UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549




FORM
10-K




x            Annual
report pursuant to  Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended November 30, 2009




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)+86-0471-466-8870
                (Registrant’s
      telephone number, including area code)Securities
      registered under Section 12(b) of the Act:  NoneSecurities
      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  oNo   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  oNo   x




Check
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 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  oNo   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
              
              (Do
      not check if a smaller
              reporting
      company)
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.  Yes   oNo   x




The
aggregate market value of the 33,289,407 shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was approximately
$3,513,1778 as of May 31, 2009, 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 $0.30 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, 45,000,000  as of February
22, 2010.




Documents
incorporated by reference: None







TABLE
OF CONTENTS





PART
      IITEM
      1. BUSINESS
                                                          3ITEM
      1A. RISK FACTORS
                                                          13ITEM
      1B. UNRESOLVED STAFF COMMENTS
                                                          13ITEM
      2. PROPERTIES
                                                          13ITEM
      3. LEGAL PROCEEDINGS
                                                          15ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                          15PART
      IIITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                                                          15ITEM
      6. SELECTED FINANCIAL DATA
                                                          16ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                                                          17ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
                                                          26ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                                          26ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                                                          26ITEM
      9A. (T).  CONTROLS AND PROCEDURES
                                                          27ITEM
      9B. OTHER INFORMATION
                                                          28PART
      IIIITEM
      10. Directors, Executive Officers and Corporate Governance
                                                          28ITEM
      11. EXECUTIVE COMPENSATION
                                                          30ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                                                          32ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                          33ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
                                                          34ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                                                          35


Page 2 of
67




This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 (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
      risk factors 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 (“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 prospectus. In
light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.




ITEM
1.  BUSINESS




Overview




We
(sometimes referred to herein as “CEC,” “Company,” “we” or “our”) produce coal through our
operating company located in the People’s Republic of China (“PRC”), Inner Mongolia Tehong
Coal Group Co, Ltd. (“Coal
Group”) and supply heating and electricity requirements throughout the
XueJiaWan district through our other operating company located in the PRC, Inner
Mongolia Zhunger Heat Power Co., Ltd. (“Heat Power,”  and collectively with
Coal Group, the “Operating Companies”). We acquired control over these operating
companies  on November 30, 2004.


Page 3 of
67




Operating
Companies




Inner Mongolia Tehong Coal
Group Co., Ltd.




Coal
Group, organized in China on August 8, 2000, produces coal from the LaiYeGou
coal mine located in Erdos City, Inner Mongolia, PRC.  Since the
acquisition of LaiYeGou in 1999, Coal Group’s principal activities consist of
the production of “powered” 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.




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


Year
                  
                  Produced
                  
                  
                  Purchasedfrom
                    ThirdParties2005
                  
                  
                  612,739
                  
                  
                  
                  100,3582006
                  
                  
                  549,970
                  
                  
                  
                  3,5722007
                  
                  
                  459,055
                  
                  
                  
                  132,7642008
                  
                  
                  264,098
                  *
                  
                  
                  50,0002009
                  
                  
                  453,430
                  
                  
                  
                  154,584









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




Inner Mongolia Zhunger Heat
Power Co., Ltd. (“Heat Power”)




Heat
Power has two distinct operations servicing customers in the XueJiaWan district
in Ordos City, Inner Mongolia.  Heat Power supplies (i) steam heating
and (ii) electricity to end users.  In 2003, Heat Power was granted a
license to supply heating 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. In conjunction with
the thermoelectric plant, Heat Power also owns and operates 21 heat transfer
stations.




Heat
Power is a regulated utility company and it meets the current regulatory
requirements applicable to such companies.  Heat Power supplies
electricity to its customers through a government controlled intermediary, Inner
Mongolia Electric Power Group Co., Ltd. (“Electric Power
Group”).  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 charged by the Company are
approved 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 receive governmental subsidies from time to
time to offset this risk.




In the
XueJiaWan area, hardly anyone owns a home boiler. Accordingly, Heat Power can
supply heat through its closed pipeline system to residents that do not have a
home heating system . Water is first heated in the Company’s thermoelectric
plant using coal burning boilers and then piped directly to homes and public
buildings, including private dwellings, businesses, as well as 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:


Page 4 of
67




Process
of generating electricity during the non-heat season









Process
of generating electricity and supplying heating 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.




Corporate
Structure and PRC Regulatory Requirements




CEC was
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. CEC was
considered a shell company until it entered into a share exchange agreement (the
“Exchange Agreement”) to
acquire its operating companies, Coal Group and Heat Power, on November 30, 2004
(the “2004 Share
Exchange”).  Mr. 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 CEC is the legal survivor of this acquisition and is
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 is considered the
“acquirer” of CEC for financial reporting purposes as its shareholders control a
majority of the post transaction combined company.


Page 5 of
67




We
control our operating companies through a series of contractual arrangements as
opposed to through direct record ownership, and the enforceability of our claim
to legal ownership of Coal Group and Heat Power under such contractual
arrangements may be subject to risk under PRC law.




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 Ministry of Commerce and other regulatory departments.  CEC
determined that, under the New Regulations, CEC was 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 CEC under the New Regulations would be classified under a type of
acquisition called “Equity Acquisition” pursuant to which CEC, being the foreign
investor, would invest cash equity interest into both companies with the
acquisition price to be determined by an asset valuation of both companies
prepared by a PRC asset valuation company as approved by the Ministry of
Commerce of the PRC. The asset valuation would be based on PRC generally
accounting standards and not based on US generally accepted accounting
principles. The acquisition price and hence asset valuation could not exceed
certain guidelines established by the Ministry of Commerce (“FIE Guidelines”).




On
December 30, 2007, CEC acquired Pacific Projects Inc. (“PPI”), a Nevada company with
no assets, liabilities, or equity. CEC holds 100% of the issued and outstanding
shares of PPI, or 5,000 common shares with a par value of $0.001.  On
December 31, 2007, PPI entered into a trust agreement with all the registered
shareholders of Coal Group (members of the family of WenXiang Ding, Chairman of
the Company) and Heat Power (members of  the Ding family indirectly
owning the majority interest), pursuant to which all of the 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 FIE
Guidelines to convert each of Coal Group and Heat Power to a FIE eligible
business pursuant to which a FIE business license would be
issued.  Under the FIE proposed arrangement Coal Group would have
become a wholly owned subsidiary of CEC and Heat Power would be 51% owned by
Coal Group and 49% owned by registered shareholders in the PRC in trust for
CEC.In accordance with the FIE Guidelines, based upon the registered paid up
capital of Coal Group as of November 30, 2008 of approximately $8.5 million
(or RMB 60 million), the acquisition price would not be greater than two and a
half times this amount or $21.25 million. The 49% registered paid up capital of
Heat Power (CEC’s total interest in Heat Power) as of November 30, 2008 was
approximately $3.4 million (RMB 24.5 million) so that the acquisition price
would not be greater than two times this amount or $6.8 million in accordance
with the Ministry of Commerce guidelines. 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”).  The sole
shareholder and director of each of GPI and Axim is Yi Ding, son of WenXiang
Ding, our President and Chief Executive Officer.The controlling
shareholders of CEC transferred their shares to GPI and Axim to be held in trust
with the view that such entities would sell the shares in the open market in
order to fund the plan to convert Coal Group and Heat Power into FIEs to raise
the mandated acquisition price.  As of November 30, 2009, GPI held
20,589,107 shares and Axim held 10,000,000 shares, totaling 30,589,107
shares.  We deemed the 30,589,107 shares held by GPI and Axim to
comprise a portion of the 45,000,000 currently outstanding shares of
CEC.  The shares were never sold under this arrangement because the
Company determined that an alternative structure would be better suited for the
Company.  The Company determined that by using an alternative
structure involving the use of “variable interest entities” or VIEs to reduce
any regulatory risks relating to the foreign ownership structure of the Company.
Pursuant to this approach, the Company would forgo any right to registered
ownership of the Coal Group and Heat Power  contemplated by the 2004
Share Exchange, and would instead permit registered ownership of Coal Group and
Heat Power  to continue to be held by all or certain of the PRC
shareholders (the “VIE
Shareholders”).  The plan requires the Company  to
establish a new indirect subsidiary of the Company incorporated in the PRC (“CEC
China”) which would enter into a series of contractual arrangements with the VIE
Shareholders so that the control and the economic benefits and costs of
ownership of the Operating Companies would flow directly to CEC China through a
series of management and business cooperation agreements.  CEC China
would also have the option to purchase the equity interests in Coal Group and
Heat Power held by the VIE Shareholders.  The VIE Shareholders would
pledge their equity interests in Coal Group and Heat Power as security for their
agreement to comply with provisions of the management and cooperation agreements
and would provide CEC China with a power of attorney to exercise all their
shareholder rights in Coal Group and Heat Power.  The contractual
arrangements under the VIE structure are intended to comply with, and be
enforceable under, applicable PRC law, and would adequately reduce any PRC
regulatory risk without the capital contributions necessary under the FIE plan
initially proposed by the Company.  In connection with the planned VIE
restructuring, the Company and the PRC Shareholders have entered into a
framework contract in July 2009 pursuant to which the Company and the VIE
Shareholders have agreed to enter into the aforementioned
agreements.


Page 6 of
67




Pending
the consummation of the VIE restructuring, the Company still continues to
control Coal Group and Heat Power. The evidence of the Company’s ownership of
Coal Group and Heat Power is reflected by the continued memorialization of the
intent of the original shareholders of the Operating Companies to transfer the
business of Coal Group and Heat Power  to the Company, the actions of
the original shareholders consistent with this view, and the validity and
enforceability of the framework contract under PRC law.




Notwithstanding
the foregoing, prior to the consummation of the VIE restructuring, the
enforceability of the Company’s legal ownership under PRC law could be subject
to risk or challenge.  We believe that the likelihood of the Company’s
claim to legal ownership being at risk or challenged is low.  In our
view, there is a hypothetical risk that a challenge could arise from an action
initiated by either one or more of the original shareholders of Coal Group
and Heat Power, or by a third-party claiming that it received shares of Coal
Group and Heat Power from one or more of the original shareholders following the
date of the 2004 Share Exchange, in each case in violation of the intent of
the  Exchange Agreement.   Given the contractual
agreements and representations of the original shareholders under the Exchange
Agreement, the PPI trust agreement and the framework contract, we do not believe
this to be a material risk.  Furthermore, to the best of our
knowledge, the actions of the original shareholders of Coal Group and Heat Power
have been consistent with this view. Given the foregoing, we plan and expect to
maintain control over Coal Group and Heat Power pending the VIE
restructuring.  We do not believe that there is any reasonably
possible liability associated with past operations that would arise as a result
of our current ownership status over Coal Group and Heat Power.  We do
not believe that our current ownership over Coal Group and Heat Power materially
adversely affects the ability of Coal Group and Heat Power to obtain licenses,
permits, or other authorizations that are necessary to conduct business
operations and commerce.




Coal
Group




Acquisition of LaiYeGou Mine
and related Mining Rights




All land
in the PRC belongs to the PRC government.  Property acquisition in the
PRC is through 50 or 70 year lease agreements and this is the only type of
ownership permitted in the PRC. The Company’s State Owned Land Usage Certificate
covers the land and allows the Company to use the storage facility, office and
“dormitory” for such period.  We acquired the rights to the LaiYeGou mine
and the land surrounding the mine in June 1999 for a period of 50
years.   In addition, Coal Group has all six required
governmental approvals necessary to mine the reserves in the LaiYeGou
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 PRC
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 mine is an underground operation 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.  Full production
resumed in 2009 following the 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 mine to coal field, construction
of seven work stations and emergency exits and improvements to the draught
system.


Page 7 of
67




Occupying
an area of 230.3 hectares (approximately 569 acres) at Dongsheng Coalfield near
Dongsheng City, the LaiYe Gou mine has established proven and probable reserves
of 26.09 million metric tons.  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 of 6,800 -7,000 Kilocalories (“Kcal”). With such
minimal harmful chemical content, it meets the stringent environmental standards
set by the central government of the PRC.




Reserves
Survey




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 LaiYeGou mine is included in the Hongjingta
district and represents approximately 3% of the total survey area (or 230.3
hectares; approximately 569 acres). The survey consisted of 3,454 samples
including 184 outcrops (a body of rock exposed at the surface of the Earth), 140
trenches and 32 drilling samples. The distance between each sample is 4,428
hectares (approximately 10,937 acres).




The
recoverable reserves in the mine decrease gradually and as of the fiscal year
end, the recoverable reserves equaled approximately 8,000,000 metric
tons.  All reported reserves will be mined out within the period of
the existing 50 year permit.




Proven and Probable
Reserves




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




·
              Reserve. That part of a
      mineral deposit which could be economically and legally extracted or
      produced at the time of the reserve determination.  Reserves are
      customarily stated in terms of “ore” when dealing with metalliferous
      minerals; when other materials such as coal, oil, shale, tar, sands,
      limestone, etc. are involved, an appropriate term such as “recoverable
      coal” may be substituted.




·
              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.




As of
March 2005, the reserves in the LaiYeGou mine were as follows (in thousand
metric ton units):





Proven
      reserves
                  
                  
                  21,160Probable
      reserves*
                  
                  
                  4,930Total
      reserve
                  
                  
                  26,090




*
Probable reserves are assigned to existing facilities whereby existing
infrastructure and equipment allows these reserves to be mined at current
production levels.




The
accuracy and risks associated with Proven Reserves are less than of Probable
Reserves due to the assumption of continuity of coal layers between sample
points.


Page 8 of
67




With the
exception of reserves currently developing, all other reserves have been
assigned to existing facilities and determined for sorting or for packaging of
mixed coal.




The
following table shows the mined-out reserves, mining recovery and coal
production for the mine:





Year
                              
                              Mined-outReserves
                              
                              
                              Recovery
                              
                              
                              CoalProduced2006
                              
                              
                              1,374,927
                              
                              
                              
                              40
                              %
                              
                              
                              549,9702007
                              
                              
                              1,147,637
                              
                              
                              
                              40
                              %
                              
                              
                              459,0552008
                              
                              
                              330,122
                              
                              
                              
                              80
                              %
                              
                              
                              264,0982009
                              
                              
                              566,788
                              
                              
                              
                              80
                              %
                              
                              
                              453,430




Coal
Specifications




The
British Thermal Unit (“BTU”) per pound is 12,322.98. One BTU is equal to the
amount of heat required to raise the temperature of one pound of liquid water by
1 degree Fahrenheit at its maximum density, which occurs at a temperature of
39.1 degrees Fahrenheit. One BTU is equal to approximately 251.9 calories or
1055 joules.




Coal
produced from the LaiYeGou 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 mine does not have wash plant facilities nor it is necessary to account
for dilution of its products.




The
sulphur content is 0.5 pounds per million BTU or (St,d): 0.19% and deemed to be
compliant coal as non compliance coal emits greater than 3.0 pounds of sulphur
dioxide per million BTU when burned.  The heat valve is 25 million
BTU/ton (29MJ/kg).




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 recent change to a longwall system has led to a significant
increase in our efficiency and production.


Page 9 of
67




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 by the
contractor. We require the use of four loaders with the capacity of 1.5 tons
each.




Transportation
Infrastructure




Customers
of goods produced at LaiYeGou mine provide their own transportation of goods
from production to their desired location.  Coal sold as part of our
trading activities is transported at our expense using third party
contractors..




Resources and
Utilities




The
source of water for the mine is from Zhunger Keyuan Water Supply Co., Ltd, a
public utility company owned by the government.  The source of power
is provided by the Agricultural Power Supply Bureau and the Erdos Power Industry
Bureau, public utility companies owned by the government.




Coal
Products




Coal
Group’s main products are “powdered” coal and “lump” coal, representing
approximately 60% and 40%, 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.




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




Pricing




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





Year
                                  
                                  AnnualProductionperTon
                                  
                                  
                                  WeightedAveragePrice2005
                                  
                                  
                                  612,739
                                  
                                  
                                  $
                                  242006
                                  
                                  
                                  549,970
                                  
                                  
                                  $
                                  242007
                                  
                                  
                                  459,055
                                  
                                  
                                  $
                                  252008
                                  
                                  
                                  264,098
                                  
                                  
                                  $
                                  332009
                                  
                                  
                                  453,430
                                  
                                  
                                  $
                                  37




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 rendering our mine unsafe. Mine managers on site perform
daily safety inspections.


Page 10
of 67




Future demand for
coal




Integral
to China’s industrial expansion and related energy demand escalation at the
present time, the PRC government is encouraging sectors to build more power
stations, coking factories, calcium carbide factories and silicon iron factories
across the country. As a consequence, the future demand in China for coal
remains strong; a key factor underpinning the output of power stations and such
factories potentially reaching 1.820 billion metric tons in 2010 and 2.100
billion metric tons by 2020. However, estimates of supply deficiencies also are
sizable at 250 million metric tons and 700 million metric tons in 2010 and 2020,
respectively.




Diesel is
an alternative competing factor to coal; however, it is generally not 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 compared to coal products; however, diesel has a higher energy
rate per ton compared to coal.




Heat
Power




Overview




Heat
Power was founded in September 2003 in XueJiaWan Town, Inner Mongolia. 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.




Heat Supply
License




On July
29, 2003 Heat Power was granted a license by the Zhunger County government to
provide centralized heating service to the entire XueJiaWan area, including
Donghua and Yinze residential area. The license was granted 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. Existing pipelines are used and in new areas
expanded.   The PRC government has constructed new networks for
this area.




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 110,400,000 mega
joules and 144,000 megawatts, respectively generated per year.




Heat
Power has two distinct operations: 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 21 to date, 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 will require approximately 160,000 metric tons of powdered coal to sustain
current operations. Guanbanwusu will supply 120,000 of the required metric tons
of coal per year on a non contracted basis.  The remainder will be
sourced from other smaller supliers.




Supply of Powered
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 fluctuating on an upward
trend.


Page 11
of 67




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 the
end of 2010.




Competition




Coal
Group




Due to
existing market conditions as discussed above, the Company does not face any
competition in the usual sense of the term. There are approximately 30,000 coal
mining companies throughout China; however, since demand currently exceeds
supply, competition is not a primary concern in the operation of our business.
We currently anticipate that China’s coal industry will remain a large, growing
and chronically under-supplied customer base for the foreseeable
future.




Although
there are pressures from the PRC government to use clean and other alternative
energies instead of coal due to environmental concerns; coal reserves in China
are abundant and less expensive and a switch to other forms of resources to
generate energy is unlikely.




Heat
Power




Heat
Power does not have competition as it holds an exclusive license to supply
heating and electricity to serviced areas. Competition in obtaining such license
are largely mitigated by a good review of operating history by the PRC
government.  A license  is granted for an undetermined
period of time given that production capabilities and prices are maintained. As
long as heat is supplied to the specified area, there are no termination
provisions.




Patents,
Trademarks and Labor Contracts




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




Employees




Management
believes that relations with its employees are good.




Coal
Group




Coal
Group has a total 150 contracted staff to operate the LaiYeGou coal mine working
in the mine under the supervision of one contractor, Zhangjiakou Coal Group, and
40 full time employees.  Coal Group has an agreement with Zhangjiakou Coal
Group expiring in 2015.  Li Guanghua from Zhangjiakou Coal Group is
responsible for all areas of production and processing.




The 40
employees fill positions in its Administration, Accounting, Sales, Finance &
Securities, and Management department.  The Administration department
is responsible for human resources, training, and payroll. The department also
evaluates all processes to ensure certain levels of efficiency are maintained
and provides any support services to other departments should the need
arise.  The Accounting department is responsible for compliance with
accounting principles and national tax laws, bookkeeping, preparing budgets and
analysis of financial reports.  The Sales department is responsible
for arranging transportation, market research and customer
service.  The Finance and Securities department is responsible for all
corporate matters relating to preparation of contracts and maintaining corporate
books and records.  The Management department is responsible for
overall direction and marketing efforts. This department oversees all other
departments.


Page 12
of 67




Heat
Power




Heat
Power has 250 full time employees filling positions in our Administration,
Finance, Heat Station Management and Project Management Departments and also at
the thermoelectric plant.  Heat Power’s Administration and Finance
departments have similar functions as do their Coal Group counterparts described
above.  The Heat Station Management department is responsible for
inventory levels, purchasing, transportation, maintenance, safety, and overall
management of the efficiency and operation of thermoelectric plant including
heat transfer stations and boilers.  The Project Management department
is responsible for design and production process specifications of new
projects and appointing and managing subcontractors.




Over 200
of the staff of 250 employees work in heating stations in XueJiaWan consisting
of engineers, technicians and management staff overseeing
operations.




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 required 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 required under this item.




ITEM
2.  PROPERTIES




Coal
Group




Principal Business
Office




Our
principal business office is located at 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 and is kept in good condition.




The
office building was purchased by our President, Mr. 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 3 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. Only expenses exceeding $25,000 are
paid.




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. A regulation Coal Group must comply with in order to keep the lease is
the use of the land as specified in the 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 intends to hold this property as an investment and leases the
units for commercial use.  The two buildings are currently vacant with
the exception of 3 floors which were previously occupied by one tenant. The
space is rented on a month to month basis.  There are no renovation
plans for this property in the next fiscal year.


Page 13
of 67




LaiYeGou
Mine




The
location of the LaiYeGou mine is south-east of Bianjia Road and is approximately
230 hectares as shown on the below map:









The
location is central as it intersects with national highways making access to the
mine central to regional areas through No. 210 National Highway. The distance
from LaiYeGou to each location is as follows:


·
            Dongsheng
      – 70 km


·
            Baotou
      City – 170km


·
            XueJiaWan
      Town – 145km


·
            Yulin
      City, Shang’xi Province - 215 km


·
            Wuhai
      City - 370 km


Page 14
of 67




There are
other transportation routes. 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 it to customers.




Access to
the 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 serves as a basis for
permitting entry to the mine and locations where employees are assigned to
work.




Heat
Power




Principal Business
Office




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.




XueJiaWan Thermoelectric
Plant and Office Space




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




ITEM
3.  LEGAL PROCEEDINGS




None.




ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.




PART
II




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




Market
Information




Our
common stock became listed on the Over-the-Counter Bulletin Board under the
symbol “CHGY” in May 2007. The following table shows the high and low closing
bid prices as quoted on the OTCBB for the fiscal quarters indicated and the
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.


High($)
                
                
                Low($)Fiscal
      year Ended November 30, 2008First
      Quarter (December 1, 2007 – February 28, 2008)
                
                
                0.80
                
                
                
                0.30Second
      Quarter (March 1, 2008 - May 31, 2008)
                
                
                1.75
                
                
                
                0.30Third
      Quarter (June 1, 2008 - August 31, 2008)
                
                
                1.55
                
                
                
                0.50Fourth
      Quarter (September 1, 2008 – November 30, 2008)
                
                
                0.68
                
                
                
                0.28




Fiscal
      year Ended November 30, 2009First
      Quarter (December 1, 2008 – February 28, 2009)
                
                
                0.36
                
                
                
                0.07Second
      Quarter (March 1, 2009 - May 31, 2009)
                
                
                0.45
                
                
                
                0.04Third
      Quarter (June 1, 2009 - August 31, 2009)
                
                
                0.95
                
                
                
                0.27Fourth
      Quarter (September 1, 2009 – November 30, 2009)
                
                
                0.93
                
                
                
                0.66


Page 15
of 67




Holders
of Record




As of the
close of business on February 22, 2010, there were approximately 312 holders of
record of our common stock.  However, we believe that there are
additional beneficial owners of our common stock who own their shares in “street
name.”




Dividends




We do not
anticipate that we will declare any dividends in the foreseeable future. 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.




Equity
Compensation Plan Information




The
following is a summary of all of our equity compensation plans as of November
30, 2009.




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
                              
                              –
                              
                              –
                              
                              
                              
                              –Equity
      compensation plans not approved by security holders
                              
                              4,500,000
                              
                              $1.00
                              
                              
                              
                              0Total
                              
                              4,500,000
                              
                              $1.00
                              
                              
                              
                              0




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
2009.




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 required under this
item.


Page 16
of 67




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




Industry
Overview




China’s
coal industry is growing and its customer base is chronically under-supplied.
There are pressures from the government to use clean or alternative energies
instead of coal due to environmental concerns; however, coal reserves in China
are abundant and less expensive than switching to clean or alternative
energies.




Given the
increase in demand for coal production for electricity and heating in China, the
Central government is encouraging local governments to build more power
stations, coking factories, calcium carbide factories and silicon iron factories
across the country.




For the
Coal Group, we attempt to obtain contracts granted by the government, because in
such cases transportation would be guaranteed from LaiYeGou coal mine to the
final destination. Where contracts are privately arranged, transportation is
arranged through the hire of third party transporters by customers. In some
instances, coal is purchased by third parties in close proximity to train
stations where transportation to customer destinations is more efficiently
arranged. However, transportation to destinations is limited to those for which
routes are in place.




The Coal
Group does not have competition in the usual sense of the term that most other
businesses experience. Although there are approximately 30,000 coal mining
companies throughout China, because demand currently exceeds supply, competition
is not a concern in the operation of our business.




The
electricity and heating supply industry is also growing; however, the government
is taking steps to monitor and control economic growth in the rural areas to
ensure that the economy is developing at a stable rate.




China National Labor
Laws




We are
subject to the following labor laws and to the best of our knowledge, we are not
in violation of any labor laws in effect:




·
            The Right to organize and
      Bargain Collectively:China’s National Labor Law, which entered
      into force on January 1, 1995, permits workers in both state and private
      enterprises in China to bargain collectively. The National Labor Law
      provides for collective contracts to be developed through collaboration
      between the labor union (or worker representatives in the absence of a
      union) and management, and should specify such matters as working
      conditions, wage scales, and hours of work. The law also permits workers
      and employers in all types of enterprises to sign individual contracts,
      which are to be drawn up in accordance with the collective
      contract.




·
            Minimum Age for Employment of
      Children:China’s National Labor Law forbids employers to hire
      workers less than 16 years of age and specifies administrative review,
      fines and revocation of business licenses of those businesses that hire
      minors. Laborers between the ages 16 and 18 are referred to as “juvenile workers” and
      are prohibited from engaging in certain forms of physical work including
      labor in mines.




·
            Acceptable Conditions of Work:The Labor Law provides for broad legal protections for workers on
      such matters as working hours, wages, and safety and health. The Trade
      Union Law invests unions with the authority to protect workers against
      violations of their legal rights or contractually agreed conditions of
      work. The Law on the Prevention and Treatment of Occupational Diseases,
      and the Production Safety Law identify responsibilities for work-related
      illness and accidents, and provide for specific penalties for violation of
      the law.




There is
no national minimum wage. The Labor Law allows local governments to determine
their own standards for minimum wages. Local governments generally set their
minimum wage at a level higher than the local minimum living standard but lower
than the average wage.




The Labor
Law mandates a 40-hour standard work week, excluding overtime, and a 24-hour
weekly rest period. It also prohibits overtime work in excess of 3 hours per day
or 36 hours per month and mandates a required percentage of additional pay for
overtime work.




We
believe that we have complied with these China National Labor Laws as discussed
above. Our administration department takes a pro-active approach to ensure that
we and our employees adhere to labor laws.


Page 17
of 67




Compliance
with Environment and Safety laws




Coal
Group




The
safety of Coal Group’s coal mine employees is governed under Coal Laws of China
under the authority of the Coal Safety Production Bureau. Such laws coincide
with application and maintenance of its business license obtained through the
Department of Geology and Mineral Resources. Coal Group is required to pass
random periodic safety inspections which check for gas and water seepage,
ventilation, communication methods between in and outside of the mine, any
breach of environmental laws and certifications of employees who work in
the mine. Mine managers and staff must be trained and have a mine
management qualification certificates obtained through the Coal Safety
Production Bureau. Mine managers on site perform daily safety
inspections.




Heat
Power




Safety in
Heat Power’s thermoelectric plant and heating plants are also regularly reviewed
and monitored. On a quarterly basis, tests are performed on pressure vessels,
insulation, levels of toxicity and moisture, and overall operational efficiency
by local Work Safe Labor Departments and Electric Power companies operated by
the PRC Government.




Heat
Power also performs annual servicing of the plant and a major inspection and
thorough evaluation every 3 years. Such inspections are contracted out to civil
engineering companies.




The
potential liability for violation of environmental standards consists of loss of
our business licenses causing irreparable damage to our reputation and payment
of penalties which vary depending on the nature of the violation and history of
previous violations made. There is currently no fixed amount set by the
government and penalties are determined on a case by case basis. In addition,
any project which we are undertaking will be ceased, pending compliance with
environmental standards.




Also
refer to “Risks Relating to Our Business - Compliance and enforcement of
environmental laws and regulations may cause us to incur significant
expenditures and resources which we may not have.”




Effect of government
regulation on our revenues and costs




Government
regulation affects us materially whenever the pricing to our customers is set by
the government.  Starting in 2009, the selling price of coal was no
longer determined by the government; therefore, Coal Group now sells coal
products at market prices.  However, the pricing to Heat Power end
users remains highly regulated.  The government reviews the price of
heating and electricity from time to time as market conditions
change.  We purchase coal at market prices; therefore, we bear the
risk that market prices for raw materials exceed the regulated prices paid by
end-users.  We receive governmental subsidies from time to time to
offset this risk.




The Role of the National
Department and Reform Commission (NDRC)




The NDRC,
in its efforts to improve the efficiencies in the coal mining industry, is
taking the approach of shutting down smaller mines or any mine which does not
meet its specified basic production requirements. The LaiYeGou mine is
considered one of the larger mines in the area, and, therefore, we do not
believe it will be subject to such potential closure. Our production levels are
determined by market demand.




Heating Pricing Regulated by
Zhunger Pricing Bureau




The price
charged to supply heating to XueJiaWan users is regulated and controlled by the
Inner Mongolia Zhunger Pricing Bureau, a division of the Inner Mongolia
government. The pricing structure is approximately as follows per square
foot:




Residential:
$ 0.43


Commercial:
0.62


Municipal:
$0.62




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




The
prices we charge to supply heating in any area in China is determined by the
Inner Mongolia Zhunger Pricing Bureau and we 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.


Page 18
of 67


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.




Results
of Operations




The
following is an analysis of our financial results for the years ended November
30, 2009 and November 30, 2008.




CoalGroup
                      
                      2009
                      
                      
                      % TotalSales
                      
                      
                      2008
                      
                      
                      % TotalSalesSales
                      
                      $
                      31,966,702
                      
                      
                      
                      77
                      
                      
                      $
                      12,875,569
                      
                      
                      
                      65Cost
      of sales
                      
                      $
                      19,241,768
                      
                      
                      
                      46
                      
                      
                      $
                      5,875,978
                      
                      
                      
                      30Gross
      Profit
                      
                      $
                      12,724,935
                      
                      
                      
                      31
                      
                      
                      $
                      6,999,591
                      
                      
                      
                      35Heat
      Power
                      
                      2009
                      
                      
                      % TotalSales
                      
                      
                      2008
                      
                      
                      % TotalSalesSales
                      
                      $
                      9,748,301
                      
                      
                      
                      23
                      
                      
                      $
                      7,008,528
                      
                      
                      
                      35Cost
      of sales
                      
                      $
                      10,116,176
                      
                      
                      
                      24
                      
                      
                      $
                      8,077,020
                      
                      
                      
                      40Gross
      Profit
                      
                      $
                      (367,875
                      )
                      
                      
                      (1
                      )
                      
                      $
                      (1,068,492
                      )
                      
                      
                      (5
                      )




Sales




Coal
Group




Sales for
Coal Group were $31,966,702 in 2009 compared to $ 12,875,569 in 2008. The
$19,091,133 or 164% increase was as a result of a sales volume increase
resulting from an increase in both coal production and coal
trading..  The LaiYeGou mine became fully operational following the
completion of an expansion and improvement program which included the
installation of more efficient “longwall” mining equipment. Coal Group does not
expect to encounter further interruptions in its business
operations.




The
following is an analysis of the financial results of Coal Group for the years
ended November 30, 2009 and November 30, 2008.




CoalTrading
                    
                    2009
                    
                    
                    % TotalSales
                    
                    
                    2008
                    
                    
                    % TotalSalesSales
                    
                    $
                    15,096,726
                    
                    
                    
                    36
                    
                    
                    $
                    4,280,673
                    
                    
                    
                    22Cost
      of sales
                    
                    $
                    13,931,995
                    
                    
                    
                    33
                    
                    
                    $
                    4,173,304
                    
                    
                    
                    21Gross
      Profit
                    
                    $
                    1,164,731
                    
                    
                    
                    3
                    
                    
                    $
                    107,369
                    
                    
                    
                    1CoalProduction
                    
                    2009
                    
                    
                    % TotalSales
                    
                    
                    2008
                    
                    
                    % TotalSalesSales
                    
                    $
                    16,869,976
                    
                    
                    
                    41
                    
                    
                    $
                    8,594,896
                    
                    
                    
                    43Cost
      of sales
                    
                    $
                    5,309,773
                    
                    
                    
                    13
                    
                    
                    $
                    1,702,674
                    
                    
                    
                    9Gross
      Profit
                    
                    $
                    11,560,204
                    
                    
                    
                    28
                    
                    
                    $
                    6,892,222
                    
                    
                    
                    34


Page 19
of 67


Our
business of buying and selling coal on a proprietary basis expanded in 2009 as a
result of our receipt of additional quota from the local railway bureau to
transport coal by train.  We were able to trade more coal as a result
of our ability to deliver more coal to trading partners by
rail.  Quota is awarded by the local railway bureau based on an
application prepared by us each year.  Parties are awarded additional
quota based on their successful use of quota in the previous year.  We
have received a larger amount of quota for 2010 than we held in 2009; however,
our ability to use any or all of this quota in 2010 is not guaranteed and will
vary with market conditions, and our ability to source commercially acceptable
coal purchases and subsequent trades.




Heat
Power




Heat
Power has two distinct operations: 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. Revenues generated by Heat
Power were $9,748,301 in 2009 compared to $7,008,528  in 2008.
The  $2,739,773 change was a result of an increase in sales
volume resulting from an over 50% increase in the coverage area of Heat Power’s
operations, and a 31% increase in megawatts sold by the electric Power
Group.  In addition, sales in 2008 were artificially low due to a
temporary shutdown of electricity power plant operations for air quality control
purposes in connection with the 2008 Beijing Olympics.




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





Area(‘000sq meterUser
                    
                    
                    
                    
                    Unit Price
                    
                    
                    
                    
                    
                    range)
                    
                    
                    
                    
                    
                    
                    
                    
                    Revenue ($)2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    VarianceResidential
                    
                    
                    0.43
                    
                    
                    
                    0.43
                    
                    
                    
                    1440/1860
                    
                    
                    
                    1010/1440
                    
                    
                    
                    3,504,683
                    
                    
                    
                    2,154,291
                    
                    
                    
                    1,350,392Commercial
                    
                    
                    0.62
                    
                    
                    
                    0.62
                    
                    
                    
                    350/310
                    
                    
                    
                    240/350
                    
                    
                    
                    1,254,595
                    
                    
                    
                    860,842
                    
                    
                    
                    393,753Municipal
                    
                    
                    0.62
                    
                    
                    
                    0.62
                    
                    
                    
                    310/510
                    
                    
                    
                    290/310
                    
                    
                    
                    1,328,395
                    
                    
                    
                    877,737
                    
                    
                    
                    450,658Total
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,087,673
                    
                    
                    
                    3,892,870
                    
                    
                    
                    2,194,803




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





Units ofpowersuppliedPeriod
                    
                    
                    
                    
                    Unit Price
                    
                    
                    
                    
                    
                    (1000KW.h)
                    
                    
                    
                    
                    
                    
                    
                    
                    Revenue ($)2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    VarianceQ1
                    
                    
                    0.03
                    
                    
                    
                    0.03
                    
                    
                    
                    30,388
                    
                    
                    
                    35,561
                    
                    
                    
                    911,646
                    
                    
                    
                    1,127,523
                    
                    
                    
                    (215,877
                    )Q2
                    
                    
                    0.03
                    
                    
                    
                    0.03
                    
                    
                    
                    34,460
                    
                    
                    
                    37,798
                    
                    
                    
                    1,033,782
                    
                    
                    
                    1,198,459
                    
                    
                    
                    (164,677
                    )Q3
                    
                    
                    0.03
                    
                    
                    
                    0.03
                    
                    
                    
                    25,320
                    
                    
                    
                    919
                    
                    
                    
                    661,931
                    
                    
                    
                    29,155
                    
                    
                    
                    632,776Q4
                    
                    
                    0.03
                    
                    
                    
                    0.03
                    
                    
                    
                    34,810
                    
                    
                    
                    20,922
                    
                    
                    
                    1,044,300
                    
                    
                    
                    663,363
                    
                    
                    
                    380,937Total
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    124,978
                    
                    
                    
                    95,200
                    
                    
                    
                    3,651,659
                    
                    
                    
                    3,018,500
                    
                    
                    
                    633,159


Page 20
of 67




Cost of
Sales




Details
of the cost of goods sold for the year 2009 and 2008 are as
follows:




2009
                      
                      
                      2008Salaries
      and wages
                      
                      $
                      711,599
                      
                      
                      $
                      599,882Operating
      supplies
                      
                      
                      489,696
                      
                      
                      
                      472,990Depreciation
      and amortization
                      
                      
                      2,875,596
                      
                      
                      
                      2,069,366Repairs
                      
                      
                      167,391
                      
                      
                      
                      90,081Coal
      and freight
                      
                      
                      22,952,219
                      
                      
                      
                      9,583,012Utilities
                      
                      
                      1,615,581
                      
                      
                      
                      751,117Others
                      
                      
                      545,862
                      
                      
                      
                      386,550Total
                      
                      $
                      29,357,994
                      
                      
                      $
                      13,952,998




Salaries
increased as a result of annual market increases in pay to employees and the
hiring of new personnel at Heat Power. Our cost of coal consumption increased
principally as a result of coal purchases in connection with our trading
business. Our utility costs increased to higher levels because we purchased
steam from other suppliers in to ensure a stable and reliable heat supply as we
increased our service coverage area.




Administrative and Selling
Expenses


2009
                      
                      
                      
                      % Expenses
                      
                      
                      
                      2008
                      
                      
                      
                      % ExpensesSalaries
      and Wages
                      
                      
                      662,636
                      
                      
                      
                      12
                      
                      
                      
                      502,795
                      
                      
                      
                      19Transportation
      and Storage
                      
                      
                      1,448,797
                      
                      
                      
                      27
                      
                      
                      
                      -
                      
                      
                      
                      -Postage
      and office supplies
                      
                      
                      860,820
                      
                      
                      
                      16
                      
                      
                      
                      517,000
                      
                      
                      
                      19Sales
      Tax
                      
                      
                      790,485
                      
                      
                      
                      14
                      
                      
                      
                      352,244
                      
                      
                      
                      13Professional
      and other fees
                      
                      
                      893,395
                      
                      
                      
                      16
                      
                      
                      
                      664,644
                      
                      
                      
                      25Depreciation
                      
                      
                      243,637
                      
                      
                      
                      4
                      
                      
                      
                      167,873
                      
                      
                      
                      6Travel
                      
                      
                      217,702
                      
                      
                      
                      4
                      
                      
                      
                      185,120
                      
                      
                      
                      7Repairs
                      
                      
                      114,505
                      
                      
                      
                      2
                      
                      
                      
                      153,273
                      
                      
                      
                      6Allowance
      for doubtful accounts
                      
                      
                      18,294
                      
                      
                      
                      1
                      
                      
                      
                      1,811
                      
                      
                      
                      1Other
                      
                      
                      213,500
                      
                      
                      
                      4
                      
                      
                      
                      121,881
                      
                      
                      
                      4Total
                      
                      
                      5,463,771
                      
                      
                      
                      100
                      
                      
                      
                      2,666,641
                      
                      
                      
                      100




Salaries and Wages.Wages
increased as a result of annual market increases in pay to employees and the
hiring of new personnel at Heat Power.  We believe that such increase
is in line with market rates in comparable industries in the
region.




Transportation and Storage.Transportation and Storage relates to expenses incurred in our coal
trading business.  We first incurred these expenses in the fiscal year
ended November 30, 2009 because that year was the first full roll-out of our
proprietary coal trading business




Postage and Office.The
increase was attributed to purchasing of office consumables after renovation of
office building in LaiYeGou coal mine in 2009.


Page 21
of 67




Professional and Other Fees.
Fees were paid principally to various professionals, including financial
advisors, attorneys and accountants.  These expenses significantly
increased in the fiscal year ended November 30, 2009 because the company decided
to change many of its advisors, requiring that the new advisors spend time and
resources studying and familiarizing itself with us and our history in an effort
to contribute to our strategic plan going forward.




Depreciation  .Depreciation
relates to office equipment.  These expenses significantly increased in the
fiscal year ended November 30, 2009 due to the recent purchases of new office
equipment.




Travel.Travel expenses
increased due to the work of our consultants.  We expect such expenses
to recur on an periodic basis.




Repairs.Minor repairs were
made to mining equipment as part of overall yearly maintenance
schedule.




Government
Subsidies




Heat
Power received government grants from the Zhunger Finance Department, Zhunger
National Taxation Bureau for supplying heating to local secondary schools and
for VAT exemptions for the period.  Such subsidies declined from
$3,042,579 to $1,633,075 because in 2008 our subsidy was artificially high given
that a portion of our expected 2007 subsidy was delayed until  fiscal
year 2008.




Non-Operating
Income and Expenses




Non-operating
income increased from $319,925 to $510,565 as a result of  as a result of
an increase in deferred revenue recognized in 2008 and 2009.  Deferred
revenue relates to the construction of pipeline, and it increased in line with
the expansion of pipeline in recent years) . Non-operating expenses increased
from $399,093 to $955,648 as a result of  increased loss on disposal of
fixed assets).




Research
and Development




We are
not devoting any resources to research and development efforts on our products.
The development efforts in expanding our production cycle and of constructing of
new thermoelectric plants are subcontracted out to third
parties.


Page 22
of 67




Liquidity
and Capital Resources




As of
November 30, 2009 we had a working capital deficit of $(21,927,565)




We
estimate our cash requirements for the next 12 months for the Coal Group will be
approximately $42,076,000 and for Heat Power will be approximately $
7,070,000 as follows:




Coal Group
                
                
                Heat PowerMaterials
                
                $
                29,248,000
                
                
                $
                4,074,000Labor/Overhead
                
                
                8,695,000
                
                
                
                1,203,000Selling/Administrative
      expenses
                
                
                4,133,000
                
                
                
                1,793,000Total
                
                
                42,076,000
                
                
                
                7,070,000




We
believe that cash flow from collection of accounts receivables, customer
deposits and bank and shareholder loans will be sufficient to sustain our
working capital needs. Shareholder loans are principally used for the purposes
of improvement and expansion rather than to cover working capital
needs.  Bank loans are used for working capital and for expansions
purposes




Loans




Coal
Group obtained loans from the Agricultural Bank of China amounting to $
12,012,012 to assist in funding working capital needs. The terms and
principal amount of the loans granted are as follows:




Duedate
                
                Interestrate
                
                
                PrincipleDecember
      5, 2009
                
                
                6.696
                %
                
                $
                1,757,855March
      15, 2010
                
                
                6.372
                %
                
                
                8,789,277April
      21, 2010
                
                
                6.372
                %
                
                
                1,464,880Total
                
                
                
                
                
                
                12,012,012




We have
no formal agreement with shareholders that ensures that we will continue to
receive shareholders loans for any purpose. We may exhaust this source of
funding at any time.




Cash
Flows




Our net
cash provided by operating activities were $13,208,238 for 2008 and $4,403,400
for 2008. The following summarizes the inflow and outflow of cash for these
periods




2009
                
                
                2008Net
      income
                
                
                5,106,219
                
                
                
                3,959,003(Increase)
      decrease in accounts receivables
                
                
                (1,612,663
                )
                
                
                588,491(Increase)
      in other receivables
                
                
                (113,724
                )
                
                
                (3,111,908
                )(Increase)
      in advance to suppliers
                
                
                (484,264
                )
                
                
                (3,060,298
                )(Increase)
      in inventories
                
                
                (5,074,311
                )
                
                
                (348,021
                )Increase
      in deferred income
                
                
                1,675,012
                
                
                
                3,199,059Increase
      in accounts payable
                
                
                2,028,336
                
                
                
                942,610Increase
      (decrease) in advance from customers
                
                
                8,183,112
                
                
                
                (229,577
                )Others
                
                
                3,500,521
                
                
                
                2,464,041Net
      cash provided by operating activities
                
                
                13,208,238
                
                
                
                4,403,400


Accounts Receivable.The
increase in accounts receivables are mainly attributed to Heat Power’s user fees
made on account. Heat Power customers pay their utility bills in arrears rather
than in advance. The age of such accounts was less than 6
months.  Coal Group does not generally have any receivables except in
limited circumstances.  Coal Group’s sales on account were also
outstanding for less than 6 months.


Page 23
of 67




Customer Advances.The
majority of our customer advances were received in connection with our coal
trading operations.  We did receive some advances from real estate
developers and future Heat Power customers in connection with new developments,
and advances on a limited basis from some of our coal production
customers.




Advances to Suppliers.Advances to suppliers decreased given the completion of our LaiYeGou
improvement and expansion project .  These advances will continue in
connection with Heat Power as we continue to lay pipeline for that business
segment.




Inventory.The increase in
inventory results from the full roll-out of our coal proprietary trading
business that happened in 2009.  Large amounts of recently-purchased
inventory may be on-hand at any given date in anticipation of a trade to on-sell
the coal to a third party.




Accounts Payable.The
increase of accounts payable also results from our use of credit in connection
with our coal proprietary trading business.




Deferred income.These
amounts consist of Heat Power’s receipt of reimbursements from various real
estate development companies for the cost of constructing pipelines to connect
to rural areas being developed. The income is recognized based on a 10 year
straight line depreciation of equipment used in thermoelectric plant
operations.




Investing
Activities




Our net
cash used in investing activities was $13,817,493 in 2009 and our net cash
provided by investing activities was $ 107,638 in 2008. These amounts were used
for the expansion and improvement of the LaiYeGou mine, and to lay more pipeline
for Heat Power.  The total capital expenditures for the now completed
project at the LaiYeGou mine equals approximately $10,000,000 over the past 3
years.  The capital expenditures at Heat Power are expected to
continue for another 3 years with additional capital expenditures over that
period of approximately $7 million.  Although we have no definitive
plans for an acquisition, we from time to time consider expansion opportunities
in the coal mining sector in China, particularly Inner Mongolia, if we believe
that synergies exist with another coal mining facility and our coal
business.




Amortization




All land
in the China belongs to the PRC. To extract resources from land, Coal Group is
required to obtain a mining right. The jurisdiction responsible for issuing such
rights is the Provincial Bureau of National Land and Resource, a division of the
PRC government. In December 2005, Coal Group’s mining right was assessed to be
approximately $ 3.7 million. This mining right is regarded as an intangible
asset currently being amortized using the units of production
methodology.


Page 24
of 67




Financing
Activities




Our net
cash provided by financing activities in 2009 was $5,231,230 and our net cash
used in financing activities was $ 6,390,384 in 2008.




Given the
completion of the LaiYeGou project in 2009 and the continued expansion of Heat
Power, additional funds were required to be provided from financing activities,
including bank loans and shareholders loans. Bank loans, described in “Liquidity
and Capital Resources – Loans” above, are extended pursuant to a one-year
revolving credit facility with Agricultural Bank of China. This facility expires
at the end of April 2010; however, we expect the credit facility to be extended
and the credit line to be increased.




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 outstanding balance of these loans at November 30, 2009
is as follows:




Hangzhou
      Dayovan Group, Ltd.
                
                $
                5,428,963Xinghe
      County Haifu Coal Transportation & Sales Co., Ltd.
                
                
                1,807,686Ordos
      City YiYuan Investment Co. Ltd.
                
                
                1,634,404Yanhua
      Li
                
                
                1,025,416Yi
      Ding
                
                
                47,245Wenxiang
      Ding
                
                
                28,565Total
                
                
                9,972,279




Material
Commitments




We are
committed to the payment of bank loans, and shareholder loans as mentioned
above. We have title to all our capital assets consisting of production
equipment, automobiles, and office equipment.




Heat
Power’s offices are currently leased on a month to month basis and Coal Group
occupies space purchased in 1998. Coal Group holds title to this property in the
form of a 50 year lease from the government. There are no amounts owed with
respect to the Coal Group property.




Heat
Power is obligated to make interest payments on a loan obtained through Coal
Group as mentioned above.




Page 25
of 67




Seasonal
Aspects




Coal
Group’s business is seasonal: sales are particularly low in February, due to the
Chinese New Year holiday at which time our business is closed for 2 weeks. As a
result, sales in March are usually higher.




Heat
Power sales level relating to heat generation is not provided from October
through April since the temperature in the region is high, reducing heating
requirements.




Off
Balance Sheet Arrangements




We have
no off balance sheet arrangements.




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 required 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




The
Company dismissed its principal independent accountant, Robert G. Jeffrey,
Certified Public Accountants (“Jeffrey & Co.”) from its engagement with the
Company in the second quarter of 2009. Jeffrey & Co. was engaged by the
Company in 2004. The members of the Board of Directors approved the Company’s
decision to dismiss Jeffrey & Co. as the Company’s principal independent
accountant.




There
were no disagreements between the Company and Jeffrey & Co. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, from the time of Jeffrey & Co.’s engagement up to the
date of dismissal which disagreements that, if not resolved to Jeffrey &
Co.’s satisfaction, would have caused Jeffrey to make reference to the subject
matter of the disagreement in connection with its report issued in connection
with the audit of the Company’s financial statements. None of the reportable
events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K occurred
within the two fiscal years of the Company ended November 20, 2007 and 2008 and
subsequently up to the date of dismissal. The audit report of Jeffrey & Co.
on the financial statements of the Company as of November 30, 2008 did not
contain any adverse opinion or disclaimer of opinion, and such audit report was
not qualified or modified as to uncertainty, audit scope or accounting
principles.




On May
21, 2009, the Company engaged Wei, Wei & Co., LLP (“Wei & Co.”) to serve
as its independent auditor. The decision to engage Wei & Co. as the
Company’s principal independent accountant was approved by the members of the
Board of Directors of the Company. During the two fiscal years of the Company
ended November 30, 2007 and 2008, and through the date of the Wei & Co.’s
engagement, the Company did not consult Wei & Co. regarding either: (i) the
application of accounting principles to a specified transaction (either
completed or proposed), or the type of audit opinion that might be rendered on
the Company’s financial statements; or (ii) any matter that was either the
subject of a “disagreement” or “reportable event” within the meaning set forth
in Regulation S-K, Item 304 (a)(1)(iv) or (a)(1)(v).




Page 26
of 67




ITEM
9A.(T). CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




The
Company’s Chief Executive Officer and Chief 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 significant weakness in internal control over financial reporting
described below, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that the Company’s disclosure controls and procedures
were ineffective.




Significant Deficiency in
Internal Control Over Financial Reporting




Management
did identify a significant deficiency; 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. Currently we do not have sufficient
in-house expertise in US GAAP reporting. Instead, 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. Although we have not identified any material errors with
our financial reporting or any material weaknesses with our internal controls,
no assurances can be given that there are no such material errors or weaknesses
existing. To remediate this situation, we are seeking to recruit experienced
professionals to augment and upgrade our financial staff to address issues of
timeliness and completeness in US GAAP financial reporting. In addition, we do
not believe we have sufficient documentation with our existing financial
processes, risk assessment and internal controls. We plan to work closely with
external financial advisors to document the existing financial processes, risk
assessment and internal controls systematically.




We
believe that the remediation measures we are taking, if effectively implemented
and maintained, will remediate the significant deficiency discussed
above.




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, 2008. 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 significant weaknesses in internal control as described
above, the Company did not maintain effective internal control over financial
reporting as of November 30, 2008.




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 2008 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 Chief Accounting 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.




Page 27
of 67




ITEM
9B. OTHER INFORMATION




None.




PART
III




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




As of the
date hereof our directors and executive officers are as follows:





Name
                        
                        Age
                        
                        PositionWenXiang
      Ding
                        
                        55
                        
                        President,
      Chief Executive Officer, DirectorYanHua
      Li
                        
                        53
                        
                        DirectorAlex
      (Yuan) Gong
                        
                        36
                        
                        Chief
      Financial
Officer




WenXiang Ding. Mr. Ding became
our CEO, President, Director, and Treasurer on November 5, 2004. Mr. Ding is
responsible for implementing our investment projects, financial budgets and
forecasts, overseeing research and development and human resources and
marketing. Mr. Ding is also responsible for our overall direction and various
initiatives as needed from time to time in maintaining the health of the
Company. Mr. 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, Mr. 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. Mr. Ding also founded Heat Power in September 2003
where he serves as the General Manager. Mr. Ding’s position as General Manager
of Coal Group and Heat Power holds the same responsibilities as his position as
our President. In 1993, Mr. 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 Erdos City Construction Bureau,
respectively.




YanHua Li. Ms. Li became a
Director on November 5, 2004. She is employed as the Vice General Manager of the
Coal Group. 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 responsible for operations management and has been for the past 5
years. Ms. Li does not have any technical training in her field of finance,
human resources and operations management. Ms. Li is the spouse of Wenxiang
Ding.




Alex (Yuan) Gong.Mr. Gong
became CFO of the Company in December 2009. His services as CFO are being
provided to the Company pursuant to a two-year agreement between the Company and
Jessie International (“Jessie International”). Mr. Gong has served as a partner
of Jessie International since March 2008. From September 2007 to March 2008, Mr.
Gong served as Board Secretary and Director of Investor Relations fro Xinyuan
Real Estate Co., Ltd. Prior to that, from March 2007 toSeptember 2007, Mr. Gong
was the Assistant to the Chief Executive Officer of SPG Land (Holdings) Limited,
where he worked on financing of real estate projects and investor relations. Mr.
Gong was a research analyst with Morgan Stanley Asia from April 2005 to March
2007. r. Gong received a BA from Peking University in 1997 and an MBA from the
University of Delaware in 2003.




Page 28
of 67




Corporate
Governance




Board of
Directors




We have
two members serving on our board of directors. 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 actions of the board require the approval of a
majority of the directors in attendance at a meeting at which a quorum is
present. Through November 30, 2009, our board acted by written consent two
times. We currently do not have any independent directors serving on our board
of directors.




Board
Committees




We are
currently listed on the OTC Bulletin Board and are not required to have an audit
committee, nominating committee or a compensation committee. Our Board of
Directors currently performs the functions that would be delegated to the audit
committee.




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 2009, 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.




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, Inc., No.57, Xinhua East Street, Hohhot City,
Inner Mongolia.




Director
Compensation




Our
Directors do not receive compensation for serving on the Board of Directors.
Directors are reimbursed for any expenses incurred on behalf of the
Company.




Page 29
of 67




ITEM
11. EXECUTIVE COMPENSATION




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 year ended November 30, 2009 and 2008.




SUMMARY COMPENSATION TABLENameand
                                                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
                                              
                                              2009
                                              
                                              
                                              6,800
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              6,8002008
                                              
                                              
                                              6,800
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              70,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              76,800YanHua
      Li, Coal Group Vice General Manager
                                              
                                              2009
                                              
                                              
                                              5,100
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,1002008
                                              
                                              
                                              5,100
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,100Fu
      Xu, CFO
                                              
                                              2009
                                              
                                              
                                              9,000
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              9,0002008
                                              
                                              
                                              9,000
                                              
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              
                                              0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              9,000




Both Mr.
Ding and his wife, YanHua Li, have entered into two-year employment agreements
terminating on December 12, 2012. Ms. Li serves as Vice General Manager of Coal
Group and Mr. Ding as President of the Company.




Stock
Option Grants




Our 2008
Stock Option Plan (the “Plan”) provides for the grant of incentive stock options
and nonqualified stock options (the “Awards”) to directors, officers, employees
and consultants of the Company. Certain Awards are intended to qualify as
“incentive stock options” within the meaning of the Internal Revenue Code (the
“Code”). The shares of common stock underlying Awards that can be granted under
our Plan were registered on a Form S-8 with the Securities and Exchange
Commission on February 13, 2008.




The total
number of shares of our common stock that may be issued under the Plan may not
exceed 4,500,000. The total number of shares may be increased annually based
upon the total number of common stock outstanding in subsequent
years.




Page 30
of 67




Outstanding Equity Awards at
Fiscal Year-end




OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOption
      Awards
                            
                            
                            Stock
      AwardsName
                            
                            Number
                              of
                              Securities
                              Underlying
                              Unexercised
                              options
                              (#)
                            
                            
                            Equity
                              Incentive
                              Plan
                              Awards:
                              Number of
                              Securities
                              Underlying
                              Unexercised
                              Unearned
                              Options
                              (#)
                            
                            
                            Equity
                              Incentive
                              Plan
                              Awards:
                              Numberof
                              Securities
                              Underlying
                              Unexercised
                              Unearned
                              Options
                              (#)
                            
                            
                            Option
                              Exercise
                              Price
                              ($)
                            
                            
                            Option
                              Expiration
                              Date
                              ($)
                            
                            
                            Number
                              of
                              Shares
                              or
                              Units of
                              Stock
                              that
                              have not
                              Vested
                              (#)
                            
                            
                            Market
                              Value
                              of
                              Shares
                              of
                              Units of
                              Stock
                              that
                              Have
                              not
                              Vested
                              ($)
                            
                            
                            Equity
                              Incentive
                              Plan
                              Awards:
                              Number
                              of
                              Unearned
                              Shares,
                              Units or
                              Other
                              Rights
                              that
                              have
                              not
                              Vested
                              (#)
                            
                            
                            Equity
                              Incentive
                              Plan Awards:
                              Market or
                              Payout Value
                              of Unearned
                              Shares, Units
                              or other
                              Rights that
                              have not
                              Vested
                              ($)WenXiang
      Ding
                            
                            
                            1,000,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            1.00
                            
                            
                            
                            12/31/10
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -




Page 31
of 67




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




The
following table sets forth as of February 26, 2010 certain information regarding
the beneficial ownership of our common stock by:




·
            each
      person who is known by us to be the beneficial owner of more than 5% of
      the common stock,




·
            each
      of our directors and executive officers,
and




·
            all
      of our directors and executive officers as a
  group.




The
persons or entities listed below have sole voting and investment power with
respect to all shares of common stock beneficially owned by them, except to the
extent such power may be shared with a spouse. No change in control is currently
being contemplated.




As of
February 22, 2010, 45,000,000 shares with a par value of $0.001 per share were
issued and outstanding. We are authorized to issue 200,000,000 shares with a par
value of $0.001 per share.




NameandAddressofBeneficialOwner(1)
                                  
                                  Amountand
                                    Natureof
                                    Beneficial Owner
                                  
                                  
                                  Percent of ClassWenXiang
      Ding  (2)
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  *YanHua
      Li
                                  
                                  
                                  0
                                  
                                  
                                  
                                  —Alex
      (Yuan) Gong
                                  
                                  
                                  0
                                  
                                  
                                  
                                  —Georgia
      Pacific Investments Inc. (3)
                                    No.
      5 New Road, Belize City, Belize
                                  
                                  
                                  20,589,107
                                  (2)
                                  
                                  
                                  46
                                  %Axim
      Holdings Inc. (3)
                                    No.
      5 New Road, Belize City, Belize
                                  
                                  
                                  10,000,000
                                  (2)
                                  
                                  
                                  22
                                  %Officers
      and Directors as a Group
                                  
                                  
                                  33,289,407
                                  
                                  
                                  
                                  74
                                  %








*   Less
than one percent.


(1) The
business address of each holder is the principal address of the Company unless
otherwise stated.


(2)
Represents currently exercisable stock options.


(3) Yi Ding, son
of WenXiang Ding, is the sole shareholder and director of GPI and/or
Axim.




Page 32
of 67




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




Acquisition
of Subsidiary




On
November 30, 2004, we entered into a Share Exchange Agreement with Coal Group
and Heat Power, both Chinese Corporations, whereby we acquired all the issued
and outstanding stock of Coal Group and 49% of the issued and outstanding stock
of Heat Power for consideration of 45,000,000 shares of our common stock. These
shares were exempt from registration under Regulation S of the Securities Act as
they were made to off-shore, non US residents.




The
remaining 51% of Heat Power is owned by Coal Group. In September 2003, our
President and majority shareholder, Mr. Ding, acquired a 70% interest in Heat
Power. That interest was acquired through a contribution of property which is
used by Heat Power in its operations. The property has been capitalized at the
original cost to Mr. Ding. In February, 2004 Mr. Ding transferred this equity
interest to Coal Group. In March 2004, Coal Group sold 15% of its interest to
another shareholder. In August of 2004, a further 4% interest was sold to a
shareholder leaving 51% to be owned by Coal Group. As a result of the Share
Exchange Agreement, Coal Group and the Company together now control 100% of the
outstanding capital stock of Heat Power.




Coal
Group and Heat Power thus became our controlled operating companies. The
shareholders of both companies unanimously agreed to enter into the Agreement
for the purposes of restructuring in anticipation of becoming listed on the OTC
Bulletin Board. We were formed by the shareholders of Coal Group and Heat Power
for this purpose and prior to entering into the Agreement; we had no assets,
liabilities or equity and had not issued any of our shares. As a result of
entering into the Agreement; the shareholders of Coal Group and Heat Power
became our shareholders. The 45,000,000 shares were allocated based on the
capital contributions or ownership of Coal Group and Heat Power. The Agreement
therefore was a non-arms length transaction.




On
December 30, 2007, CEC acquired PPI, a Nevada company with no assets,
liabilities, or equity. CEC holds 100% of the issued and outstanding shares of
PPI, or 5,000 common shares with a par value of $ 0.001.




On
December 31, 2007, PPI entered into a Trust Agreement with all the registered
shareholders of Coal Group, and that of Heat Power, whereby under the terms of
the Trust Agreement, all the shareholders are obligated to hold their interests
in Coal Group and Heat Power in (represented by their registered paid up capital
contributions to date) trust for PPI, for an 8 year term, extendable for another
5 more years.




In
addition, prior to the execution of the PPI Trust Agreement, controlling
shareholders of CEC, including Wenxiang Ding, Yanhua Li and members of their
immediate family, transferred their shares of CEC to GPI and Axim to be held in
trust with the view that GPI and Axim would sell the shares in the open market
in order to fund a plan to convert Coal Group and Heat Power into FIEs to raise
the mandated acquisition price under PRC rules for FIEs. The sole
shareholder and director of each of GPI and Axim is Yi Ding, son of WenXiang
Ding, our President and Chief Executive Officer.As of November 30. 2009,
GPI held 20,589,107 shares and Axim held 10,000,000 shares, totaling 30,589,107
shares. The Company has decided to forgo the FIE plan in favor of the VIE
restructuring described below.




Pursuant
to a VIE restructuring as contemplated by a framework contract entered in June
2009, CEC China, a newly-formed subsidiary of CEC, plans to enter into a series
of contractual arrangements with the registered shareholders of the Operating
Companies so that the control and the economic benefits and costs of ownership
of the Operating Companies would flow directly to CEC China through a series of
management and business cooperation agreements. CEC China would also have the
option to purchase the equity interests in Coal Group and Heat Power held by the
registered shareholders. The registered shareholders would pledge their equity
interests in Coal Group and Heat Power as security for their agreement to comply
with provisions of the management and cooperation agreements and would provide
CEC China with a power of attorney to exercise all their shareholder rights in
Coal Group and Heat Power. The contractual arrangements under the VIE structure
are intended to comply with, and be enforceable under, applicable PRC law, and
would adequately reduce any PRC regulatory risk without the capital
contributions necessary under the FIE plan initially proposed by the Company. In
connection with the planned VIE restructuring, the Company and the registered
shareholders have entered into a framework contract in July 2009 pursuant to
which the Company and the registered shareholders have agreed to enter into the
aforementioned agreements.




Page 33
of 67




Shareholder
Loans




Our
shareholders have advanced the following amounts to Heat Power for the purposes
of satisfying working capital needs as of November 30, 2009:




Hangzhou
      Dayovan Group, Ltd.
                
                $
                5,428,963Xinghe
      County Haifu Coal Transportation & Sales Co., Ltd.
                
                
                1,807,686Ordos
      City YiYuan Investment Co. Ltd.
                
                
                1,634,404Yanhua
      Li
                
                
                1,025,416Yi
      Ding
                
                
                47,245Wenxiang
      Ding
                
                
                28,565Total
                
                
                9,972,279




These
loans are payable upon demand and interest is charged at 6.31% 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.




We expect
this source of funding to continue; however, in the event shareholder loans are
no longer granted to us, we may obtain long or short term financing or downsize
our operations. There are no formal agreements in place with respect to
shareholder loans.




Transactions
involving our directors, officers, principal shareholders consist of the above
noted principal shareholders providing shareholder loans to fund our
thermoelectric plant expansion and working capital needs. There is no formal
agreement with principal shareholders.




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:




2009
                        
                        
                        2008Audit
      fees
                        
                        $
                        120,000
                        
                        
                        $
                        50,000Audit-related
      feesTax
      feesAll
      other feesTotal
                        
                        $
                        120,000
                        
                        
                        $
                        50,000




All of
the professional services rendered by principal accountants for the audit of the
our annual 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 the Board of Directors.




Page 34
of 67




Pre-Approval
Process, Policies and Procedures




We do not
have an audit committee and as a result, our entire board of directors performs
the duties of an audit committee. Our board of directors evaluated and approved
in advance the scope and cost of the engagement of an auditor before the auditor
rendered audit and non-audit services.  In the future, when we
establish an audit committee, the committee will pre-approve all audit and
permissible non-audit services performed by the independent registered public
accounting firm. These services may include audit services, audit-related
services, tax services and other services.




ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




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





(1)  Financial Statements:





(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.




Page 35
of 67




Exhibit
                      Number
                    
                    Description3.1
                    
                    Certificate
      of Incorporation, dated October 14, 2002-Omega Project Consultations Inc.
      *3.2
                    
                    Certificate
      of Incorporation, dated November 3, 2004- China Energy Corporation
      *3.3
                    
                    Articles
      of Incorporation, dated October 11, 2002- Omega Project Consultations Inc.
      *3.4
                    
                    Certificate
      Amending Articles of Incorporation dated November 3, 2004 changing our
      name to “ChinaEnergy
      Corporation” and increase our authorized capital to 200,000,000 from
      75,000,000. *3.5
                    
                    Bylaws,
      effective October 12, 2002 *10.1
                    
                    Share
      Exchange Agreement between China Energy Corporation and Inner Mongolia
      Tehong Coal GroupCo.,
      Ltd and Inner Mongolia Zhunger Heat Power Co., Ltd., dated November 30,
      2004. *10.2
                    
                    Trust
      Agreement between PPI and Coal Group and Heat Power dated December 31,
      2007**10.3
                    
                    Share
      Trust Agreement between PPI, Axim and GPI dated January 3,
      2008**10.4
                    
                    2008
      Stock Option Plan ***31.1
                    
                    Rule
      13a-14(A) Certification of the Chief Executive Officer31.2
                    
                    Rule
      13a-14(A) Certification of the Chief Financial Officer32.1
                    
                    Section
      1350 Certification of the Chief Executive Officers32.2
                    
                    Section
      1350 Certification of the Chief Financial
  Officers







*
              Incorporated
      by reference from our Form SB-2 that was originally filed with the SEC on
      September 27, 2005.**
              Incorporated
      by reference from Form 8K filed with the SEC on January 14,
      2008.***
              Incorporated
      by reference from Form 8K filed with the SEC on February 13,
      2008.




Page 36
of 67




CHINA
ENERGY CORPORATION


AND
SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS


FOR THE
YEARS ENDED NOVEMBER 30, 2009 AND 2008


AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Page 37
of 67





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The 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, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years ended November 30, 2009 and 2008. 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
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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 at November 30, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years
ended November 30, 2009 and 2008, in conformity with accounting principles
generally accepted in the United States of America.





/s/ Wei,
Wei & Co., LLP





New York,
New York


March 1,
2010





Page 38
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


NOVEMBER
30, 2009 AND 2008





2009
                  
                  
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  5,073,645
                  
                  
                  $
                  456,802Accounts
      receivables, net of allowance for doubtful accounts of $120,853 and
      $102,401, respectively
                  
                  
                  4,600,667
                  
                  
                  
                  3,006,456Other
      receivables
                  
                  
                  4,447,272
                  
                  
                  
                  4,333,548Advance
      to suppliers
                  
                  
                  5,511,630
                  
                  
                  
                  2,750,536Inventories
                  
                  
                  5,574,465
                  
                  
                  
                  500,154Total
      current assets
                  
                  
                  25,207,679
                  
                  
                  
                  11,047,496Fixed
      assets:Property,
      plant and equipment
                  
                  
                  50,546,862
                  
                  
                  
                  38,566,119Construction
      in progress
                  
                  
                  4,236,281
                  
                  
                  
                  9,809,23054,783,143
                  
                  
                  
                  48,375,349Less:
      accumulated depreciation and depletion
                  
                  
                  (7,456,849
                  )
                  
                  
                  (4,778,216
                  )Net
      fixed assets
                  
                  
                  47,326,294
                  
                  
                  
                  43,597,133Other
      assets:Investment
      property, net of accumulated depreciation of $166,172 and $120,686,
      respectively
                  
                  
                  1,936,278
                  
                  
                  
                  1,978,873Mining
      right, net of amortization of $787,417 and $492,575,
      respectively
                  
                  
                  3,627,642
                  
                  
                  
                  3,916,413Long
      term investment
                  
                  
                  -
                  
                  
                  
                  255,776Restricted
      cash
                  
                  
                  149,898
                  
                  
                  
                  148,668Other
      long term assets
                  
                  
                  450,021
                  
                  
                  
                  -Notes
      receivable
                  
                  
                  7,913,100
                  
                  
                  
                  2,802,850Total
      other assets
                  
                  
                  14,076,939
                  
                  
                  
                  9,102,580TOTAL
      ASSETS
                  
                  $
                  86,610,912
                  
                  
                  $
                  63,747,209LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
                  
                  $
                  12,012,012
                  
                  
                  $
                  5,558,888Accounts
      payable
                  
                  
                  11,489,568
                  
                  
                  
                  9,389,617Advance
      from customers
                  
                  
                  12,125,187
                  
                  
                  
                  3,350,659Accrued
      liabilities
                  
                  
                  325,539
                  
                  
                  
                  326,611Other
      payables
                  
                  
                  387,729
                  
                  
                  
                  929,463Shareholder
      loans
                  
                  
                  9,972,279
                  
                  
                  
                  10,718,163Current
      portion of deferred income
                  
                  
                  822,930
                  
                  
                  
                  581,903Total
      current liabilities
                  
                  
                  47,135,244
                  
                  
                  
                  30,855,304Non-current
      liabilitiesDeferred
      income
                  
                  
                  6,224,033
                  
                  
                  
                  4,790,048Total
      liabilities
                  
                  
                  53,359,277
                  
                  
                  
                  35,645,352Stockholders’
      equity:Common
      stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000
      shares issued and outstanding
                  
                  
                  45,000
                  
                  
                  
                  45,000Additional
      paid-in capital
                  
                  
                  8,655,805
                  
                  
                  
                  8,655,805Paid
      in capital – stock options
                  
                  
                  315,000
                  
                  
                  
                  315,000Retained
      earnings
                  
                  
                  12,542,081
                  
                  
                  
                  8,545,786Statutory
      reserves
                  
                  
                  8,078,765
                  
                  
                  
                  6,968,841Accumulated
      other comprehensive income
                  
                  
                  3,614,984
                  
                  
                  
                  3,571,425Total
      stockholders’ equity
                  
                  
                  33,251,635
                  
                  
                  
                  28,101,857TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  86,610,912
                  
                  
                  $
                  63,747,209





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





Page 39
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED NOVEMBER 30, 2009 AND 2008





2009
                                          
                                          
                                          2008Revenues
                                          
                                          $
                                          41,715,003
                                          
                                          
                                          $
                                          19,884,097Cost
      of revenues
                                          
                                          
                                          (29,357,944
                                          )
                                          
                                          
                                          (13,952,998
                                          )Gross
      profit
                                          
                                          
                                          12,357,059
                                          
                                          
                                          
                                          5,931,099Operating
      expenses:Selling
      and marketing
                                          
                                          
                                          (2,207,042
                                          )
                                          
                                          
                                          (394,298
                                          )General
      and administrative
                                          
                                          
                                          (3,256,729
                                          )
                                          
                                          
                                          (2,272,343
                                          )Total
      operating expenses
                                          
                                          
                                          (5,463,771
                                          )
                                          
                                          
                                          (2,666,641
                                          )Income
      from operations
                                          
                                          
                                          6,893,288
                                          
                                          
                                          
                                          3,264,458Other
      income and expenses:Finance
      expenses, net
                                          
                                          
                                          (793,670
                                          )
                                          
                                          
                                          (765,388
                                          )Government
      subsidies
                                          
                                          
                                          1,633,075
                                          
                                          
                                          
                                          3,042,579Non-operating
      income
                                          
                                          
                                          510,565
                                          
                                          
                                          
                                          319,925Non-operating
      expenses
                                          
                                          
                                          (955,648
                                          )
                                          
                                          
                                          (399,093
                                          )Income
      before income taxes
                                          
                                          
                                          7,287,610
                                          
                                          
                                          
                                          5,462,481Provision
      for income taxes
                                          
                                          
                                          (2,181,391
                                          )
                                          
                                          
                                          (1,503,478
                                          )Net
      income
                                          
                                          $
                                          5,106,219
                                          
                                          
                                          $
                                          3,959,003Other
      comprehensive income:Foreign
      currency translation adjustment
                                          
                                          
                                          43,559
                                          
                                          
                                          
                                          1,883,321Total
      comprehensive income
                                          
                                          $
                                          5,149,778
                                          
                                          
                                          $
                                          5,842,324Net
      income per common sharebasic
      and diluted
                                          
                                          $
                                          0.11
                                          
                                          
                                          $
                                          0.09Weighted
      average common shares outstandingbasic and
      diluted
                                          
                                          $
                                          45,000,000
                                          
                                          
                                          $
                                          45,000,000




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





Page 40
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED NOVEMBER 30, 2009 AND 2008





Additional
                          
                          
                          Paid-in
                          
                          
                          
                          
                          
                          
                          
                          
                          Accumulated Other
                          
                          
                          TotalCommonStock
                          
                          
                          Paid-in
                          
                          
                          Capital Stock
                          
                          
                          Retained
                          
                          
                          Statutory
                          
                          
                          Comprehensive
                          
                          
                          Stockholders’Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Options
                          
                          
                          Earnings
                          
                          
                          Reserves
                          
                          
                          Income
                          
                          
                          EquityBalance
      as of November 30, 2007
                          
                          
                          45,000,000
                          
                          
                          $
                          45,000
                          
                          
                          $
                          8,655,805
                          
                          
                          $
                          -
                          
                          
                          $
                          5,706,522
                          
                          
                          
                          5,849,102
                          
                          
                          
                          1,688,104
                          
                          
                          
                          21,944,533Value
      of stock options granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          315,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          315,000Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,959,003
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,959,003Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,883,321
                          
                          
                          
                          1,883,321Appropriation
      of statutory reserves
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,119,739
                          )
                          
                          
                          1,119,739
                          
                          
                          
                          -
                          
                          
                          
                          -Balance
      as of November 30, 2008
                          
                          
                          45,000,000
                          
                          
                          $
                          45,000
                          
                          
                          $
                          $8,655,805
                          
                          
                          $
                          315,000
                          
                          
                          $
                          8,545,786
                          
                          
                          
                          6,968,841
                          
                          
                          
                          3,571,425
                          
                          
                          
                          28,101,857Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,106,219
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,106,219Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          43,559
                          
                          
                          
                          43,559Appropriation
      of statutory reserves
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,109,924
                          )
                          
                          
                          1,109,924
                          
                          
                          
                          -
                          
                          
                          
                          -Balance
      as of November 30, 2009
                          
                          
                          45,000,000
                          
                          
                          $
                          45,000
                          
                          
                          $
                          $8,655,805
                          
                          
                          $
                          315,000
                          
                          
                          $
                          12,542,081
                          
                          
                          
                          8,078,765
                          
                          
                          
                          3,614,984
                          
                          
                          
                          33,251,635





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





Page 41
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED NOVEMBER 30, 2009 AND 2008





2009
                                                                
                                                                
                                                                2008Cash
      flows from operating activities:Net
      income
                                                                
                                                                $
                                                                5,106,219
                                                                
                                                                
                                                                $
                                                                3,959,003Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Allowance
      for doubtful accounts
                                                                
                                                                
                                                                18,452
                                                                
                                                                
                                                                
                                                                -Depreciation
      and amortization
                                                                
                                                                
                                                                3,102,399
                                                                
                                                                
                                                                
                                                                2,281,398Options
      issued for services
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                315,000Interest
      accrued on shareholder loans
                                                                
                                                                
                                                                206,175
                                                                
                                                                
                                                                
                                                                209,118Loss
      on disposal of property, plant and equipment
                                                                
                                                                
                                                                753,114
                                                                
                                                                
                                                                
                                                                -Gain
      from short term investments
                                                                
                                                                
                                                                (36,813
                                                                )
                                                                
                                                                
                                                                -Changes
      in operating assets and liabilities:Decrease
      in certificate of deposit
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                94,698(Increase)
      decrease in accounts receivables
                                                                
                                                                
                                                                (1,612,663
                                                                )
                                                                
                                                                
                                                                588,491(Increase)
      in other receivables
                                                                
                                                                
                                                                (113,724
                                                                )
                                                                
                                                                
                                                                (3,111,908
                                                                )(Increase)
      in advance to suppliers
                                                                
                                                                
                                                                (484,264
                                                                )
                                                                
                                                                
                                                                (3,060,298
                                                                )(Increase)
      in inventories
                                                                
                                                                
                                                                (5,074,311
                                                                )
                                                                
                                                                
                                                                (348,021
                                                                )Increase
      in deferred income
                                                                
                                                                
                                                                1,675,012
                                                                
                                                                
                                                                
                                                                3,199,059Increase
      in accounts payable
                                                                
                                                                
                                                                2,028,336
                                                                
                                                                
                                                                
                                                                942,610Increase
      (decrease) in advance from customers
                                                                
                                                                
                                                                8,183,112
                                                                
                                                                
                                                                
                                                                (229,577
                                                                )(Decrease)
      in accrued liabilities and other payables
                                                                
                                                                
                                                                (542,806
                                                                )
                                                                
                                                                
                                                                (436,173
                                                                )Net
      cash provided by operating activities
                                                                
                                                                
                                                                13,208,238
                                                                
                                                                
                                                                
                                                                4,403,400Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                                                                
                                                                
                                                                (5,466,545
                                                                )
                                                                
                                                                
                                                                (4,552,335
                                                                )Increase
      in construction in progress
                                                                
                                                                
                                                                (2,870,197
                                                                )
                                                                
                                                                
                                                                (1,029,104
                                                                )Proceeds
      from disposal of property, plant and equipment
                                                                
                                                                
                                                                75,661
                                                                
                                                                
                                                                
                                                                -Payments
      made on mining right obligation
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (152,614
                                                                )Proceeds
      from disposal of long term investment
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                3,633,408Payments
      made on other long term assets
                                                                
                                                                
                                                                (450,021
                                                                )
                                                                
                                                                
                                                                -Increase
      in notes receivable
                                                                
                                                                
                                                                (5,238,230
                                                                )
                                                                
                                                                
                                                                (2,126,434
                                                                )Payments
      received on notes receivable
                                                                
                                                                
                                                                131,839
                                                                
                                                                
                                                                
                                                                4,334,717Net
      cash (used in) provided by investing activities
                                                                
                                                                
                                                                (13,817,493
                                                                )
                                                                
                                                                
                                                                107,638Cash
      flows from financing activities:Proceeds
      from short term bank loans
                                                                
                                                                
                                                                12,000,585
                                                                
                                                                
                                                                
                                                                5,424,000Principal
      payments made on short term bank loans
                                                                
                                                                
                                                                (5,561,247
                                                                )
                                                                
                                                                
                                                                (9,991,579
                                                                )Advance
      from shareholders
                                                                
                                                                
                                                                4,435,826
                                                                
                                                                
                                                                
                                                                2,024,754Repayment
      of shareholder loans
                                                                
                                                                
                                                                (5,643,934
                                                                )
                                                                
                                                                
                                                                (1,141,895
                                                                )Repayment
      of long term obligation
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (2,705,665
                                                                )Net
      cash provided by (used in) financing activities
                                                                
                                                                
                                                                5,231,230
                                                                
                                                                
                                                                
                                                                (6,390,384
                                                                )Effect
      of exchange rate changes on cash
                                                                
                                                                
                                                                (5,132
                                                                )
                                                                
                                                                
                                                                846,386Net
      change in cash and cash equivalents
                                                                
                                                                
                                                                4,616,843
                                                                
                                                                
                                                                
                                                                (1,032,960
                                                                )Cash
      and cash equivalents,
      beginning of year
                                                                
                                                                
                                                                456,802
                                                                
                                                                
                                                                
                                                                1,489,762Cash
      and cash equivalents, end of year
                                                                
                                                                $
                                                                5,073,645
                                                                
                                                                
                                                                $
                                                                456,802Supplemental
      disclosure of cash flow informationCash
      paid for interest
                                                                
                                                                $
                                                                809,111
                                                                
                                                                
                                                                $
                                                                755,959Cash
      paid for income taxes
                                                                
                                                                $
                                                                1,887,198
                                                                
                                                                
                                                                $
                                                                2,373,379Supplemental
      disclosure of non-cash investing and financing cash flow
      informationProperty, plant and equipmentpurchased with
      financing
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                1,701,485





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





Page 42
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED NOVEMBER 30, 2009 AND 2008





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, that
the Company was 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.





The
Company is in the process of completing the necessary actions to meet the
current PRC legal requirements related to the acquisition of Coal Group and Heat
Power.  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.





The
framework agreement provides that (i) the Company will establish a newly-formed,
indirect subsidiary of the Company incorporated in the People’s Republic of
China (“CEC China”), (ii) CEC China will enter an exclusive service agreement
and option agreement with each of Coal Group and Heat Power (collectively, the
“Operating Companies”) and a share pledge agreement with each of the
Operating Companies and certain of their respective PRC Shareholders (“PRC
Shareholders”). The framework agreement also requires the PRC Shareholders
to fully authorize CEC China to exercise all shareholders’ rights that the PRC
Shareholders can exercise in the Operating Companies. By entering into the
framework agreement and subsequently setting up the structure involving the use
of VIEs, the Company will have the control and the economic benefits and costs
of ownership of the Operating Companies consistent with PRC regulatory
requirements.





The
Company contemplates that the restructuring process will be completed during
2010.





Page 43
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED NOVEMBER 30, 2009 AND 2008





Business





The
Company’s business is made up of two segments: Coal Group and Heat
Power.





Coal Group: Coal Group 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 Group
Co. Ltd. Coal Group owns a coal mine in the Inner Mongolia District from which
it produces coal. It also buys, sells, and transports coal, serving the Inner
Mongolia District.  Coal Group has the capacity to produce
approximately up to 800,000 metric tons per year based on enhancement of
productions lines, which was completed in August of 2009.





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”).





Heat
Power obtains its supply of powdered coal required to generate heat production
from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”). It also obtains its
supply through various other coal mines in the area.





2.
            Summary
      of Significant Accounting Policies





The
consolidated financial statements of the Company as of November 30,
2009 and 2008 and for the years ended November 30, 2009 and 2008, have been
prepared in accordance with generally accepted accounting principles in the
United States of America and the rules and regulations of the Securities and
Exchange Commission (the “SEC”), including the accounts of China Energy
Corporation and its wholly owned subsidiaries.





Basis
of Consolidation





The
consolidated financial statements include the accounts of the Company and Coal
Group and Heat Power.  All significant intercompany accounts and
transactions have been eliminated in consolidation.





A
subsidiary is an entity in which the Company, directly or indirectly, controls
more than one half of the voting power; has the power to appoint or remove the
majority of the members of the board of directors; to cast majority of votes at
the meeting of the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the shareholders or
equity holders.





Page 44
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Recently
Issued Accounting Standards





In
December 2007, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141R”), as codified
in FASB Accounting Standards Codification (the “ASC”) Topic 805 “Business Combinations” (“ASC 805”).  The
objective of ASC 805 is to improve the relevance, representational faithfulness
and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects.  To
accomplish this, ASC 805 establishes principles and requirements for how the
acquirer (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree, (b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain price, and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  SFAS
141R, now codified in ASC 805, is effective for fiscal years beginning on or
after December 15, 2008.  The Company’s adoption of ASC 805 did not
have a material impact on its consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated
Financial Statements–an amendment of ARB
No.51” (“SFAS
160”), as codified in FASB ASC Subtopic 810-10, “Consolidation” (“ASC
810-10”).   ASC 810-10 requires that non-controlling (or
minority) interests in subsidiaries be reported in the equity section of the
company’s balance sheet, rather than in a mezzanine section of the balance sheet
between liabilities and equity.  Additionally, ASC 810-10 revises
the manner in which the net income of the subsidiary is reported and disclosed
in the controlling company’s income statement and also establishes guidelines
for accounting or changes in ownership percentages and for
deconsolidation.  ASC 810-10 is effective for financial statements for
fiscal years beginning on or after December 15, 2008 and interim periods within
those years. The Company’s adoption of SFAS 160, now codified as ASC 810-10 did
not to have a material impact on its consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” Which is codified as FASB ASC Topic 825, “Financial Instruments” (“ASC
825”). The ASC 825 amends SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments,” now codified in ASC 825, to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. This issuance also amends APB Opinion No. 28, “Interim Financial Reporting”
now codified in FASB Topic 270 “Interim Reporting” (“ASC
270”), to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 and APB 28-1, now codified in ASC 825
were effective for interim reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The issuance
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, it requires
comparative disclosures only for periods ending after initial adoption. The
Company does not expect the changes associated with adoption of ASC 825 will
have a material effect on the determination or reporting of its consolidated
financial results.





In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”(“FSP FAS No. 115-2 and
FAS 124-2”), which are codified in ASC 320 FSP FAS No. 115-2 provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities.  This FSP is effective
for interim periods ending after June 15, 2009, but early adoption is permitted
for interim periods ending after March 15, 2009.  The Company does not
believe this guidance will have a significant impact on its consolidated
financial statements.




Page 45
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





In April
2009, the FASB released  FSP FAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”), now
codified in ASC 820.  This issuance  provides additional guidance
for estimating fair value in accordance with ASC 820, when the volume and level
of activity for the asset or liability have significantly decrease with
providing guidance on identifying circumstances that indicate a transaction is
no orderly.  FSP FAS No. 157-4, now codified in ASC 820 was
effective for interim periods ending after June 15, 2009, and the adoption of
ASC 820 did not have a significant impact on its consolidated financial
statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), as codified
in FASB ASC 855, “Subsequent Events” (“ASC 855”).  ASC
855 established standards of accounting for and disclosures of subsequent
events which occur after the balance sheet date but before the financial
statements are issued or are available to be issued.  ASC 855 requires
the disclosure of the date through which the subsequent events have been
evaluated as well as whether that date is the date the financial statement were
issued or the date the financial statements were available to be
issued.  The Company does not believe the adoption of SFAS 165, now
codified in ASC 855 would have a significant impact on the consolidated
financial statements.  The requisite evaluation of events occurring
subsequent to the Company’s year ended of November 30, 2009 through March
1, 2010 the filling date of this Annual Report on Form 10-K for the fiscal
year ended November 30, 2009 had been evaluated.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No.46(R)”
(“SFAS 167”) as codified in FASB ASC 810 “Consolidation” (ASC 810”), which amends
the consolidation guidance applicable to variable interest entities. The
amendments will significantly affect the overall consolidation analysis under
FASB Interpretation No. 46(R).  This statement is effective as of
the beginning of the first fiscal year that begins after November 15, 2009.
This statement will be effective for the Company beginning in fiscal 2010. The
Company is still assessing whether ASC 810 will have a material impact on the
Company’s financial position, results of operations or cash flows.





In June
2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 168”), as
codified in FASB ASC 105, “Generally Accepted Accounting
Principles”
(“ASC 105”).  ASC 105 established the FASB Accounting Standards
Codification (“the Codification”) as the sources for authoritative U.S. GAAP.
The Codification will supersede all existing non-SEC accounting and reporting
standards under U.S. GAAP for nongovernmental entities.  ASC 105 was
effective for interim and annual periods ending after September 15,
2009.  Accordingly, upon the adoption of SFAS 168, now codified as ASC
105, effective September 1, 2009, the Company began to reference the new
Codification as the sole source of authoritative literature when referring to
U.S. GAAP in the Company’s Annual Report on Form 10-K for the fiscal year ended
November 30, 2009 and all subsequent public filings. The Codification is not
intended to nor does it change existing U.S. GAAP and adoption will not have any
impact on the Company’s financial position, results of operations or cash
flows.





Page 46
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





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,
                  2009
                
                November 30,
                  2008Balance
      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=RMB
      6.8265
                
                US$1=RMB
      6.8359Amounts
      included in the statements of operations, statements of changes in
      stockholders’ equity and statements of cash flows for the
    year
                US$1=RMB
      6.8330
                
                US$1=RMB
      7.0059





For the
years ended November 30, 2009 and 2008, foreign currency translation adjustment
of approximately $43,559 and $1,883,321, respectively, have been 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. As of November 30, 2009 and 2008, the balances of
allowance for doubtful accounts were $120,853 and $102,401,
respectively.  For the years presented, the Company did not write off
any accounts receivable as bad debts.





Page 47
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Inventories





Inventories
consisted of coal and operating supplies. Inventories are valued at the
lower of cost or market, with cost being determined on the first in, first out
basis.  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, 2009 and 2008.





Property,
Plant and Equipment





Property,
plant and equipment are recorded at cost, less accumulated depreciation and
amortization.  Cost include 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





All land
in China belongs to the government.  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 is payable in installments 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 and probable reserves.





Page 48
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Long
Term Investment





Investments
in which the Company owns a 20% or greater equity interest are accounted for by
the equity method of accounting.





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. The
long-term deposits carry an interest rate of 0.6% per annum.





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 Group
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, 2009 and 2008.





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.





Page 49
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





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 $188,151 and $132,730 for the years ended
November 30, 2009 and 2008, respectively. 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, 2009 and
2008, the carrying values of these financial instruments approximated their fair
values.





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.





Page 50
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
estimated.





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:





SurplusReserveFund: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 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 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-SurplusReserveFund (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 and RMB 10 per ton of raw coal mined for 2009 and
2008, 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.




Page 51
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





The
statutory reserves consist of the following:





November30,2009
                  
                  November30,2008Statutory
      surplus reserve and welfare fund
                  
                  $
                  2,447,598
                  
                  
                  $
                  1,932,528Safety
      and maintenance reserve
                  
                  
                  5,631,167
                  
                  
                  
                  5,036,313Total
      statutory reserves
                  
                  $
                  8,078,765
                  
                  
                  $
                  6,968,841





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.





Page 52
of 67


CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





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.





3.        Segment
Reporting





The
Company is made up of two segments of business, Coal Group which derives its
revenue from the mining and purchase and sale of coal, and Heat Power which
derives its revenue by providing heating and electricity to residents and
businesses of a local community.  Each of these segments is conducted
in a separate corporation and each functions independently of the
other.





Except
for the loans made to Heat Power by Coal Group in the principal amount of RMB 93
million (equivalent to $14 million) as of November 30, 2009 and 2008, during the
periods reported herein, there were no other transactions between the two
segments.  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 30,2009
                                
                                
                                
                                
                                
                                2008Heat
                                
                                
                                Coal
                                
                                
                                
                                
                                
                                Heat
                                
                                
                                CoalPower
                                
                                
                                Group
                                
                                
                                Total
                                
                                
                                Power
                                
                                
                                Group
                                
                                
                                TotalSales
      to external customers
                                
                                
                                9,748,301
                                
                                
                                
                                31,966,702
                                
                                
                                
                                41,715,004
                                
                                
                                $
                                7,008,528
                                
                                
                                $
                                12,875,569
                                
                                
                                $
                                19,884,097Interest
      expenses, net
                                
                                
                                208,332
                                
                                
                                
                                585,338
                                
                                
                                
                                793,670
                                
                                
                                
                                208,283
                                
                                
                                
                                557,105
                                
                                
                                
                                765,388Depreciation
      and amortization
                                
                                
                                2,598,146
                                
                                
                                
                                502,091
                                
                                
                                
                                3,100,237
                                
                                
                                
                                2,037,973
                                
                                
                                
                                243,425
                                
                                
                                
                                2,281,398Segment
      profit (loss)
                                
                                
                                (1,113,782
                                )
                                
                                
                                8,007,070
                                
                                
                                
                                6,893,288
                                
                                
                                
                                (1,701,522
                                )
                                
                                
                                4,965,980
                                
                                
                                
                                3,264,458Income
      tax expense




November 30, 2009
                
                
                November 30, 2008Heat
                
                
                Coal
                
                
                
                
                
                Heat
                
                
                CoalPower
                
                
                Group
                
                
                Total
                
                
                Power
                
                
                Group
                
                
                TotalSegment
      assets
                
                
                49,346,842
                
                
                
                37,264,070
                
                
                
                86,610,912
                
                
                $
                43,592,370
                
                
                $
                20,154,839
                
                
                $
                63,747,209Construction
      in progress
                
                
                3,514,152
                
                
                
                722,129
                
                
                
                4,236,281
                
                
                
                2,107,353
                
                
                
                7,701,877
                
                
                
                9,809,230Investment
      property, net
                
                
                -
                
                
                
                1,936,278
                
                
                
                1,936,278
                
                
                
                -
                
                
                
                1,978,873
                
                
                
                1,978,873




Page 53
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





4.
            Shareholder
      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
shareholder loans. Balances are detailed below:





November30,2009
                    
                    
                    November30,2008Ordos
      City YiYuan Investment Co., Ltd.
                    
                    $
                    1,634,404
                    
                    
                    $
                    1,535,992Hangzhou
      Dayuan Group, Ltd.
                    
                    
                    5,428,963
                    
                    
                    
                    5,101,839Xinghe
      County Haifu Coal Transportation &Sales
      Co., Ltd.
                    
                    
                    1,807,686
                    
                    
                    
                    1,760,278Wenxiang
      Ding
                    
                    
                    28,565
                    
                    
                    
                    2,071,366Wenhua
      Ding
                    
                    
                    -
                    
                    
                    
                    248,688Yanhua
      Li
                    
                    
                    1,025,416
                    
                    
                    
                    -Yi
      Ding
                    
                    
                    47,245
                    
                    
                    
                    -Total
                    
                    $
                    9,972,279
                    
                    
                    $
                    10,718,163





The
shareholder loans are due on demand and part of shareholder loans bore interest
at 3.155%.





November 30, 2009
                              
                              
                              November 30, 2008Balance
                              
                              
                              Interest
                                rate
                              
                              
                              Balance
                              
                              
                              Interest
                                rateShareholder
      loans – interest free
                              
                              $
                              1,101,226
                              
                              
                              
                              0
                              %
                              
                              $
                              2,320,055
                              
                              
                              
                              0
                              %Shareholder
      loans – interest bearing
                              
                              
                              6,964,156
                              
                              
                              
                              3.16
                              %
                              
                              
                              6,699,921
                              
                              
                              
                              3.16
                              %Interest
      payable
                              
                              
                              1,906,897
                              
                              
                              
                              
                              
                              
                              
                              1,698,187Total
                              
                              $
                              9,972,279
                              
                              
                              
                              
                              
                              
                              $
                              10,718,163





5.
Lease Obligation





The
Company leases an office under an operating leases expiring in the year ending
November 30, 2012. The minimum future annual rent payments under the lease as of
November 30, 2009 are approximated as follows:





Year Ending
                  
                  AnnualNovember 30,
                  
                  Amount2010
                  
                  
                  87,8932011
                  
                  
                  87,8932012
                  
                  
                  7,324Total
                  
                  $
                  183,110





Rent
expenses charged to operations for the years ended November 30,
2009 and 2008 were $87,809 and $78,505,
respectively.





Page 54
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





6.
Advances to Suppliers





As is
customary in China, the Company has made advances to its
suppliers.  At November 30, 2009 and 2008, advances amounted to
$5,511,630 and $2,750,536, respectively.  There is no interest due on these
advances; the advances are offset against billings as they are made by the
suppliers.





7.
Other Receivables





Other
receivables consist of the following:




November30,2009
                  
                  
                  November30,2008Loans
      to suppliers and other associated firms
                  
                  $
                  1,332,038
                  
                  
                  $
                  1,133,515Deposit
      funds to secure agreements
                  
                  
                  509,392
                  
                  
                  
                  140,418Employee
      expense advances
                  
                  
                  217,643
                  
                  
                  
                  104,223Government
      subsidies receivable
                  
                  
                  1,464,880
                  
                  
                  
                  1,828,581Heat
      network access fee receivable
                  
                  
                  923,319
                  
                  
                  
                  1,126,811Total
                  
                  $
                  4,447,272
                  
                  
                  $
                  4,333,548





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 other receivables at November 30, 2009 and 2008 to be fully collectible and,
therefore, did not provide for an allowance for doubtful accounts.





8.
Fixed Assets





Fixed
assets, consisting principally of buildings and equipment and construction in
progress, are summarized as follows:





November30,2009
                  
                  
                  November30,2008Buildings
                  
                  
                  9,682,139
                  
                  
                  $
                  10,049,203Machinery
      & equipment
                  
                  
                  39,322,399
                  
                  
                  
                  26,452,156Automotive
      equipment
                  
                  
                  919,922
                  
                  
                  
                  684,546Office
      Equipment
                  
                  
                  622,402
                  
                  
                  
                  649,137Construction
      in progress
                  
                  
                  4,236,281
                  
                  
                  
                  9,809,230Fixed
      assets to be disposed
                  
                  
                  -
                  
                  
                  
                  731,07754,783,143
                  
                  
                  
                  48,375,349Accumulated
      depreciation
                  
                  
                  (7,456,849
                  )
                  
                  
                  (4,778,216
                  )Fixed
      assets, net
                  
                  
                  47,326,294
                  
                  
                  $
                  43,597,133





Depreciation
expenses charged to operations for the years ended November 30,
2009 and 2008 were $2,763,239 and $2,223,135,
respectively.





Page 55
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





9.
Long Term Investment/Notes Receivable





Certain
investments and loans were made for strategic purposes.





Long term
investment consists of the following:





November30,2009
                  
                  
                  November30,2008LiTai
      Coking Co.,Ltd
                  
                  $
                  -
                  
                  
                  $
                  255,776Total
      long term investment
                  
                  $
                  -
                  
                  
                  $
                  255,776





Investment
in LiTai Coking Co., Ltd (“Litai”) represents 20% equity interests, which
have been accounted for by the equity method of accounting.  Litai is a
customer of the Company’s Coal Group.  Litai discontinued operations
in 2008 due to its inability to meet government mandated environmental
standards. The Company sold the 20% equity interests of Litai in
2009.





Notes
receivable, which are non-interest bearing and payable on demand, consist of the
following:





November30,2009
                
                
                November30,2008Inner
      Mongolia XiangRong Investment Management Co., Ltd.
                
                
                1,378,900
                
                
                $
                -Inner
      Mongolia Tehong Investment Co., Ltd.
                
                
                3,244,785
                
                
                
                -Inner
      Mongolia Tehong Coal Chemical Co., Ltd.
                
                
                761,737
                
                
                
                760,690QuanYing
      Coal Mine
                
                
                916,311
                
                
                
                301,350Inner
      Mongolia XinKe Kaolin Fabrication Plant
                
                
                1,611,367
                
                
                
                1,740,810Total
      notes receivable
                
                
                7,913,100
                
                
                $
                2,802,850





10.
Short Term Bank Loans





The
Company has bank loans collateralized by the mining rights.  Relevant
terms of these bank loans are as follows:





November 30, 2009
                
                
                November 30, 2008Bank
      loan due 12/5/09, with interest at 6.696%
                
                $
                1,757,855
                
                
                $
                -Bank
      loan due 3/15/10, with interest at 6.372%
                
                
                8,789,277
                
                
                
                -Bank
      loan due 4/21/10, with interest at 6.372%
                
                
                1,464,880
                
                
                
                -Bank
      loan due 10/22/09, with interest at 8.316%
                
                
                -
                
                
                
                2,633,156Bank
      loan due 3/30/09, with interest at 8.964%
                
                
                -
                
                
                
                1,462,866Bank
      loan due 4/23/09, with interest at 8.964%
                
                
                -
                
                
                
                1,462,866Total
                
                $
                12,012,012
                
                
                $
                5,558,888





The
Company had no unutilized bank credit facility as of November 30, 2009 and
2008.





Page 56
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





11.
Fair Value Measurement





SFAS No.
157, as codified in FASB ASC 820 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.





Following
is a description of the valuation methodologies used for assets measured at fair
value.  There have been no changes in the methodologies used at
November 30, 2009.





Long term
investment:  The valuation methodologies consist of internal
analysis, review of financial statements from the investee companies,
etc.  The transaction price, excluding transaction costs, is the
Company’s best estimate of fair value at inception.  When evidence
supports a change to the carrying value from the transaction price, adjustments
are made to reflect expected exit values.  Ongoing reviews by the
Company are based on an assessment of each underlying investment, incorporating
valuation that consider the evaluation of financing and sale transactions with
third parties, expected cash flows and market-based information.





Notesreceivable:  The
carrying amounts of notes receivable approximate fair value due to their short
term nature.





The
method described above may produce a fair calculation that may not be indicative
of net realizable value or reflective of future values.  Furthermore,
while the Company believes its valuation method are appropriate and consistent
with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value measurement at the reporting date.





The
following table presents the Company’s assets and related valuation inputs
within the fair value hierarchy utilized to measure fair value on a recurring
basis as of November 30, 2009:





Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalNotes
      receivable
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  7,913,100
                  
                  
                  $
                  7,913,100Total
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  7,913,100
                  
                  
                  $
                  7,913,100





The
following table presents the Company’s assets and related valuation inputs
within the fair value hierarchy utilized to measure fair value on a recurring
basis as of November 30, 2008:





Page 57
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalLong
      term investment
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  255,776
                  
                  
                  $
                  255,776Notes
      receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,802,850
                  
                  
                  
                  2,802,850Total
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,058,626
                  
                  
                  $
                  3,058,626





The
following table presents a Level 3 reconciliation of the beginning and ending
balances of the fair value measurements using significant unobservable
inputs:





Long Term
                    Investments
                  
                  
                  Notes Receivable
                  
                  
                  TotalBalance,
      December 1, 2007
                  
                  $
                  3,889,184
                  
                  
                  $
                  5,011,133
                  
                  
                  $
                  8,900,317Purchases,
      sales, issuance and settlements (net)
                  
                  
                  (3,633,408
                  )
                  
                  
                  (2,208,283
                  )
                  
                  
                  (5,841,691
                  )Balance,
      December 1, 2008
                  
                  
                  255,776
                  
                  
                  
                  2,802,850
                  
                  
                  
                  3,058,626Purchases,
      sales, issuance and settlements (net)
                  
                  
                  (255,776
                  )
                  
                  
                  5,110,250
                  
                  
                  
                  4,854,474Balance,
      November 30, 2009
                  
                  $
                  -
                  
                  
                  $
                  7,913,100
                  
                  
                  $
                  7,913,100





12.
Cost of Revenue and Expenses





Details
of the cost of goods sold for the years ended November 30, 2009 and 2008 are as
follows:





2009
                  
                  
                  2008Salaries
      and wages
                  
                  $
                  711,599
                  
                  
                  $
                  599,882Operating
      supplies
                  
                  
                  489,696
                  
                  
                  
                  472,990Depreciation
      and amortization
                  
                  
                  2,875,596
                  
                  
                  
                  2,069,366Repairs
                  
                  
                  167,391
                  
                  
                  
                  90,081Coal
      and freight
                  
                  
                  22,952,219
                  
                  
                  
                  9,583,012Utilities
                  
                  
                  1,615,581
                  
                  
                  
                  751,117Other
                  
                  
                  545,862
                  
                  
                  
                  386,550Total
                  
                  $
                  29,357,944
                  
                  
                  $
                  13,952,998





Major
items included in operating expenses reported in the accompanying consolidated
statements of operations for the years ended November 30, 2009 and 2008 are as
follows:





2009
                        
                        
                        2008Salaries
      and wages
                        
                        $
                        662,636
                        
                        
                        $
                        502,795Transportation
      and storage
                        
                        
                        1,448,797
                        
                        
                        
                        -Postage
      and office supplies
                        
                        
                        860,820
                        
                        
                        
                        517,000Sales
      tax
                        
                        
                        790,485
                        
                        
                        
                        352,244Professional
      and other fees
                        
                        
                        893,395
                        
                        
                        
                        664,644Depreciation
                        
                        
                        243,637
                        
                        
                        
                        167,873Travel
                        
                        
                        217,702
                        
                        
                        
                        185,120Repairs
                        
                        
                        114,505
                        
                        
                        
                        153,273Allowance
      for doubtful accounts
                        
                        
                        18,294
                        
                        
                        
                        1,811Other
      expenses
                        
                        
                        213,500
                        
                        
                        
                        121,881Total
                        
                        $
                        5,463,771
                        
                        
                        $
                        2,666,
      641








Page 58
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





13.
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 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 amounted to
$1,633,075 and $3,042,579 for the years ended November 30, 2009 and 2008,
respectively, and are included in government subsidies in the accompanying
consolidated statements of operations.





14. Income Taxes





The
Company is required to file income tax returns in both the United States and
China. Its operations in the United States have been insignificant and income
taxes have not been accrued.  In China, 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 China
permit the carryforward of net operating losses for a period of five
years.  At November 30, 2009, the Chinese entities had net operating
losses of $1,024,038 available for future use. If not used, these
carryforwards will expire as follows:





Year
                  
                  Amount2010
                  
                  
                  102,5962011
                  
                  
                  -2012
                  
                  
                  -2013
                  
                  
                  921,442





Under ASC
740, recognition of deferred tax assets is permitted unless it is more likely
than not that the assets will not be realized.  The Company has recorded
deferred tax assets as follows:





November30,2009
                  
                  
                  November30,2008Deferred
      tax assets
                  
                  $
                  256,010
                  
                  
                  $
                  285,428Valuation
      allowance
                  
                  
                  (256,010
                  )
                  
                  
                  (285,428
                  )Balance
      recognized
                  
                  $
                  -
                  
                  
                  $
                  -





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 years ended November 30, 2009 and 2008 since the Company is
unable to determine if and when those benefits will be realized.





Page 59
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





The
following tables reconcile the effective income tax rate with the statutory rate
for the years ended November 30, 2009 and 2008:





2009
                
                IncomeBefore
                  IncomeTaxes
                
                
                TaxProvision
                
                
                RateofTaxAs
      reported on the consolidated statements of
      operations
                
                
                7,287,610
                
                
                
                2,181,391
                
                
                
                29.9
                %Losses
      not used in calculation of taxable income on the tax
      returns
                
                
                1,437,954
                
                
                
                -
                
                
                
                (4.9
                )%As
      calculated with statutory rate
                
                
                8,725,564
                
                
                
                2,181,391
                
                
                
                25
                %





2008
                
                IncomeBefore
                  IncomeTaxes
                
                
                TaxProvision
                
                
                RateofTaxAs
      reported on the consolidated statements of operations
                
                $
                5,462,481
                
                
                $
                1,503,478
                
                
                
                27.5
                %Losses
      not used in calculation taxable income on the tax
      returns
                
                
                551,431
                
                
                
                -
                
                
                
                (2.5
                )%As
      calculated with statutory rate
                
                $
                6,013,912
                
                
                $
                1,503,478
                
                
                
                25
                %





The
Company has adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes — an
interpretation of SFAS 109” as codified in ASC 740 (“FIN
48”).  FIN 48 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 FIN 48, 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.  FIN 48 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.





The
Company does not have any accruals for uncertain tax positions as of November
30, 2009 and 2008.  It is not anticipated that unrecognized tax
benefits would significantly increase or decrease within 12 months of the
reporting date.





15.
Contingencies





As is
customary in China, 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 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.





China has
enacted legislation which appears to restrict the ability of entities considered
foreign to China, like the Company, to have ownership interest in operating
companies located in China.  The Company has taken steps to avoid any
potential adverse impact of this legislation.  (See Note
1)





Page 60
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





16.
Condensed Financial Information of Registrant





The
following condensed financial information of registrant includes the U.S. parent
company only balance sheets as at November 30, 2009 and 2008, and the U.S.
parent company only statements of operations, and cash flows for the years ended
November 30, 2009 and 2008:





Balance
Sheets





November 30,2009
                    
                    
                    2008ASSETSOther
      assets:Investment
      in subsidiaries
                    
                    $
                    33,371,635
                    
                    
                    $
                    28,465,996Total
      other assets
                    
                    
                    33,371,635
                    
                    
                    
                    28,465,996TOTAL
      ASSETS
                    
                    $
                    33,371,635
                    
                    
                    $
                    28,465,996LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accrued
      liabilities
                    
                    $
                    120,000
                    
                    
                    $
                    89,000Shareholder
      loans
                    
                    
                    -
                    
                    
                    
                    275,139Total
      current liabilities
                    
                    
                    120,000
                    
                    
                    
                    364,139Stockholders’
      equity:Common
      stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000
      shares issued and outstanding
                    
                    
                    45,000
                    
                    
                    
                    45,000Additional
      paid-in capital
                    
                    
                    8,655,805
                    
                    
                    
                    8,655,805Paid
      in capital – stock options
                    
                    
                    315,000
                    
                    
                    
                    315,000Retained
      earnings
                    
                    
                    24,235,830
                    
                    
                    
                    19,086,052Total
      stockholders’ equity
                    
                    
                    33,251,635
                    
                    
                    
                    28,101,857TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    33,371,635
                    
                    
                    $
                    28,465,996





Statements
of Operations





For the Years Ended November 30,2009
                  
                  
                  2008Revenues:Share
      of earnings from investment in subsidiaries
                  
                  $
                  5,219,778
                  
                  
                  $
                  6,251,824Total
      revenues
                  
                  
                  5,219,778
                  
                  
                  
                  6,251,824Operating
      expenses:General
      and administrative
                  
                  
                  70,000
                  
                  
                  
                  94,500Professional
      and other fees
                  
                  
                  -
                  
                  
                  
                  315,000Total
      operating expenses
                  
                  
                  70,000
                  
                  
                  
                  409,500Net
      income
                  
                  $
                  5,149,778
                  
                  
                  $
                  5,842,324




Page 61
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CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Statements
of Cash Flows





For the Years Ended November 30,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income
                    
                    $
                    5,149,778
                    
                    
                    $
                    5,842,324Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Share
      of earnings from investment in subsidiaries
                    
                    
                    (5,219,778
                    )
                    
                    
                    (6,251,824
                    )Options
      issued for services
                    
                    
                    -
                    
                    
                    
                    315,000Changes
      in operating assets and liabilities:Increase in accrued liabilities and other payables
                    
                    
                    31,000
                    
                    
                    
                    44,500Net
      cash (used in) operating activities
                    
                    
                    (39,000
                    )
                    
                    
                    (50,000
                    )Cash
      flows from financing activities:Advance from shareholders
                    
                    
                    39,000
                    
                    
                    
                    50,000Net
      cash provided by financing activities
                    
                    
                    39,000
                    
                    
                    
                    50,000Net
      increase in cash and cash equivalents
                    
                    
                    -
                    
                    
                    
                    -Cash
      and cash equivalents, beginning of year
                    
                    
                    -
                    
                    
                    
                    -Cash
      and cash equivalents, end of year
                    
                    $
                    -
                    
                    
                    $
                    -




The U.S.
parent company has no assets other than investments in its
subsidiaries.  There were no cash transactions in the parent company
during the years ended November 30, 2009 and 2008.





17.
Selected Quarterly Financial Data (Unaudited)





Quarterly
financial data is as follows:





First quarter
                
                
                Second quarter
                
                
                Third quarter
                
                
                Fourth quarter2009
      (as restated for all quarters)Revenues
                
                $
                5,014,946
                
                
                $
                4,283,675
                
                
                $
                9,957,044
                
                
                $
                22,459,338Gross
      profit (loss)
                
                
                327,694
                
                
                
                46,736
                
                
                
                2,190,835
                
                
                
                9,791,794Net
      (loss) income
                
                
                (532,350
                )
                
                
                (966,567
                )
                
                
                (456,369
                )
                
                
                7,061,505(Loss)
      earnings per share – basic and diluted
                
                $
                (0.012
                )
                
                $
                (0.022
                )
                
                $
                (0.010
                )
                
                $
                0.157





The
Company has restated its consolidated balance sheets and the related
consolidated statements of income, stockholders’ equity and cash flows as of and
for the quarters ended February 28, May 30, and August 31, 2009. The following
tables present the effects of the restatement on the Company’s unaudited interim
financial statements for the periods presented.





Page 62
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Condensed
Consolidated Balance Sheets





February 28, 2009
                
                
                May 30, 2009As Previously
                  Reported
                
                
                Effect of
                  Restatement
                
                
                Restated
                
                
                As Previously
                  Reported
                
                
                Effect of
                  Restatement
                
                
                RestatedASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                335,100
                
                
                $
                363
                
                
                $
                335,463
                
                
                $
                1,697,846
                
                
                $
                -
                
                
                $
                1,697,846Accounts
      receivable, net
                
                
                5,516,828
                
                
                
                (96,362
                )
                
                
                5,420,466
                
                
                
                6,038,580
                
                
                
                (1,228,279
                )
                
                
                4,810,301Other
      receivables
                
                
                2,558,661
                
                
                
                1,173,116
                
                
                
                3,731,777
                
                
                
                2,057,693
                
                
                
                7,373,400
                
                
                
                9,431,093Advances
      to suppliers
                
                
                5,177,109
                
                
                
                (1,902,322
                )
                
                
                3,274,787
                
                
                
                6,149,319
                
                
                
                (1,933,177
                )
                
                
                4,216,142Inventories
                
                
                786,063
                
                
                
                853
                
                
                
                786,916
                
                
                
                578,766
                
                
                
                -
                
                
                
                578,766Prepaid
      taxes
                
                
                336,217
                
                
                
                48,669
                
                
                
                384,886
                
                
                
                443,616
                
                
                
                (8,549
                )
                
                
                435,067Total
      current assets
                
                
                14,709,978
                
                
                
                (775,683
                )
                
                
                13,934,295
                
                
                
                16,965,820
                
                
                
                4,203,395
                
                
                
                21,169,215Fixed
      assets:Property,
      plant and equipment
                
                
                33,678,464
                
                
                
                4,214,985
                
                
                
                37,893,449
                
                
                
                33,966,632
                
                
                
                4,154,661
                
                
                
                38,121,293Construction
      in progress
                
                
                10,866,861
                
                
                
                (623,091
                )
                
                
                10,243,770
                
                
                
                12,262,245
                
                
                
                (1,481,045
                )
                
                
                10,781,20044,545,325
                
                
                
                3,591,894
                
                
                
                48,137,219
                
                
                
                46,228,877
                
                
                
                2,673,616
                
                
                
                48,902,493Less:
      accumulated depreciation and amortization
                
                
                5,264,422
                
                
                
                223,272
                
                
                
                5,487,694
                
                
                
                5,858,547
                
                
                
                229,075
                
                
                
                6,087,622Net
      fixed assets
                
                
                39,280,903
                
                
                
                3,368,622
                
                
                
                42,649,525
                
                
                
                40,370,330
                
                
                
                2,444,541
                
                
                
                42,814,871Other
      assets:Investment
      property, net
                
                
                1,964,392
                
                
                
                2,131
                
                
                
                1,966,523
                
                
                
                1,958,565
                
                
                
                -
                
                
                
                1,958,565Mining
      right, net
                
                
                3,384,011
                
                
                
                408,939
                
                
                
                3,792,950
                
                
                
                3,313,952
                
                
                
                480,860
                
                
                
                3,794,812Long
      term investments
                
                
                255,364
                
                
                
                37,055
                
                
                
                292,419
                
                
                
                -
                
                
                
                -
                
                
                
                -Restricted
      cash
                
                
                0
                
                
                
                148,590
                
                
                
                148,590
                
                
                
                -
                
                
                
                148,844
                
                
                
                148,844Notes
      receivable
                
                
                2,933,769
                
                
                
                (1,024,273
                )
                
                
                1,909,496
                
                
                
                7,843,282
                
                
                
                (5,930,514
                )
                
                
                1,912,768Other
      long term assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                330,560
                
                
                
                -
                
                
                
                330,560Total
      other assets
                
                
                8,537,536
                
                
                
                (427,558
                )
                
                
                8,109,978
                
                
                
                13,446,359
                
                
                
                (5,300,810
                )
                
                
                8,145,549TOTAL
      ASSETS
                
                $
                62,528,417
                
                
                $
                2,165,381
                
                
                $
                64,693,798
                
                
                $
                70,782,509
                
                
                $
                1,347,126
                
                
                $
                72,129,635LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
                
                $
                -
                
                
                $
                7,310,476
                
                
                $
                7,310,476
                
                
                $
                14,646,006
                
                
                $
                -
                
                
                $
                14,646,006Notes
      payable
                
                
                7,302,554
                
                
                
                (7,302,554
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Accounts
      payable
                
                
                7,932,282
                
                
                
                1,352,319
                
                
                
                9,284,601
                
                
                
                6,709,564
                
                
                
                1,682,874
                
                
                
                8,392,438Advance
      from customers
                
                
                4,665,117
                
                
                
                (1,384,116
                )
                
                
                3,281,001
                
                
                
                5,741,314
                
                
                
                (1,222,577
                )
                
                
                4,518,737Accrued
      liabilities
                
                
                248,650
                
                
                
                5,271,716
                
                
                
                5,520,366
                
                
                
                238,010
                
                
                
                5,313,153
                
                
                
                5,551,163Other
      payables
                
                
                6,003,277
                
                
                
                (9,740,518
                )
                
                
                -3,737,241
                
                
                
                6,460,372
                
                
                
                (9,904,843
                )
                
                
                -3,444,471Shareholder
      loans
                
                
                9,503,526
                
                
                
                10,310
                
                
                
                9,513,836
                
                
                
                10,218,107
                
                
                
                (281,374
                )
                
                
                9,936,733Current
      portion of deferred income
                
                
                -
                
                
                
                666,301
                
                
                
                666,301
                
                
                
                -
                
                
                
                667,442
                
                
                
                667,442Total
      current liabilities
                
                
                35,655,406
                
                
                
                (3,816,066
                )
                
                
                31,839,340
                
                
                
                44,013,373
                
                
                
                (3,745,325
                )
                
                
                40,268,048Deferred
      income
                
                
                3,566,174
                
                
                
                1,771,181
                
                
                
                5,337,355
                
                
                
                3,640,202
                
                
                
                1,539,438
                
                
                
                5,179,640Total
      liabilities
                
                
                39,221,580
                
                
                
                (2,044,885
                )
                
                
                37,176,695
                
                
                
                47,653,575
                
                
                
                (2,205,887
                )
                
                
                45,447,688Stockholders’
      equity:Common
      stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000
      shares issued and outstanding
                
                
                45,000
                
                
                
                -
                
                
                
                45,000
                
                
                
                45,000
                
                
                
                -
                
                
                
                45,000Additional
      paid-in capital
                
                
                8,655,805
                
                
                
                -
                
                
                
                8,655,805
                
                
                
                8,655,805
                
                
                
                -
                
                
                
                8,655,805Paid
      in capital – stock options
                
                
                315,000
                
                
                
                -
                
                
                
                315,000
                
                
                
                315,000
                
                
                
                -
                
                
                
                315,000Retained
      earnings
                
                
                10,101,835
                
                
                
                (2,233,339
                )
                
                
                7,868,496
                
                
                
                9,339,560
                
                
                
                (2,250,219
                )
                
                
                7,089,341Statutory
      reserves
                
                
                1,819,915
                
                
                
                5,293,867
                
                
                
                7,113,782
                
                
                
                2,335,468
                
                
                
                4,590,902
                
                
                
                6,926,370Accumulated
      other comprehensive income
                
                
                2,369,282
                
                
                
                1,149,738
                
                
                
                3,519,020
                
                
                
                2,438,101
                
                
                
                1,212,330
                
                
                
                3,650,431Total
      stockholders’ equity
                
                
                23,306,837
                
                
                
                4,210,266
                
                
                
                27,517,103
                
                
                
                23,128,934
                
                
                
                3,553,013
                
                
                
                26,681,947TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                62,528,417
                
                
                $
                2,165,381
                
                
                $
                64,693,798
                
                
                $
                70,782,509
                
                
                $
                1,347,126
                
                
                $
                72,129,635




Page 63
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





August 31, 2009As Previously
                            Reported
                          
                          
                          Effect of
                            Restatement
                          
                          
                          RestatedASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          8,362,280
                          
                          
                          $
                          -
                          
                          
                          $
                          8,362,280Accounts
      receivable, net
                          
                          
                          6,072,177
                          
                          
                          
                          (79,407
                          )
                          
                          
                          5,992,770Other
      receivables
                          
                          
                          3,122,986
                          
                          
                          
                          (41,906
                          )
                          
                          
                          3,081,080Advances
      to suppliers
                          
                          
                          8,380,962
                          
                          
                          
                          (3,710,633
                          )
                          
                          
                          4,670,329Inventories
                          
                          
                          4,311,084
                          
                          
                          
                          577,161
                          
                          
                          
                          4,888,245Prepaid
      taxes
                          
                          
                          894,453
                          
                          
                          
                          53,044
                          
                          
                          
                          947,497Total
      current assets
                          
                          
                          31,143,942
                          
                          
                          
                          (3,201,741
                          )
                          
                          
                          27,942,201Fixed
      assets:Property,
      plant and equipment
                          
                          
                          35,276,664
                          
                          
                          
                          5,689,300
                          
                          
                          
                          40,965,964Construction
      in progress
                          
                          
                          12,838,892
                          
                          
                          
                          (1,392,858
                          )
                          
                          
                          11,446,03448,115,556
                          
                          
                          
                          4,296,442
                          
                          
                          
                          52,411,998Less:
      accumulated depreciation and amortization
                          
                          
                          6,472,431
                          
                          
                          
                          203,799
                          
                          
                          
                          6,676,230Net
      fixed assets
                          
                          
                          41,643,125
                          
                          
                          
                          4,092,643
                          
                          
                          
                          45,735,768Other
      assets:Investment
      property, net
                          
                          
                          1,946,639
                          
                          
                          
                          -
                          
                          
                          
                          1,946,639Mining
      right, net
                          
                          
                          3,233,423
                          
                          
                          
                          507,228
                          
                          
                          
                          3,740,651Restricted
      Cash
                          
                          
                          -
                          
                          
                          
                          148,798
                          
                          
                          
                          148,798Notes
      receivable
                          
                          
                          7,125,765
                          
                          
                          
                          302,830
                          
                          
                          
                          7,428,595Other
      long term assets
                          
                          
                          332,113
                          
                          
                          
                          (302,830
                          )
                          
                          
                          29,283Total
      other assets
                          
                          
                          12,637,940
                          
                          
                          
                          656,026
                          
                          
                          
                          13,293,966TOTAL
      ASSETS
                          
                          $
                          85,425,007
                          
                          
                          $
                          1,546,928
                          
                          
                          $
                          86,971,935LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
                          
                          $
                          19,033,954
                          
                          
                          $
                          -
                          
                          
                          $
                          19,033,954Accounts
      payable
                          
                          
                          11,715,156
                          
                          
                          
                          1,505,671
                          
                          
                          
                          13,220,827Advance
      from customers
                          
                          
                          13,319,916
                          
                          
                          
                          (1,484,618
                          )
                          
                          
                          11,835,298Accrued
      liabilities
                          
                          
                          261,632
                          
                          
                          
                          2,512,675
                          
                          
                          
                          2,774,307Other
      payables
                          
                          
                          5,751,208
                          
                          
                          
                          (10,458,622
                          )
                          
                          
                          (4,707,414
                          )Shareholder
      loans
                          
                          
                          10,071,909
                          
                          
                          
                          -
                          
                          
                          
                          10,071,909Current
      portion of deferred income
                          
                          
                          -
                          
                          
                          
                          667,237
                          
                          
                          
                          667,237Total
      current liabilities
                          
                          
                          60,153,775
                          
                          
                          
                          (7,257,657
                          )
                          
                          
                          52,896,118Deferred
      income
                          
                          
                          3,533,058
                          
                          
                          
                          1,478,181
                          
                          
                          
                          5,011,239Total
      liabilities
                          
                          
                          63,686,833
                          
                          
                          
                          (5,779,476
                          )
                          
                          
                          57,907,357Stockholders’
      equity:Common
      stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000
      shares issued and outstanding
                          
                          
                          45,000
                          
                          
                          
                          -
                          
                          
                          
                          45,000Additional
      paid-in capital
                          
                          
                          8,655,805
                          
                          
                          
                          -
                          
                          
                          
                          8,655,805Paid
      in capital – stock options
                          
                          
                          315,000
                          
                          
                          
                          -
                          
                          
                          
                          315,000Retained
      earnings
                          
                          
                          7,955,480
                          
                          
                          
                          (170,527
                          )
                          
                          
                          7,784,953Statutory
      reserves
                          
                          
                          2,335,468
                          
                          
                          
                          3,438,921
                          
                          
                          
                          5,774,389Accumulated
      other comprehensive income
                          
                          
                          2,431,421
                          
                          
                          
                          4,058,010
                          
                          
                          
                          6,489,431Total
      stockholders’ equity
                          
                          
                          21,738,174
                          
                          
                          
                          7,326,404
                          
                          
                          
                          29,064,578TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                          
                          $
                          85,425,007
                          
                          
                          $
                          1,546,928
                          
                          
                          $
                          86,971,935





Condensed
Consolidated Statements of Operations





Three months ended February 28, 2009
                        
                        
                        Three months ended May 30, 2009As Previously
                          Reported
                        
                        
                        Effect of
                          Restatement
                        
                        
                        Restated
                        
                        
                        As Previously
                          Reported
                        
                        
                        Effect of
                          Restatement
                        
                        
                        RestatedRevenues
                        
                        $
                        5,579,760
                        
                        
                        $
                        (564,814
                        )
                        
                        $
                        5,014,946
                        
                        
                        $
                        3,603,374
                        
                        
                        $
                        680,301
                        
                        
                        $
                        4,283,675Cost
      of revenues
                        
                        
                        (4,983,750
                        )
                        
                        
                        296,498
                        
                        
                        
                        (4,687,252
                        )
                        
                        
                        (3,158,727
                        )
                        
                        
                        (1,078,212
                        )
                        
                        
                        (4,236,939
                        )Gross
      profit
                        
                        
                        596,010
                        
                        
                        
                        (268,316
                        )
                        
                        
                        327,694
                        
                        
                        
                        444,647
                        
                        
                        
                        (397,911
                        )
                        
                        
                        46,736Operating
      expenses:Selling
      and marketing
                        
                        
                        (45,633
                        )
                        
                        
                        45,633
                        
                        
                        
                        -
                        
                        
                        
                        (192,520
                        )
                        
                        
                        192,520
                        
                        
                        
                        -General
      and administrative
                        
                        
                        (436,901
                        )
                        
                        
                        2,210
                        
                        
                        
                        (434,691
                        )
                        
                        
                        (513,731
                        )
                        
                        
                        (519,875
                        )
                        
                        
                        (1,033,606
                        )Total
      operating expenses
                        
                        
                        (482,534
                        )
                        
                        
                        47,843
                        
                        
                        
                        (434,691
                        )
                        
                        
                        (706,251
                        )
                        
                        
                        (327,355
                        )
                        
                        
                        (1,033,606
                        )(Loss)
      income from operations
                        
                        
                        113,476
                        
                        
                        
                        (220,473
                        )
                        
                        
                        (106,997
                        )
                        
                        
                        (261,604
                        )
                        
                        
                        (725,266
                        )
                        
                        
                        (986,870
                        )Other
      income and expensesInvestment
      income
                        
                        
                        -
                        
                        
                        
                        34,351
                        
                        
                        
                        34,351
                        
                        
                        
                        36,847
                        
                        
                        
                        (34,351
                        )
                        
                        
                        2,496Non-operating
      income
                        
                        
                        115,363
                        
                        
                        
                        45,038
                        
                        
                        
                        160,401
                        
                        
                        
                        79,823
                        
                        
                        
                        84,949
                        
                        
                        
                        164,772Finance
      expenses, net
                        
                        
                        (99,453
                        )
                        
                        
                        4,065
                        
                        
                        
                        (95,388
                        )
                        
                        
                        (96,624
                        )
                        
                        
                        (6,710
                        )
                        
                        
                        (103,334
                        )Government
      subsidies
                        
                        
                        -
                        
                        
                        
                        153,024
                        
                        
                        
                        153,024
                        
                        
                        
                        -
                        
                        
                        
                        11,121
                        
                        
                        
                        11,121Non-operating
      expenses
                        
                        
                        (4,605
                        )
                        
                        
                        (696,060
                        )
                        
                        
                        (700,665
                        )
                        
                        
                        (5,219
                        )
                        
                        
                        (51,199
                        )
                        
                        
                        (56,418
                        )(Loss
      ) income before income taxes
                        
                        
                        124,781
                        
                        
                        
                        (680,055
                        )
                        
                        
                        (555,274
                        )
                        
                        
                        (246,777
                        )
                        
                        
                        (721,456
                        )
                        
                        
                        (968,233
                        )Provision
      for income taxes
                        
                        
                        24,535
                        
                        
                        
                        (1,611
                        )
                        
                        
                        22,924
                        
                        
                        
                        55
                        
                        
                        
                        1,611
                        
                        
                        
                        1,666Net
      (loss) income
                        
                        
                        149,316
                        
                        
                        
                        (681,666
                        )
                        
                        
                        (532,350
                        )
                        
                        
                        (246,722
                        )
                        
                        
                        (719,845
                        )
                        
                        
                        (966,567
                        )Other
      comprehensive incomeForeign
      currency translation adjustment
                        
                        
                        (37,436
                        )
                        
                        
                        (14,969
                        )
                        
                        
                        (52,405
                        )
                        
                        
                        (1,009,575
                        )
                        
                        
                        1,582,659
                        
                        
                        
                        573,084Total
      comprehensive (loss) income
                        
                        $
                        111,880
                        
                        
                        $
                        (696,635
                        )
                        
                        $
                        (584,755
                        )
                        
                        $
                        (177,903
                        )
                        
                        $
                        (657,254
                        )
                        
                        $
                        (835,157
                        )Net
      (loss) income per common  sharebasic
      and diluted
                        
                        $
                        0.003
                        
                        
                        
                        (0.015
                        )
                        
                        $
                        (0.012
                        )
                        
                        $
                        (0.006
                        )
                        
                        
                        (0.016
                        )
                        
                        $
                        (0.022
                        )Weighted
      average common shares outstandingbasic
      and diluted
                        
                        
                        45,000,000
                        
                        
                        
                        -
                        
                        
                        
                        45,000,000
                        
                        
                        
                        45,000,000
                        
                        
                        
                        -
                        
                        
                        
                        45,000,000




Page 64
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Three
      months ended August 31, 2009As Previously
      Reported
                        
                        
                        Effect
      of Restatement
                        
                        
                        RestatedRevenues
                        
                        $
                        10,652,642
                        
                        
                        $
                        (695,598
                        )
                        
                        $
                        9,957,044Cost
      of revenues
                        
                        
                        (9,285,042
                        )
                        
                        
                        1,518,833
                        
                        
                        
                        (7,766,209
                        )Gross
      profit (loss)
                        
                        
                        1,367,600
                        
                        
                        
                        823,235
                        
                        
                        
                        2,190,835Operating
      expenses:Selling
      and marketing
                        
                        
                        (838,399
                        )
                        
                        
                        838,399
                        
                        
                        
                        -General
      and administrative
                        
                        
                        (1,156,051
                        )
                        
                        
                        (684,953
                        )
                        
                        
                        (1,841,004
                        )Total
      operating expenses
                        
                        
                        (1,994,450
                        )
                        
                        
                        153,446
                        
                        
                        
                        (1,841,004
                        )(Loss)
      income from operations
                        
                        
                        (626,850
                        )
                        
                        
                        976,681
                        
                        
                        
                        349,831Other
      income and expensesInvestment
      income
                        
                        
                        (6
                        )
                        
                        
                        -
                        
                        
                        
                        (6
                        )Non-operating
      income
                        
                        
                        101,240
                        
                        
                        
                        66,954
                        
                        
                        
                        168,194Finance
      expenses, net
                        
                        
                        (271,644
                        )
                        
                        
                        (109,846
                        )
                        
                        
                        (381,490
                        )Government
      subsidies
                        
                        
                        
                        
                        
                        
                        5,576
                        
                        
                        
                        5,576Non-operating
      expenses
                        
                        
                        (113,452
                        )
                        
                        
                        (11,654
                        )
                        
                        
                        (125,106
                        )(Loss)
      income before income taxes
                        
                        
                        (910,712
                        )
                        
                        
                        927,711
                        
                        
                        
                        16,999Provision
      for income taxes
                        
                        
                        (473,368
                        )
                        
                        
                        -
                        
                        
                        
                        (473,368
                        )Net
      (loss) income
                        
                        
                        (1,384,080
                        )
                        
                        
                        927,711
                        
                        
                        
                        (456,369
                        )Other
      comprehensive incomeForeign
      currency translation adjustment
                        
                        
                        (6,680
                        )
                        
                        
                        2,845,680
                        
                        
                        
                        2,839,000Total
      comprehensive (loss) income
                        
                        $
                        (1,390,760
                        )
                        
                        $
                        3,773,391
                        
                        
                        $
                        2,382,631Net
      (loss) income per common sharebasic
      and diluted
                        
                        $
                        (0.031
                        )
                        
                        
                        (0.021
                        )
                        
                        $
                        (0.010
                        )Weighted
      average common shares outstandingbasic
      and diluted
                        
                        
                        45,000,000
                        
                        
                        
                        -
                        
                        
                        
                        45,000,000





Condensed
Consolidated Statements of Cash Flows




Three months ended February 28, 2009
                      
                      
                      Six months ended May 31, 2009As Previously
                        Reported
                      
                      
                      Effect of
                        Restatement
                      
                      
                      Restated
                      
                      
                      As Previously
                        Reported
                      
                      
                      Effect of
                        Restatement
                      
                      
                      RestatedCash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      149,316
                      
                      
                      $
                      (681,666
                      )
                      
                      $
                      (532,350
                      )
                      
                      $
                      (97,406
                      )
                      
                      $
                      (1,401,511
                      )
                      
                      $
                      (1,498,917
                      )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      662,797
                      
                      
                      
                      126,164
                      
                      
                      
                      788,961
                      
                      
                      
                      1,361,076
                      
                      
                      
                      80,490
                      
                      
                      
                      1,441,566Interest
      accrued on shareholder loans
                      
                      
                      52,828
                      
                      
                      
                      (3,496
                      )
                      
                      
                      49,332
                      
                      
                      
                      -
                      
                      
                      
                      106,433
                      
                      
                      
                      106,433Loss
      on disposal of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      694,081
                      
                      
                      
                      694,081
                      
                      
                      
                      -
                      
                      
                      
                      744,524
                      
                      
                      
                      744,524Gain
      from short term investments
                      
                      
                      -
                      
                      
                      
                      (3,351
                      )
                      
                      
                      (34,351
                      )
                      
                      
                      (36,847
                      )
                      
                      
                      -
                      
                      
                      
                      (36,847
                      )Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                      
                      
                      (800,138
                      )
                      
                      
                      (1,613,818
                      )
                      
                      
                      (2,413,956
                      )
                      
                      
                      (1,313,698
                      )
                      
                      
                      (490,093
                      )
                      
                      
                      (1,803,791
                      )Decrease
      (increase) in other receivables
                      
                      
                      (769,981
                      )
                      
                      
                      1,371,752
                      
                      
                      
                      601,771
                      
                      
                      
                      70,949
                      
                      
                      
                      (5,168,494
                      )
                      
                      
                      (5,097,545
                      )(Increase)
      decrease  in advances to suppliers
                      
                      
                      (547,777
                      )
                      
                      
                      158,778
                      
                      
                      
                      (388,999
                      )
                      
                      
                      (1,256,888
                      )
                      
                      
                      486,800
                      
                      
                      
                      (770,088
                      )(Increase)
      decrease in inventories
                      
                      
                      (101,257
                      )
                      
                      
                      (185,505
                      )
                      
                      
                      (286,762
                      )
                      
                      
                      107,219
                      
                      
                      
                      (185,831
                      )
                      
                      
                      (78,612
                      )Increase
      (decrease) in deferred income
                      
                      
                      552,873
                      
                      
                      
                      78,832
                      
                      
                      
                      631,705
                      
                      
                      
                      621,634
                      
                      
                      
                      (146,503
                      )
                      
                      
                      475,131(Decrease)
      increase in accounts payable
                      
                      
                      163,998
                      
                      
                      
                      (4,280,788
                      )
                      
                      
                      (4,116,790
                      )
                      
                      
                      (742,630
                      )
                      
                      
                      (3,391,197
                      )
                      
                      
                      (4,133,827
                      )(Decrease)
      increase in advances from customers
                      
                      
                      (2,496
                      )
                      
                      
                      (228,427
                      )
                      
                      
                      (230,923
                      )
                      
                      
                      738,091
                      
                      
                      
                      100,423
                      
                      
                      
                      838,514Increase
      in accrued liabilities and other payables
                      
                      
                      11,675
                      
                      
                      
                      130,490
                      
                      
                      
                      142,165
                      
                      
                      
                      4,692
                      
                      
                      
                      410,859
                      
                      
                      
                      415,551Net
      cash (used in) operating activities
                      
                      
                      (628,162
                      )
                      
                      
                      (4,467,954
                      )
                      
                      
                      (5,096,116
                      )
                      
                      
                      (543,808
                      )
                      
                      
                      (8,854,100
                      )
                      
                      
                      (9,397,908
                      )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                      
                      
                      (64,044
                      )
                      
                      
                      (1,045,324
                      )
                      
                      
                      (1,109,368
                      )
                      
                      
                      (911,968
                      )
                      
                      
                      (1,274,102
                      )
                      
                      
                      (2,186,070
                      )Increase
      in construction in progress
                      
                      
                      (173,906
                      )
                      
                      
                      (75,515
                      )
                      
                      
                      (249,421
                      )
                      
                      
                      (1,551,924
                      )
                      
                      
                      853,047
                      
                      
                      
                      (698,877
                      )Payments
      made on other long term assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (330,560
                      )
                      
                      
                      (330,560
                      )Increase
      in notes receivable
                      
                      
                      (106,298
                      )
                      
                      
                      106,298
                      
                      
                      
                      -
                      
                      
                      
                      (5,011,175
                      )
                      
                      
                      5,011,175
                      
                      
                      
                      -Payments
      received on notes receivable
                      
                      
                      -
                      
                      
                      
                      833,022
                      
                      
                      
                      833,022
                      
                      
                      
                      -
                      
                      
                      
                      893,563
                      
                      
                      
                      893,563Net
      cash provided by (used in) investing activities
                      
                      
                      (344,248
                      )
                      
                      
                      (181,519
                      )
                      
                      
                      (525,767
                      )
                      
                      
                      (7,475,067
                      )
                      
                      
                      5,153,123
                      
                      
                      
                      (2,321,944
                      )Cash
      flows from financing activities:Proceeds
      from short term bank loans
                      
                      
                      1,753,900
                      
                      
                      
                      (115,167
                      )
                      
                      
                      1,638,733
                      
                      
                      
                      12,012,850
                      
                      
                      
                      (1,014
                      )
                      
                      
                      12,011,836Principal
      payments made on short term bank loans
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,925,732
                      )
                      
                      
                      (3,984
                      )
                      
                      
                      (2,929,716
                      )Advance
      from shareholders
                      
                      
                      -
                      
                      
                      
                      3,956,173
                      
                      
                      
                      3,956,173
                      
                      
                      
                      301,765
                      
                      
                      
                      4,137,871
                      
                      
                      
                      4,439,636Repayments
      of shareholders loans
                      
                      
                      (742,342
                      )
                      
                      
                      529,990
                      
                      
                      
                      (212,352
                      )
                      
                      
                      -
                      
                      
                      
                      (594,000
                      )
                      
                      
                      (594,000
                      )Net
      cash provided by financing activities
                      
                      
                      1,011,558
                      
                      
                      
                      4,370,996
                      
                      
                      
                      5,382,554
                      
                      
                      
                      9,388,883
                      
                      
                      
                      3,538,873
                      
                      
                      
                      12,927,756Effect
      of exchange rate changes on cash
                      
                      
                      (503
                      )
                      
                      
                      118,493
                      
                      
                      
                      117,990
                      
                      
                      
                      31,383
                      
                      
                      
                      1,757
                      
                      
                      
                      33,140Net
      change in cash and cash equivalents
                      
                      
                      38,645
                      
                      
                      
                      (159,984
                      )
                      
                      
                      (121,339
                      )
                      
                      
                      1,401,391
                      
                      
                      
                      (160,347
                      )
                      
                      
                      1,241,044Cash
      and cash equivalents, beginning of period
                      
                      
                      296,455
                      
                      
                      
                      160,347
                      
                      
                      
                      456,802
                      
                      
                      
                      296,455
                      
                      
                      
                      160,347
                      
                      
                      
                      456,802Cash
      and cash equivalents, end of period
                      
                      
                      335,100
                      
                      
                      
                      363
                      
                      
                      
                      335,463
                      
                      
                      
                      1,697,846
                      
                      
                      
                      -
                      
                      
                      
                      1,697,846Supplemental
      disclosure of cash flow informationCash
      paid for interest
                      
                      $
                      -
                      
                      
                      $
                      230,401
                      
                      
                      $
                      230,401
                      
                      
                      $
                      276,071
                      
                      
                      $
                      -
                      
                      
                      $
                      276,071Cash
      paid for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -




Page 65
of 67





CHINA
ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED NOVEMBER 30, 2009
AND 2008





Nine months ended August 31, 2009As Previously
                    Reported
                  
                  
                  Effect of
                    Restatement
                  
                  
                  RestatedCash
      flows from operating activities:Net
      loss
                  
                  $
                  (1,481,486
                  )
                  
                  $
                  (473,800
                  )
                  
                  $
                  (1,955,286
                  )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  2,139,567
                  
                  
                  
                  29,048
                  
                  
                  
                  2,168,615Interest
      accrued on shareholder loans
                  
                  
                  -
                  
                  
                  
                  155,020
                  
                  
                  
                  155,020Loss
      on disposal of property, plant and equipment
                  
                  
                  -
                  
                  
                  
                  740,058
                  
                  
                  
                  740,058Gain
      from short term investments
                  
                  
                  (36,841
                  )
                  
                  
                  -
                  
                  
                  
                  (36,841
                  )Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                  
                  
                  (1,347,295
                  )
                  
                  
                  (1,638,965
                  )
                  
                  
                  (2,986,260
                  )Decrease
      (increase) in other receivables
                  
                  
                  (994,344
                  )
                  
                  
                  2,246,812
                  
                  
                  
                  1,252,468(Increase)
      decrease  in advances to suppliers
                  
                  
                  (3,743,921
                  )
                  
                  
                  2,956,013
                  
                  
                  
                  (787,908
                  )(Increase)
      in inventories
                  
                  
                  (3,625,099
                  )
                  
                  
                  (762,992
                  )
                  
                  
                  (4,388,091
                  )Increase
      (decrease) in deferred income
                  
                  
                  514,490
                  
                  
                  
                  (207,965
                  )
                  
                  
                  306,525Increase
      (decrease) in accounts payable
                  
                  
                  7,161,950
                  
                  
                  
                  (5,071,569
                  )
                  
                  
                  2,090,381Increase
      (decrease) in advances from customers
                  
                  
                  8,644,777
                  
                  
                  
                  (737,768
                  )
                  
                  
                  7,907,009(Decrease)
      in accrued liabilities and other payables
                  
                  
                  (1,131,687
                  )
                  
                  
                  (3,004,991
                  )
                  
                  
                  (4,136,678
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  6,100,111
                  
                  
                  
                  (5,771,099
                  )
                  
                  
                  329,012Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                  
                  
                  (5,353,867
                  )
                  
                  
                  39,626
                  
                  
                  
                  (5,314,241
                  )Proceeds
      received on sales of fixed assets
                  
                  
                  86,480
                  
                  
                  
                  (10,995
                  )
                  
                  
                  75,485Increase
      in construction in progress
                  
                  
                  (2,128,571
                  )
                  
                  
                  880,996
                  
                  
                  
                  (1,247,575
                  )Payments
      made on other long term assets
                  
                  
                  -
                  
                  
                  
                  (29,283
                  )
                  
                  
                  (29,283
                  )Increase
      in notes receivable
                  
                  
                  (4,293,658
                  )
                  
                  
                  (921,606
                  )
                  
                  
                  (5,215,264
                  )Payments
      received on notes receivable
                  
                  
                  -
                  
                  
                  
                  893,419
                  
                  
                  
                  893,419Net
      cash provided by (used in) investing activities
                  
                  
                  (11,689,616
                  )
                  
                  
                  852,157
                  
                  
                  
                  (10,837,459
                  )Cash
      flows from financing activities:Proceeds
      from short term bank loans
                  
                  
                  16,403,367
                  
                  
                  
                  400
                  
                  
                  
                  16,403,767Principal
      payments made on short term bank loans
                  
                  
                  (2,928,301
                  )
                  
                  
                  (943
                  )
                  
                  
                  (2,929,244
                  )Advance
      from shareholders
                  
                  
                  155,561
                  
                  
                  
                  4,283,708
                  
                  
                  
                  4,439,269Repayments
      of shareholders loans
                  
                  
                  -
                  
                  
                  
                  (2,081,017
                  )
                  
                  
                  (2,081,017
                  )Net
      cash provided by financing activities
                  
                  
                  13,630,627
                  
                  
                  
                  2,202,148
                  
                  
                  
                  15,832,775Effect
      of exchange rate changes on cash
                  
                  
                  24,703
                  
                  
                  
                  2,556,447
                  
                  
                  
                  2,581,150Net
      change in cash and cash equivalents
                  
                  
                  8,065,825
                  
                  
                  
                  (160,347
                  )
                  
                  
                  7,905,478-Cash
      and cash equivalents, beginning of period
                  
                  
                  296,455
                  
                  
                  
                  160,347
                  
                  
                  
                  456,802-Cash
      and cash equivalents, end of period
                  
                  $
                  8,362,280
                  
                  
                  $
                  -
                  
                  
                  $
                  8,362,280Supplemental
      disclosure of cash flow informationCash
      paid for interest
                  
                  $
                  514,526
                  
                  
                  $
                  -
                  
                  
                  $
                  514,526Cash
      paid for income taxes
                  
                  $
                  263,336
                  
                  
                  $
                  -
                  
                  
                  $
                  263,336





18.
Subsequent Events





The
Company’s management has performed subsequent events procedures through March 1,
2010, which is the date the financial statements were available to be issued and
there were no subsequent events requiring adjustment to the consolidated
financial statements or disclosures as stated herein.





Page 66
of 67


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 1st day of March
2010.
  CHINA
      ENERGY CORPORATIONBy
                        /s/ WenXiang DingWenXiang
      DingPresident, Chief Executive Officer
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this amended 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.
  Signatures
                        
                        Title
                        
                        DatePresident,
      Chief Executive Officer, Secretary, Treasurer and
      Director
                        
                        March
      1, 2010/s/
      WenXiang Ding
                        
                        (Principal
      Executive Officer)WenXiang
      Ding/s/
      Yanhua Li
                        
                        Director
                        
                        March
      1, 2010Yanhua
      Li/s/
      Alex Gong
                        
                        Chief
      Financial Officer
                          (Principal
      Financial and Accounting Officer)
                        
                        March
      1, 2010Alex
      Gong
  Page 67
of 67