders
by the weighted average number of shares of common stock outstanding plus the effect of any dilutive shares or common stock equivalents
outstanding during the period. Accordingly, the number of weighted average shares outstanding as well as the amount of net income
(loss) per share are presented for basic and diluted per share calculations for all periods reflected in the accompanying consolidated
financial statements.



F-12







Statutory Reserves



Pursuant to corporate laws of the PRC,
the Company is required to maintain statutory reserves by appropriating from its after-tax profit before declaration or payment
of dividends. The statutory reserves, representing restricted retained earnings, consist of the following funds:

Surplus Reserve Fund:The Company
is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion
or converted into share capital by issuing new shares to existing stockholders in proportion to their stockholding or by increasing
the par value of the shares currently held by them, provided that the remaining reserve balance after such issuance is not less
than 25% of the registered capital.



Common Welfare Fund:The common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income, as determined under PRC accounting
rules and regulations, to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s
employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable
other than upon liquidation.



Non-Surplus Reserve Fund (Safety and
Maintenance):According to ruling No. 119 (2004) issued on May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005
by the PRC Ministry of Finance regarding “Accrual and Utilization of Coal Production Safety Expense”and “Criterion
on Coal Mine Maintenance and Improvement,” the Company is required to set aside in a safety fund, 6 RMB per ton of raw
coal mined, and 10.5 RMB per ton for a maintenance fund. As defined under US GAAP, a liability for safety and maintenance expenses
does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a
result of any past transactions. Therefore, for financial reporting purposes, this statutory reserve has been recorded as
an appropriation of retained earnings.



The statutory reserves consist of the following:



|                                           |  | November 30, 2012 |           |  | November 30, 2011 |  
|------------------------------------------ |  | ----------------- | --------- |  | ----------------- | -
|                                           |  |                   |           |  |                   |  
|Statutory surplus reserve and welfare fund |  | $                 | 2,447,598 |  |                   | $
|Safety and maintenance reserve fund        |  |                   | 6,847,018 |  |                   |  
|                                           |  |                   |           |  |                   |  
|Total statutory reserves                   |  | $                 | 9,294,616 |  |                   | $



Stock Based Compensation



The Company records stock based compensation
in accordance with FASB ASC 718, “Compensation – Stock Based Compensation,”which requires the measurement
and recognition of compensation expense based on the estimated fair values for all stock-based awards made to employees and directors,
including stock options.



FASB ASC 718 requires companies to estimate
the fair value of stock-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing
model as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions
regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected
stock price volatility over the term of the awards, and actual and projected stock option exercise behaviours. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense in the statements of operations and other
comprehensive income (loss) over the requisite service period.



F-13







Asset Retirement Cost and Obligation



The Company has adopted FASB ASC 410, “Asset
Retirement and Environmental Obligations”(“ASC 410”). ASC 410 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 are incurred at the time development of a mine commences for underground mines or construction begins
for support facilities, refuse areas and slurry ponds. 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. The related asset is amortized using the
UOP method over the productive life of the mine based on proven and probable reserves. The Company did not incur and does not anticipate
incurring any material dismantlement, restoration or abandonment costs given the nature of its mining activities and the current
PRC regulations surrounding such activities.



Vulnerability Due to Operations in the
PRC



The Company’s operations may be adversely
affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing
economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue
such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social
or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions. There is also
no guarantee that the PRC government’s pursuit of economic reforms will be consistent, effective or continue.



All of the Company’s operations are
transacted in RMB, which is not freely convertible to US Dollars. The People’s Bank of China and other banks are 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 institutions requires submitting a payment application form together with
suppliers’ invoices, shipping documents and signed contracts.



Since the Company has its primary operations
in the PRC, its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist in
the PRC, the Company’s ability to use revenue generated in RMB to pay any dividends to its shareholders outside of China
is limited.



All of the Company’s bank accounts
are in banks located in the PRC and are not covered by protection similar to that provided by the FDIC on funds held in United
States banks.



The Company's mining operations are subject
to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally,
compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits
require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such
permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition
of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.



Reclassifications



Certain accounts in the prior period’s
financial statements have been reclassified for comparative purposes to conform to the presentation in the current period’s
financial statements. These reclassifications had no effect on previously reported earnings.

3. Segment Reporting



The Company is made up of three segments
of business, Coal Production which derives its revenue from the mining and sale of coal, Coal Trading which derives its revenue
from purchase and sales of coal, and Heat Power which derives its revenue by providing heating and electricity to residents and
businesses of a local community. Coal Production and Coal Trading comprise the Coal Group, which is conducted in a separate variable
interest corporation and each functions independently of Heat Power segment.



F-14







Except
for the loans made to Heat Power by Coal Group in the principal amount of RMB 85.2 million (equivalent to U.S. $13.7 million) and
RMB 84 million (equivalent to U.S. $13.1 million) as of November 30, 2012 and 2011,
respectively,during the periods reported herein, there were no other
transactions between Coal Group and Heat Power. There also were no differences between the measurements used to report operations
of the segments and those used to report the consolidated operations of the Company. In addition, there were no differences between
the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheets.



|                                        |  | For
    the Years Ended November 30, |           
|--------------------------------------- |  | ------------------------------------ | ----------
|                                        |  |                                      |           
|                                        |  | 2012                                 |           
|                                        |  | Heat                                 |           
|                                        |  | Power                                |           
|                                        |  |                                      |           
|Sales to external customers             |  | $                                    | 17,662,372
|Sales – government
    subsidies        |  |                                      | 2,840,288 
|Other income – government
    subsidies |  |                                      | -         
|Interest expenses, net                  |  |                                      | 1,558,938 
|Depreciation and amortization           |  |                                      | 6,064,994 
|Segment profit (loss)                   |  |                                      | (2,589,359



|                              |  | November
    30, 2012 |            |  | November
    30, 2011 |  
|----------------------------- |  | --------------------- | ---------- |  | --------------------- | -
|                              |  | Heat                  |            |  | Coal                  |  
|                              |  | Power                 |            |  | Trading               |  
|                              |  |                       |            |  |                       |  
|Segment assets                |  | $                     | 74,308,658 |  |                       | $
|Construction  in
    progress |  |                       | 2,956,470  |  |                       |  
|Investment property, net      |  |                       | 3,638,296  |  |                       |  



Reconciliation of the total segment profit
(loss) to net income (loss) included in the consolidated financial statements is as follows:



|                               |  | For the Years Ended November 30, |           
|------------------------------ |  | -------------------------------- | ----------
|                               |  | 2012                             |           
|                               |  |                                  |           
|Total segment profit (loss)    |  | $                                | 12,910,383
|Unallocated corporate expenses |  |                                  | (607,067  
|                               |  |                                  |           
|Net income (loss)              |  | $                                | 12,303,316



F-15







4. Stockholder Loans



Substantial portions of the cost of construction
of the thermoelectric plant and of the costs of expansion projects at Heat Power and the coal mine were provided by loans from
stockholders of Heat Power. Balances are as below:



|                                       |  | November 30, 2012 |            |  | November 30, 2011 |  
|-------------------------------------- |  | ----------------- | ---------- |  | ----------------- | -
|                                       |  |                   |            |  |                   |  
|Ordos City YiYuan Investment Co., Ltd. |  | $                 | 1,986,244  |  |                   | $
|Hangzhou Dayuan Group, Ltd.            |  |                   | 5,903,204  |  |                   |  
|Inner Mongolia Duoyida Mining Co. Ltd. |  |                   | 2,145,131  |  |                   |  
|                                       |  |                   |            |  |                   |  
|Total                                  |  | $                 | 10,034,579 |  |                   | $



The stockholder loans are due on demand
with interest as follow:



|                                     |  | November 30, 2012 |            |  | November 30, 2011 | 
|------------------------------------ |  | ----------------- | ---------- |  | ----------------- | 
|                                     |  | Balance           |            |  | Interest rate     | 
|                                     |  |                   |            |  | 5.31% and         | 
|Stockholder loans – interest bearing |  | $                 | 7,098,691  |  |                   | 
|Interest payable                     |  |                   | 2,935,888  |  |                   | 
|                                     |  |                   |            |  |                   | 
|Total                                |  | $                 | 10,034,579 |  |                   | 



5. Lease Obligation



The Company leases office space under an
operating lease expiring December 31, 2015. The minimum future annual rent payments under the lease as of November 30, 2012 are
as follows:



|Year Ending  |  | Annual |        
|------------ |  | ------ | -------
|November 30, |  | Amount |        
|             |  |        |        
|2013         |  | $      | 104,393
|2014         |  |        | 104,393
|2015         |  |        | 104,393
|2016         |  |        | 8,699  
|             |  |        |        
|Total        |  | $      | 321,878



Rent expense charged to operations for
the years ended November 30, 2012 and 2011 was $104,393 and $118,908, respectively.



6. Other Payables



Other payables included advances from the
Company’s Chairman and entities affiliated to the Company through a family member of the Company’s Chairman totalling
$6,424,155 and $4,704,775 as of November 30, 2012 and 2011, respectively. These advances are non-interest bearing and payable on
demand. At November 30, 2012 and 2011, other payables amounted to $9,310,598 and $13,111,017, respectively.



7. Advances to Suppliers



As is customary in China, the Company has
made advances to its suppliers for coal purchases, utility payments and other purchases. At November 30, 2012 and 2011, advances
amounted to $60,837,720 and $27,566,516, respectively. There is no interest due on these advances and they are offset against billings
as they are made by the suppliers.



F-16







8. Other Receivables



Other receivables consist of the following:



|                                              |  | November 30, 2012 |           |  | November 30, 2011 |  
|--------------------------------------------- |  | ----------------- | --------- |  | ----------------- | -
|                                              |  |                   |           |  |                   |  
|Loans to suppliers and other associated firms |  | $                 | 895,364   |  |                   | $
|Employee expense advances                     |  |                   | 305,489   |  |                   |  
|Government subsidies receivable               |  |                   | 1,818,497 |  |                   |  
|Heat network access fee receivable            |  |                   | 1,616,961 |  |                   |  
|                                              |  |                   |           |  |                   |  
|Total                                         |  | $                 | 4,636,311 |  |                   | $



Included in loans to suppliers and other
associated firms are advances to an entity affiliated to the Company through the Company’s Chairman and shareholders of Heat
Power of $775,201 and $752,380 as of November 30, 2012 and 2011, respectively. In addition, included in loans to suppliers and
other associated firms are advances to Heat Power’s Vice President and family members of the Company’s Chairman of
$0 and $39,923 as of November 30, 2012 and 2011, respectively. Those advances are non-interest bearing.



On a periodic basis, management reviews
the other receivable balances and establishes allowances where there is doubt as to the collectability of the individual balances.
In evaluating collectability of the individual balances, the Company considers factors such as the age of the balance, payment
history, and credit-worthiness of the creditor. The Company considers all these other receivables at November 30, 2012 and 2011
to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts.



9. Fixed Assets



Fixed assets are summarized as follows:



|                         |  | November 30, 2012 |             |   | November 30, 2011 |  
|------------------------ |  | ----------------- | ----------- | - | ----------------- | -
|                         |  |                   |             |   |                   |  
|Buildings                |  | $                 | 12,220,763  |   |                   | $
|Machinery & equipment    |  |                   | 45,247,105  |   |                   |  
|Transferred assets (a)   |  |                   | 28,576,167  |   |                   |  
|Automotive equipment     |  |                   | 2,450,577   |   |                   |  
|Office Equipment         |  |                   | 1,470,972   |   |                   |  
|Construction in progress |  |                   | 2,974,939   |   |                   |  
|                         |  |                   | 92,940,523  |   |                   |  
|Accumulated depreciation |  |                   | (25,182,228 | ) |                   |  
|                         |  |                   |             |   |                   |  
|Fixed assets, net        |  | $                 | 67,758,295  |   |                   | $



(a) Real estate with equipment subject
to the lease finance obligation as described in Note 10 under “Finance Obligation”.



F-17







Depreciation expense charged to operations
for the years ended November 30, 2012 and 2011 was $7,150,312 and $5,264,229, respectively.



Land use rights of $251,228 and $245,318
at November 30, 2012 and 2011, respectively, are included in buildings and are depreciated over the useful lives along with the
related buildings.



10. Short Term Bank Loans



The Company has bank loans collateralized
by mining rights and the real estate properties and guaranteed by the Company’s CEO and a stockholder. Relevant terms of
these bank loans are as follows:



|                                                   |  | November 30, 2012 |            |  | November 30, 2011 |  
|-------------------------------------------------- |  | ----------------- | ---------- |  | ----------------- | -
|Bank loan due 1/17/12, with interest at 6.94% (a)  |  | $                 | -          |  |                   | $
|Bank loan due 1/17/12, with interest at 6.94% (b)  |  |                   | -          |  |                   |  
|Bank loan due 7/28/12, with interest at 7.22% (a)  |  |                   | -          |  |                   |  
|Bank loan due 12/14/12, with interest at 7.22% (b) |  |                   | 12,848,310 |  |                   |  
|Bank loan due 1/12/13, with interest at 7.22% (b)  |  |                   | 9,636,232  |  |                   |  
|Bank loan due 10/26/13, with interest at 6.60% (c) |  |                   | 24,090,580 |  |                   |  
|                                                   |  |                   |            |  |                   |  
|Total                                              |  | $                 | 46,575,122 |  |                   | $



(a) Loan
to Coal Group, collateralized by mining rights and the real estate properties of Coal Group.

(b) Loan to Coal Group, collateralized
by mining rights of Coal Group.



(c) Loan to Coal Group, guaranteed by Inner
Mongolia Shengli Resource Group Co. Ltd.



Interest expense related to the above bank
loans amounted to $2,163,265 and $1,060,893 for the years ended November 30, 2012 and 2011, respectively.



11. Finance Obligations



On March 31, 2011, Heat Power entered into
a Finance Leasing Contract (“Contract 1”) with a leasing company covering its thermoelectric plants, heat transfer
stations, and machinery and equipment (“Transferred Assets 1”), having a gross value of RMB 125,635,589 (US$19,392,298).
Pursuant to Contract 1, Heat Power sold to the leasing company its Transferred Assets 1 used for its operations in exchange for
RMB 60,000,000 (US$9,261,260) in cash. Under Contract 1, Heat Power leased back the Transferred Assets 1 with a quarterly installment
payment of RMB 3,555,163 (US$548,755) until April 2016, when Contract 1 expires. Contract 1 is guaranteed by Coal Group and an
unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-purchase the Transferred Assets
1 at a purchase price of RMB 900,000, or RMB 1 if Heat Power timely pays the quarterly installments. Upon the execution of Contract
1, Heat Power paid a servicing fee of RMB 3,300,000 (US$502,337) and a refundable deposit of RMB 9,000,000 (US$1,389,189) to the
leasing company.



On March 28, 2012, Heat Power entered into
another Finance Leasing Contract (“Contract 2”) with the same leasing company related to its thermoelectric plants,
heat transfer stations, and machinery and equipment (“Transferred Assets 2”), with a gross value of RMB 52,293,912
(US$8,211,468). Pursuant to Contract 2, Heat Power sold to the leasing company its Transferred Assets 2 used for its operations
in exchange for RMB 48,000,000 (US$7,537,215) in cash. Under Contract 2, Heat Power leased back the Transferred Assets 2 with a
quarterly installment payment of RMB 2,868,777 (US$450,471) until April 2017, when Contract 2 expires. Contract 2 is guaranteed
by Coal Group and an unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-purchase
the Transferred Assets 2 at a purchase price of RMB 720,000, or RMB 1 if Heat Power timely pays the quarterly installments. Included
in the amount borrowed is a servicing fee of RMB 2,400,000 (US$379,897) and a refundable deposit of RMB 9,600,000 (US$1,507,443).



F-18







Since Heat Power has the option to repurchase
its Transferred Assets, Heat Power is considered to have “continuing involvement” pursuant to ASC 840-40, “Sales-Leaseback
Transactions”(ASC 840-40). Accordingly, the lease did not qualify as a normal sale-leaseback transaction and is being
accounted for under the financing method in which Heat Power reports the sales proceeds as a finance obligation, continues to report
the Transferred Assets as its assets, and continues to depreciate the Transferred Assets. The lease payments are being recognized
under the interest method. The effective interest rate of this transaction is 6.70% and 7.05% for Contract 1 and Contract 2, respectively.



Future payments of the finance obligation
as of November 30, 2012 are as follows:



|Year Ending                                 |  | Annual |           
|------------------------------------------- |  | ------ | ----------
|November 30,                                |  | Amount |           
|                                            |  |        |           
|2013                                        |  | $      | 4,126,362 
|2014                                        |  |        | 4,126,838 
|2015                                        |  |        | 4,126,838 
|2016                                        |  |        | 2,984,893 
|Thereafter                                  |  |        | 921,474   
|                                            |  |        |           
|                                            |  |        | 16,286,405
|Less: amount representing interest          |  |        | 2,159,471 
|                                            |  |        |           
|Finance obligation                          |  |        | 14,126,934
|Less: current portion of finance obligation |  |        | 3,237,653 
|                                            |  |        |           
|Finance obligation, net of current portion  |  | $      | 10,889,281



Interest expense for these finance obligations
amounted to US$1,167,378 and $523,810 for the years ended November 30, 2012 and 2011, respectively. The refundable deposits are
included in other long term assets in the consolidated balance sheet as of November 30, 2012 and 2011. The costs related to these
Contracts of RMB 7,920,000 (US$1,271,983) are being amortized by the interest method over the life of the leases.



12. Cost of Revenues and Expenses



Details of the cost of revenues for the years ended November
30, 2012 and 2011 are as follows:



|                              |  | 2012 |             |  | 2011 |  
|----------------------------- |  | ---- | ----------- |  | ---- | -
|                              |  |      |             |  |      |  
|Salaries and wages            |  | $    | 1,499,804   |  |      | $
|Operating supplies            |  |      | 605,663     |  |      |  
|Depreciation and amortization |  |      | 7,216,527   |  |      |  
|Repairs                       |  |      | 907,615     |  |      |  
|Coal and freight              |  |      | 191,015,024 |  |      |  
|Utilities                     |  |      | 6,861,367   |  |      |  
|Other                         |  |      | 1,019,559   |  |      |  
|Total                         |  | $    | 209,125,559 |  |      | $



Details of the selling expenses for the years ended November
30, 2012 and 2011 are as follows:



|                             |  | 2012 |           |  | 2011 |  
|---------------------------- |  | ---- | --------- |  | ---- | -
|                             |  |      |           |  |      |  
|Transportation and storage   |  | $    | 4,732,730 |  |      | $
|Sales tax and other expenses |  |      | 3,202,176 |  |      |  
|Office                       |  |      | 512,551   |  |      |  
|Salaries and welfare         |  |      | 652,751   |  |      |  
|Depreciation                 |  |      | 34,697    |  |      |  
|                             |  |      |           |  |      |  
|Total                        |  | $    | 9,134,905 |  |      | $



F-19







Details of the general and administrative
expenses for the years ended November 30, 2012 and 2011 are as follows:



|                            |  | 2012 |           |  | 2011 |  
|--------------------------- |  | ---- | --------- |  | ---- | -
|                            |  |      |           |  |      |  
|Professional and other fees |  | $    | 1,768,564 |  |      | $
|Office and other            |  |      | 1,934,082 |  |      |  
|Salaries and welfare        |  |      | 1,361,780 |  |      |  
|Travel                      |  |      | 527,045   |  |      |  
|Depreciation                |  |      | 763,989   |  |      |  
|Repairs                     |  |      | 724,718   |  |      |  
|Tax fee                     |  |      | 444,369   |  |      |  
|Stock-based compensation    |  |      | 4,857     |  |      |  
|Total                       |  | $    | 7,529,404 |  |      | $



13. Rental Income



The Company entered into rental agreements
with four unrelated parties to lease commercial space in its building under operating leases expiring through 2015.



Future minimum rental income as of November
30, 2012 is as follows:



|Year Ending  |  |        |        
|------------ |  | ------ | -------
|November 30, |  | Amount |        
|             |  |        |        
|2013         |  | $      | 61,039 
|2014         |  |        | 208,714
|2015         |  |        | 196,900
|2016         |  |        | 36,886 
|             |  |        |        
|             |  | $      | 503,539



Rental income, under operating leases,
included in non-operating income in the consolidated statements of operations and other comprehensive income (loss) for years ended
November 30, 2012 and 2011 was $306,717 and $366,628, respectively.



14. Government Subsidies



Government subsidies are primarily comprised
of financial support provided by the local government to Heat Power to ensure supply of heat to the XueJiaWan area as the price
for heat charged is regulated and approved by the government. The financial support includes revenue subsidies to compensate for
lower government regulated prices charged for heat and cost subsidies for the purchase of coal used in providing heat. Government
subsidies are intended to be an incentive for Heat Power to supply heat at the government regulated prices. Government subsidies
to Heat Power amounted to $2,840,288 and $1,060,309 for the years ended November 30, 2012 and 2011, respectively. Coal Mine received
subsidies from the government of $756,501 and $0 for the years ended November 30, 2012 and 2011, respectively. All the government
subsidies are included in revenues in the consolidated statements of income and other comprehensive income.



F-20







15. Income Taxes



The Company is required to file income
tax returns in both the United States and the PRC. Its operations in the United States have been insignificant and income taxes
have not been accrued. In the PRC, the Company files tax returns for Heat Power and Coal Group and, although it is part of Coal
Group, a separate tax return is required for the operations of the coal mine. The laws of the PRC permit the carryforward of net
operating losses for a period of five years. At November 30, 2012, the PRC entities had no net operating losses available for future
use as confirmed by the local taxing authority.



Under ASC 740, recognition of deferred
tax assets is permitted unless it is more likely than not that the assets will not be realized. Deferred tax assets consist primarily
of future tax benefits of net operating losses recognized for Heat Power. A full valuation allowance has been established for the
year ended November 30, 2012 since the Company is unable to determine if and when those benefits will be realized. There are no
deferred tax assets or liabilities as of November 30, 2012 and 2011.



The following is a reconciliation of the
statutory rate with the effective income tax rate for the periods presented:



|2012                                         |  | Tax Provision |           |   | Rate of Tax | 
|-------------------------------------------- |  | ------------- | --------- | - | ----------- | 
|Tax at statutory rate                        |  | $             | 4,876,685 |   |             | 
|Tax effect of loss of subsidiaries           |  |               | 2,687,598 |   |             | 
|Non deductible expenses                      |  |               | 1,214     |   |             | 
|Tax effect of eliminated intercompany profit |  |               | (362,073  | ) |             | 
|                                             |  |               |           |   |             | 
|Tax at effective tax rate                    |  | $             | 7,203,424 |   |             | 



|2011                                         |  | Tax Provision |            |  | Rate of Tax | 
|-------------------------------------------- |  | ------------- | ---------- |  | ----------- | 
|Tax at statutory rate                        |  | $             | 9,552,173  |  |             | 
|Tax effect of loss of subsidiaries           |  |               | 40,270     |  |             | 
|Non deductible expenses                      |  |               | 390,779    |  |             | 
|Tax effect of eliminated intercompany profit |  |               | 590,245    |  |             | 
|                                             |  |               |            |  |             | 
|Tax at effective tax rate                    |  | $             | 10,573,467 |  |             | 



The Company follows ASC 740, “Accounting
for Uncertainty in Income Taxes — an interpretation of SFAS 109.” ASC 740 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC
740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties
associated with tax positions. At November 30, 2012, the Company is not aware of any uncertain tax positions.



F-21







The Company did not file its U.S. federal
income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471,
“Information Return of U.S. Persons With Respect to Certain Foreign Corporations” for the years ended November
30, 2002 through 2005. The Company was also late in filing for the years ended November 30, 2007 and 2008. Failure to furnish any
information returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company
to certain civil penalties. Management is of the opinion that penalties, if any, that may be assessed would not be material to
the consolidated financial statements.



In addition, because the Company did not
generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any
U.S. federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged
in through November 30, 2012. However, there can be no assurance that the IRS will agree with this position, and therefore the
Company ultimately could be liable for U.S. federal income taxes, interest and penalties. The tax years ended November 30, 2002
to 2011 remain open to examination by tax authorities.



16. Stock-Based Compensation



On May 31, 2010, the Company granted to
each of its three independent directors an option to purchase 20,000 shares of common stock at an exercise price of US$2.02 per
share. The options vested over one year in equal, quarterly instalments on the last day of the Company’s fiscal quarter,
beginning with the fiscal quarter ending August 31, 2010, subject to their continued service as a director. The Compensation Committee
of the Board of Directors has determined the performance conditions have been met.



On September 5, 2011, the Company granted
another option to two of its three independent directors to purchase 20,000 shares of common stock and one of its three independent
directors to purchase 15,000 shares of common stock at an exercise price of US$0.39 per share. The options vested over one year
in equal, quarterly instalments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending
August 31, 2011, subject to their continued service as a director. The Compensation Committee of the Board of Directors has determined
the performance conditions have been met.



The fair value of the options was estimated
using the Black-Scholes option pricing model. Expected volatility is based on historical volatility data of the Company’s
stock. The expected term of stock options granted is based on historical data and represents the period of time that stock options
are expected to be outstanding. The risk-free interest rate is based on a zero-coupon United States Treasury bond whose maturity
period equals the expected term of the our options. The weighted average estimated grant date fair value for options granted to
theindependent directors was US$1.24 per share.



Weighted average assumptions used to estimate
the fair values of stock options on the date of grants are as follows:



|                                |  | September 5, 2011 |         
|------------------------------- |  | ----------------- | --------
|Expected dividend yield         |  |                   | -       
|Expected stock price volatility |  |                   | 182.07  
|Risk free interest rate         |  |                   | 2.00    
|Expected life (years)           |  |                   | 10 years



|                                |  | May 31, 2010 |         
|------------------------------- |  | ------------ | --------
|Expected dividend yield         |  |              | -       
|Expected stock price volatility |  |              | 210.57  
|Risk free interest rate         |  |              | 3.29    
|Expected life (years)           |  |              | 10 years



The stock-based compensation, included
in general and administrative expenses in the accompanying consolidated statements of operations and other comprehensive income
(loss), is $4,857 and $42,621 for the year ended November 30, 2012 and 2011, respectively.



F-22







The Company will issue new shares of common
stock upon exercise of stock options. The following is a summary of stock option activity:



|                                                 |  | Shares |         |  | Weighted Average Exercise Price |   |      | Weighted- Average Remaining Contractual Life |  |  | Aggregate Intrinsic Value | 
|------------------------------------------------ |  | ------ | ------- |  | ------------------------------- | - | ---- | -------------------------------------------- |  |  | ------------------------- | 
|                                                 |  |        |         |  |                                 |   |      |                                              |  |  |                           | 
|Outstanding at November 30, 2010                 |  |        | 60,000  |  |                                 | $ | 2.02 |                                              |  |  | 9.5 years                 | 
|Granted                                          |  |        | 55,000  |  |                                 |   | 0.39 |                                              |  |  | 10.0 years                | 
|Exercised                                        |  |        | -       |  |                                 |   | -    |                                              |  |  | -                         | 
|Cancelled and expired                            |  |        | -       |  |                                 |   | -    |                                              |  |  | -                         | 
|Forfeited                                        |  |        | -       |  |                                 |   | -    |                                              |  |  | -                         | 
|                                                 |  |        |         |  |                                 |   |      |                                              |  |  |                           | 
|Outstanding at November 30, 2012                 |  |        | 115,000 |  |                                 | $ | 1.24 |                                              |  |  | 8.1 years                 | 
|                                                 |  |        |         |  |                                 |   |      |                                              |  |  |                           | 
|Vested and expected to vest at November 30, 2012 |  |        | 115,000 |  |                                 | $ | 1.24 |                                              |  |  | 8.1 years                 | 
|                                                 |  |        |         |  |                                 |   |      |                                              |  |  |                           | 
|Exercisable at November 30, 2012                 |  |        | 115,000 |  |                                 | $ | 1.24 |                                              |  |  | 8.1 years                 | 



The aggregate intrinsic value is calculated
as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock.
There were no options that were exercised during the years ended November 30, 2012 and 2011.



There is no unrecognized compensation costs
related to these options as of November 30, 2012.



The Company entered into a Terms of Services
and Release Agreement with the Company’s CEO, a consulting firm, and Fortune Place Holdings Limited (“Fortune Place”),
a British Virgin Islands corporation. The Company’s CEO is the sole director of Fortune Place. Pursuant to the terms of the
agreement, the consulting firm would be entitled to receive equity consideration of 1,800,000 restricted shares of the Company
held by Fortune Place for consulting services rendered to the Company, contingent upon the completion of all of the consulting
services enumerated in the agreement. The filing of the Company’s Form 10-Q for the quarter ended February 28, 2011 represented
the final item of the consulting services that the consulting firm was required to complete (“Completion Date”). As
of the Completion Date, the fair value of shares transferred for the services rendered to the Company were valued at $1,386,000.



The Company issued an aggregate of 60,000
share of common stock to an investor relations firm in consideration for consulting services rendered through the period ended
on March 14, 2011. The fair value of the stock was $121,800.



17. Contingencies



As is customary in the PRC, except for
auto coverage, Coal Group and Heat Power do not carry sufficient insurance. As a result, the Company is effectively self-insuring
risk of potential accidents or loss that may occur in the workplace. Given the nature of the industry, the Company may be exposed
to risks that could have a material adverse impact on its consolidated financial statements.



F-23







The PRC has enacted legislation which appears
to restrict the ability of entities considered foreign, like the Company, to have ownership interest in operating companies located
in the PRC. The Company has taken steps to avoid any potential adverse impact of this legislation. (See Note 1). However, the enacted
legislation can be affected due to the PRC’s political, social and economic conditions.



As disclosed in note 14, the Company was
delinquent in filing certain tax returns with the U.S. Internal Revenue Service. The Company filed the delinquent returns and sought
waivers of any penalties under the IRS 2011 Offshore Voluntary Disclosure Initiative. Under the program, the IRS has indicated
that it will not impose a penalty for the failure to file delinquent information returns (Form 5471) if there are no underreported
tax liabilities and the information returns are filed by August 31, 2011. The Company is unable to determine the amount of penalties,
if any, that may be assessed at this time. Management is of the opinion that penalties, if any, that may be assessed would not
be material to the consolidated financial statements.



The Company was late in filing the information
reports for the years ended November 30, 2004 through 2008 concerning its interest in foreign bank accounts on form TDF 90-22.1,
“Report of Foreign Bank and Financial Accounts” (“FBARs”). For not complying with the FBAR reporting
and recordkeeping requirements, the Company is subject to civil penalties up to $10,000 for each of its foreign bank accounts.
The Company is unable to determine the amount of any penalties that may be assessed at this time and believes that penalties, if
any, that may be assessed would not be material to the consolidated financial statements.



18. Preferred stock



On October 21, 2010, the Board of Directors
of the Company adopted resolutions authorizing 5,000,000 shares of preferred stock. As a result, the Company’s authorized
shares of common stock was reduced from 200,000,000 shares to 195,000,000 shares with the creation of a new class of 5,000,000
shares of preferred stock upon filing of the Certificate of Amendment to the Company’s Articles of Incorporation with the
Nevada Secretary of State on January 11, 2011. The total number of shares the Company is authorized to issue did not change. No
share of preferred stock is outstanding as of November 30, 2012.



19. Condensed Financial Information
of Registrant



The following condensed financial information
of the US parent company only balance sheets as of November 30, 2012 and 2011, and the US parent company only statements of operations,
and cash flows for the years ended November 30, 2012 and 2011:



Balance Sheets



|                                                                                                          |  | November 30, |           
|--------------------------------------------------------------------------------------------------------- |  | ------------ | ----------
|                                                                                                          |  | 2012         |           
|ASSETS                                                                                                    |  |              |           
|Other assets:                                                                                             |  |              |           
|Investment in subsidiaries and VIEs                                                                       |  | $            | 98,731,695
|                                                                                                          |  |              |           
|Total other assets                                                                                        |  |              | 98,731,695
|                                                                                                          |  |              |           
|TOTAL ASSETS                                                                                              |  | $            | 98,731,695
|                                                                                                          |  |              |           
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                      |  |              |           
|Current liabilities:                                                                                      |  |              |           
|Other liabilities                                                                                         |  | $            | 184,806   
|                                                                                                          |  |              |           
|Total current liabilities                                                                                 |  |              | 184,806   
|                                                                                                          |  |              |           
|Stockholders’ equity:                                                                                     |  |              |           
|Common stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000 shares issued and outstanding |  |              | 45,060    
|Additional paid-in capital                                                                                |  |              | 10,163,545
|Paid in capital – stock options                                                                           |  |              | 461,680   
|Retained earnings                                                                                         |  |              | 87,876,604
|                                                                                                          |  |              |           
|Total stockholders’ equity                                                                                |  |              | 98,546,889
|                                                                                                          |  |              |           
|TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                |  | $            | 98,731,695



F-24







Statements of Operations



|                                                           |  | For the Years Ended November 30, |           
|---------------------------------------------------------- |  | -------------------------------- | ----------
|                                                           |  | 2012                             |           
|Revenues:                                                  |  |                                  |           
|Share of earnings from investment in subsidiaries and VIEs |  | $                                | 15,116,247
|Total revenues                                             |  |                                  | 15,116,247
|                                                           |  |                                  |           
|Operating expenses:                                        |  |                                  |           
|General and administrative                                 |  |                                  | 607,067   
|                                                           |  |                                  |           
|Total operating expenses                                   |  |                                  | 607,067   
|Net income                                                 |  | $                                | 14,509,180



Statements of Cash Flows



|                                                                                            |  | For the Years Ended November 30, |            
|------------------------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                                            |  | 2012                             |            
|                                                                                            |  |                                  |            
|Cash flows from operating activities:                                                       |  |                                  |            
|Net income                                                                                  |  | $                                | 14,509,180 
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                  |            
|Share of earnings from investment in subsidiaries                                           |  |                                  | (15,116,247
|Stock-based compensation                                                                    |  |                                  | 4,857      
|Changes in operating assets and liabilities:                                                |  |                                  |            
|(Decrease) increase in accrued liabilities and other payables                               |  |                                  | (4,601     
|                                                                                            |  |                                  |            
|Net cash (used in) operating activities                                                     |  |                                  | (606,811   
|                                                                                            |  |                                  |            
|Cash flows from financing activities:                                                       |  |                                  |            
|Advance from shareholders                                                                   |  |                                  | 606,811    
|                                                                                            |  |                                  |            
|Net cash provided by financing activities                                                   |  |                                  | 606,811    
|                                                                                            |  |                                  |            
|Net increase in cash and cash equivalents                                                   |  |                                  | -          
|                                                                                            |  |                                  |            
|Cash and cash equivalents, beginning of year                                                |  |                                  | -          
|                                                                                            |  |                                  |            
|Cash and cash equivalents, end of year                                                      |  | $                                | -          



F-25







20. Basis of Presentation



The Company records its investment in its
subsidiaries and VIEs under the equity method of accounting. Such investment is presented as “Investment in subsidiaries
and VIEs” on the balance sheets and shares of the subsidiaries and VIEs’ profits are presented as “Equity in
profits of subsidiaries and VIEs” in the statements of income.



Certain information and footnote disclosures
normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States
of America have been condensed or omitted. The parent-only financial information has been derived from the Company’s consolidated
financial statements and should be read in conjunction with the Company’s consolidated financial statements.



The US parent company has no assets other
than investments in its subsidiaries and VIEs.



21. Restricted Net Assets



Under the PRC laws and regulations, the
Company’s PRC subsidiaries and VIEs are restricted in their ability to transfer certain of their net assets to the Company
in the form of dividend payments, loans or advances. The restrictions include paid-up capital and statutory reserves of the Company’s
PRC subsidiary and the net assets of the VIEs, totalling $98,546,889 and $84,032,852 as of November 30, 2012 and 2011.



In addition, the Company’s operations
and revenues are conducted and generated in the PRC, all of the Company’s revenues being earned and currency received are
denominated in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable
to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s
ability to convert RMB into US Dollars.



Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of the Company to be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of
Regulation S-X as the restricted net assets of the Company’s PRC subsidiaries and VIEs exceed 25% of the consolidated net
assets of the Company.



22. Concentration of Credit Risk



Substantially all of the Company’s
bank accounts are in banks located in The People’s Republic of China and are not covered by protection similar to that provided
by the FDIC on funds held in United States banks.



F-26







23. Major Customers



The following table shows each of the customers
who account for sales of approximately 10% or greater of Coal Group:



|                                                         |  | 2012 |   
|-------------------------------------------------------- |  | ---- | --
|                                                         |  |      |   
|Zhonghai Jiaye International Trading (Tianjin) Co., Ltd. |  |      | 18
|Shenhua International Transportation & Selling Co., Ltd. |  |      | 15
|                                                         |  |      |   



|                                     |  | 2011 |   
|------------------------------------ |  | ---- | --
|                                     |  |      |   
|Zhejiang Coal Development Co., Ltd.  |  |      | 17
|Huadian Coal Group Trading Co., Ltd. |  |      | 13
|                                     |  |      |   



24. Subsequent Event



The Company will effect a share combination
or “reverse stock split” of common stock whereby each 12,000,000 outstanding shares of common stock will be converted
into one whole share, and in lieu of the Company’s issuing fractional shares to stockholders owning less than one whole share
of common stock after effectiveness of the share combination, the Company will pay cash equal to $0.14 multiplied by the number
of pre-split shares held by a stockholder who owns fewer than 12,000,000 shares immediately prior to the split. Stockholders with
fewer than 12,000,000 shares immediately prior to the reverse stock split will have no further equity interest in the Company and
will become entitled only to a cash payment equal to $0.14 times the number of pre-split shares.



The reverse stock split is considered a
“going private” transaction as defined in Rule 13e-3 promulgated under the Exchange Act because it is intended to,
and, if completed, will enable the Company to terminate the registration of common stock under Section 15(d) of the Exchange Act
and terminate our duty to file periodic reports with the Securities and Exchange Commission (“SEC”).



The Company intends to effect the reverse
stock split as soon as practicable after all filing requirements have been satisfied. The Company proposes to consummate the reverse
stock split no earlier than the 20th day after the date on which we first mail the Notice of Internet Availability of Information
Statement to our stockholders. The effective date of the reverse stock split will be the date the Company files a Certificate of
Amendment to its Articles of Incorporation with the Nevada Secretary of State.





F-27











SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 5th day of April, 2013.



| | CHINA ENERGY CORPORATION |                                              
| | ------------------------ | ---------------------------------------------
| |                          |                                              
| | By:                      | /s/ Wenxiang Ding                            
| |                          | Name:  Wenxiang Ding                         
| |                          | Title:     President, Chief Executive Officer
| |                          |                                              



Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated below
and on the dates indicated.



|Signature         |  | Title                                                                           |  | Date         
|----------------- |  | ------------------------------------------------------------------------------- |  | -------------
|                  |  |                                                                                 |  |              
|/s/ Wenxiang Ding |  | Chairman, Chief Executive Officer, President, Secretary, Treasurer and Director |  |              
|Wenxiang Ding     |  | (Principal Executive Officer)                                                   |  | April 5, 2013
|                  |  |                                                                                 |  |              
|/s/ Fu Xu         |  | Acting Chief Financial Officer                                                  |  |              
|Fu Xu             |  | (Principal Financial and Accounting Officer)                                    |  | April 5, 2013
|                  |  |                                                                                 |  |              
|/s/ Yanhua Li     |  |                                                                                 |  |              
|Yanhua Li         |  | Director                                                                        |  | April 5, 2013
|                  |  |                                                                                 |  |              
|/s/ Shiwen Zhou   |  |                                                                                 |  |              
|Shiwen Zhou       |  | Director                                                                        |  | April 5, 2013







54