UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549




FORM
10-Q




x           Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal quarter ended August 31, 2010




 ̈           Transition
report under 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 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)




Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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
xNo 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
x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or 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  ̈
            Accelerated
      filer  ̈
            Non-accelerated
            Smaller
      reportingfiler
       ̈
            company
      x(Do
      not check if a smallerreporting
      company)




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




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:


Class
              October 14, 2010Common Stock, $ 0.001 par
    value
              45,000,000
shares









TABLE
OF CONTENTS


PART
      I.
                FINANCIAL
      INFORMATIONITEM
      1.
                Financial
      StatementsITEM
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsITEM
      3.
                Quantitative
      And Qualitative Disclosure About Market RiskITEM
      4T
                Controls
      and ProceduresPART
      II.
                OTHER
      INFORMATIONITEM
      1.
                Legal
      Proceedings.ITEM
      1A
                Risk
      FactorsITEM
      2.
                Unregistered
      Sales of Equity Securities and Use of ProceedsITEM
      3.
                Defaults
      Upon Senior Securities.ITEM
      4.
                (Removed
      and Reserved)ITEM
      5.
                Other
      Information.ITEM
      6.
                Exhibits
      and Reports on Form 8-KSignatures









SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS




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 and its subsidiaries (the “Company”) undertake 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.              FINANCIAL
STATEMENTS





CHINA
ENERGY CORPORATION


AND
SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS


FOR THE
THREE AND NINE MONTH PERIODS ENDED


AUGUST
31, 2010 AND 2009







CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





August 31,
                
                
                November 30,2010
                
                
                2009(Unaudited)
                
                
                (Audited)US$
                
                
                US$ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                4,165,914
                
                
                $
                5,073,645Term
      deposit-restricted
                
                
                7,345,488
                
                
                
                -Accounts
      receivable, net of allowance for doubtful accounts of $121,201 and
      $120,853, respectively
                
                
                8,404,009
                
                
                
                4,600,667Other
      receivables
                
                
                2,841,906
                
                
                
                4,447,272Advance
      to suppliers
                
                
                4,511,336
                
                
                
                5,511,630Inventories
                
                
                4,836,078
                
                
                
                5,574,465Total
      current assets
                
                
                32,104,731
                
                
                
                25,207,679Fixed
      assets:Property,
      plant and equipment
                
                
                61,854,649
                
                
                
                50,546,862Construction
      in progress
                
                
                6,069,246
                
                
                
                4,236,28167,923,895
                
                
                
                54,783,143Less:
      accumulated depreciation and depletion
                
                
                (10,180,956
                )
                
                
                (7,456,849
                )Fixed
      assets, net
                
                
                57,742,939
                
                
                
                47,326,294Other
      assets:Investment
      property, net of accumulated depreciation of $200,738 and $166,172,
      respectively
                
                
                1,907,766
                
                
                
                1,936,278Intangible
      assets, net of amortization of $1,008,986 and $787,417,
      respectively
                
                
                3,418,786
                
                
                
                3,627,642Restricted
      cash
                
                
                535,501
                
                
                
                149,898Other
      long term assets
                
                
                510,379
                
                
                
                450,021Notes
      receivable
                
                
                27,968,634
                
                
                
                7,913,100Total
      other assets
                
                
                34,341,066
                
                
                
                14,076,939TOTAL
      ASSETS
                
                $
                124,188,736
                
                
                $
                86,610,912LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
                
                $
                29,969,590
                
                
                $
                12,012,012Accounts
      payable
                
                
                16,345,032
                
                
                
                11,489,568Notes
      payable
                
                
                7,345,488
                
                
                
                -Advance
      from customers
                
                
                7,415,849
                
                
                
                12,125,187Accrued
      liabilities
                
                
                472,857
                
                
                
                325,539Other
      payables
                
                
                738,915
                
                
                
                387,729Shareholder
      loans
                
                
                8,749,104
                
                
                
                9,972,279Current
      portion of deferred income
                
                
                881,957
                
                
                
                822,930Total
      current liabilities
                
                
                71,918,792
                
                
                
                47,135,244Deferred
      income, net of current portion
                
                
                6,114,243
                
                
                
                6,224,033Total
      liabilities
                
                
                78,033,035
                
                
                
                53,359,277Stockholders’
      equity:Common
      stock (authorized 200,000,000 shares of $0.001 par value;45,000,000
      shares issued and outstanding, respectively)
                
                
                45,000
                
                
                
                45,000Additional
      paid-in capital
                
                
                9,036,039
                
                
                
                8,970,805Retained
      earnings
                
                
                24,956,344
                
                
                
                12,542,081Statutory
      reserves
                
                
                8,390,155
                
                
                
                8,078,765Other
      comprehensive income
                
                
                3,728,163
                
                
                
                3,614,984Total
      stockholders’ equity
                
                
                46,155,701
                
                
                
                33,251,635TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                124,188,736
                
                
                $
                86,610,912





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




1




CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME


(UNAUDITED)





For the nine months ended
                        August 31,
                      
                      
                      For the three months ended
                        August 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009US$
                      
                      
                      US$
                      
                      
                      US$
                      
                      
                      US$Revenues
                      
                      $
                      62,404,876
                      
                      
                      $
                      19,425,386
                      
                      
                      $
                      21,152,260
                      
                      
                      $
                      9,962,620Cost
      of revenues
                      
                      
                      (38,351,847
                      )
                      
                      
                      (16,690,400
                      )
                      
                      
                      (12,499,542
                      )
                      
                      
                      (7,766,209
                      )Gross
      profit
                      
                      
                      24,053,029
                      
                      
                      
                      2,734,986
                      
                      
                      
                      8,652,718
                      
                      
                      
                      2,196,411Operating
      expenses:Selling
      and marketing
                      
                      
                      (3,490,979
                      )
                      
                      
                      (1,076,552
                      )
                      
                      
                      (1,268,698
                      )
                      
                      
                      (838,399
                      )General
      and administrative
                      
                      
                      (2,748,519
                      )
                      
                      
                      (2,232,749
                      )
                      
                      
                      (1,016,673
                      )
                      
                      
                      (1,002,605
                      )Total
      operating expenses
                      
                      
                      (6,239,498
                      )
                      
                      
                      (3,309,301
                      )
                      
                      
                      (2,285,371
                      )
                      
                      
                      (1,841,004
                      )Income
      (loss) from operations
                      
                      
                      17,813,531
                      
                      
                      
                      (574,315
                      )
                      
                      
                      6,367,347
                      
                      
                      
                      355,407Investment
      income (loss)
                      
                      
                      -
                      
                      
                      
                      36,841
                      
                      
                      
                      -
                      
                      
                      
                      (6
                      )Non-operating
      income
                      
                      
                      1,107,448
                      
                      
                      
                      493,367
                      
                      
                      
                      424,770
                      
                      
                      
                      168,194Finance
      expenses, net
                      
                      
                      (1,377,543
                      )
                      
                      
                      (580,212
                      )
                      
                      
                      (606,542
                      )
                      
                      
                      (381,490
                      )Non-operating
      expenses
                      
                      
                      (291,837
                      )
                      
                      
                      (882,189
                      )
                      
                      
                      (116,326
                      )
                      
                      
                      (125,106
                      )Income
      (loss) before income taxes
                      
                      
                      17,251,599
                      
                      
                      
                      (1,506,508
                      )
                      
                      
                      6,069,249
                      
                      
                      
                      16,999(Provision
      for) income taxes
                      
                      
                      (4,525,946
                      )
                      
                      
                      (448,778
                      )
                      
                      
                      (1,770,354
                      )
                      
                      
                      (473,368
                      )Net income (loss)
                      
                      $
                      12,725,653
                      
                      
                      $
                      (1,955,286
                      )
                      
                      $
                      4,298,895
                      
                      
                      $
                      (456,369
                      )Other
      comprehensive incomeForeign
      currency translation adjustment
                      
                      
                      113,179
                      
                      
                      
                      2,918,007
                      
                      
                      
                      136,970
                      
                      
                      
                      2,839,002Total comprehensive
      income
                      
                      $
                      12,838,832
                      
                      
                      $
                      962,721
                      
                      
                      $
                      4,435,865
                      
                      
                      $
                      2,382,633Net
      income (loss) per common share, basic and diluted
                      
                      $
                      0.28
                      
                      
                      $
                      (0.04
                      )
                      
                      $
                      0.10
                      
                      
                      $
                      (0.01
                      )Weighted
      average common shares outstanding, basic and diluted
                      
                      
                      45,000,000
                      
                      
                      
                      45,000,000
                      
                      
                      
                      45,000,000
                      
                      
                      
                      45,000,000





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




2




CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE NINE MONTHS ENDED AUGUST 31, 2010


(UNAUDITED)





Common Stock
                      
                      
                      Additional
                        Paid in
                      
                      
                      Retained
                      
                      
                      Statutory
                      
                      
                      Other
                        ComprehensiveShares
                      
                      
                      Amounts
                      
                      
                      capital
                      
                      
                      Earnings
                      
                      
                      Reserves
                      
                      
                      income
                      
                      
                      TotalBalance
      as of December 1, 2009
                      
                      
                      45,000,000
                      
                      
                      $
                      45,000
                      
                      
                      $
                      8,970,805
                      
                      
                      $
                      12,542,081
                      
                      
                      $
                      8,078,765
                      
                      
                      $
                      3,614,984
                      
                      
                      $
                      33,251,635Net
      income for the period
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,725,653
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,725,653Other
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      113,179
                      
                      
                      
                      113,179Stock-based
      compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      65,234
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      65,234Allocation
      of statutory reserve
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (311,390
                      )
                      
                      
                      311,390
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      as of August 31, 2010
                      
                      
                      45,000,000
                      
                      
                      $
                      45,000
                      
                      
                      $
                      9,036,039
                      
                      
                      $
                      24,956,344
                      
                      
                      $
                      8,390,155
                      
                      
                      $
                      3,728,163
                      
                      
                      $
                      46,155,701





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




3




CHINA
ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




For the nine months ended
                        August 31,2010
                      
                      
                      2009US$
                      
                      
                      US$Cash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      12,725,653
                      
                      
                      $
                      (1,955,286
                      )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      3,019,559
                      
                      
                      
                      2,168,615Stock
      based compensation
                      
                      
                      65,234
                      
                      
                      
                      -Loss
      on disposal of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      740,058Gain
      from short term investments
                      
                      
                      -
                      
                      
                      
                      (36,841
                      )Changes
      in operating assets and liabilities:(Increase)
      in term deposit-restricted
                      
                      
                      (7,345,488
                      )
                      
                      
                      -(Increase)
      in restricted cash
                      
                      
                      (385,603
                      )
                      
                      
                      -(Increase)
      in accounts receivable
                      
                      
                      (3,803,690
                      )
                      
                      
                      (2,986,260
                      )Decrease
      in other receivables
                      
                      
                      1,605,366
                      
                      
                      
                      1,252,468(Increase)
      in advance to suppliers
                      
                      
                      (637,916
                      )
                      
                      
                      (787,908
                      )Decrease
      (increase) in inventories
                      
                      
                      738,387
                      
                      
                      
                      (4,388,091
                      )(Increase)
      in other long term assets
                      
                      
                      (25,000
                      )
                      
                      
                      (29,283
                      )(Decrease)
      increase in deferred income
                      
                      
                      (50,763
                      )
                      
                      
                      306,525Increase
      in accounts payable
                      
                      
                      660,882
                      
                      
                      
                      2,090,381(Decrease)
      increase in advance from customers
                      
                      
                      (4,709,338
                      )
                      
                      
                      7,907,009Increase
      in notes payable
                      
                      
                      7,345,488
                      
                      
                      
                      -Increase
      (decrease) in accrued liabilities and other payables
                      
                      
                      607,852
                      
                      
                      
                      (3,981,658
                      )Net
      cash provided by operating activities
                      
                      
                      9,810,623
                      
                      
                      
                      299,729Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                      
                      
                      (5,041,280
                      )
                      
                      
                      (5,314,241
                      )Proceeds
      received on sales of fixed assets
                      
                      
                      -
                      
                      
                      
                      75,485Increase
      in construction in progress
                      
                      
                      (2,186,114
                      )
                      
                      
                      (1,247,575
                      )(Increase)
      in notes receivable
                      
                      
                      (20,617,494
                      )
                      
                      
                      (5,215,264
                      )Payments
      received on notes receivable
                      
                      
                      561,960
                      
                      
                      
                      893,419Net
      cash (used in) investing activities
                      
                      
                      (27,282,928
                      )
                      
                      
                      (10,808,176
                      )Cash
      flows from financing activities:Proceeds
      from short term bank loans
                      
                      
                      29,929,138
                      
                      
                      
                      16,403,767Principal
      payments made on short term bank loans
                      
                      
                      (12,030,340
                      )
                      
                      
                      (2,929,244
                      )Advance
      from shareholders
                      
                      
                      -
                      
                      
                      
                      4,439,269Repayments
      of shareholder loans
                      
                      
                      (1,450,852
                      )
                      
                      
                      (2,081,017
                      )Net
      cash provided by financing activities
                      
                      
                      16,447,946
                      
                      
                      
                      15,832,775Effect
      of exchange rate changes on cash
                      
                      
                      116,628
                      
                      
                      
                      2,581,150Net
      (decrease) increase in cash and cash equivalents
                      
                      
                      (907,731
                      )
                      
                      
                      7,905,478Cash
      and cash equivalents, beginning of period
                      
                      
                      5,073,645
                      
                      
                      
                      456,802Cash
      and cash equivalents, end of period
                      
                      $
                      4,165,914
                      
                      
                      $
                      8,362,280Supplemental
      disclosure of cash flow informationCash
      paid for interest
                      
                      $
                      1,070,341
                      
                      
                      $
                      514,526Cash
      paid for income taxes
                      
                      $
                      349,114
                      
                      
                      $
                      263,336





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




4




CHINA
ENERGY CORPORATION


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTH PERIODS ENDED AUGUST 31, 2010 AND
2009


(UNAUDITED)





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 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.




5




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 production 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.  The Coal Group
does not sell any coal to Heat Power.





2.
            Summary
      of Significant Accounting Policies





Basis
of Accounting and Presentation





The
unaudited interim financial statements of the Company as of August 31, 2010 and
for the three and nine month periods ended August 31, 2010 and 2009, have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission (the “SEC”) which apply to interim financial statements,
including the accounts of China Energy Corporation and its wholly owned
subsidiary, Coal Group.  In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the periods
presented.  The results of operations for the three and nine months ended
August 31, 2010 are not necessarily indicative of the results to be expected for
future quarters or for the year ending November 30, 2010.





Certain
information and disclosures normally included in the notes to financial
statements have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosure is adequate to make the information presented not
misleading.  The accompanying unaudited financial statements should be read
in conjunction with the audited financial statements of the Company for the year
ended November 30, 2009.




6




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.





Recently
Issued Accounting Standards





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-6, “Improving Disclosures about Fair
Value Measurements” (“ASU No. 2010-06”).  ASU No. 2010-06 amends
FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and
Disclosures”, to require additional information to be disclosed
principally regarding Level 3 measurements and transfers to and from Level 1 and
2.  In additional, enhanced disclosure is required concerning inputs and
valuation techniques used to determine Level 2 and Level 3 measurements. 
This guidance is generally effective for interim and annual reporting periods
beginning after December 15, 2009; however, requirements to disclose separately
purchases, sales, issuances, and settlements in the Level 3 reconciliation are
effective for fiscal years beginning after December 15, 2010 (and for interim
periods within such years).  The update will not have a material impact on
the Company’s consolidated results of operations or financial
position.





In
February 2010, the FASB issued Accounting Standards Update No. 2010-09, “Amendments to Certain Recognition
and Disclosure Requirements” (“ASU No. 2010-09”).  ASU No. 2010-09
amends FASB ASC Topic 855-10, “Subsequent Events”, to remove
the requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated in both issued and revised financial
statements.  This change alleviates potential conflicts between ASC 855-10
and the SEC’s requirements.  The update did not have a material impact on
the Company’s consolidated results of operations or financial
position.





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 FASB ASC
830, “Foreign Currency
Matters.”  All asset and liability accounts have been
translated using the exchange rate in effect at the balance sheet date. 
Equity accounts have been translated at their historical exchange rates when the
capital transaction occurred.  Statements of operations amounts have been
translated using the average exchange rate for the periods presented. 
Adjustments resulting from the translation of the Company’s financial statements
are recorded as other comprehensive income.




7




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





August 31,
                              2010
                            
                            August 31,
                              2009
                            
                            November30,
                              2009Balance
      sheet items, except for the registeredcapital,
      additional paid-in capital, statutoryreserves,
      retained earnings and othercomprehensive
      income, as of period end
                            
                            US$1=RMB
                              6.8069
                            
                            US$1=RMB
                              6.8299
                            
                            US$1=RMB
                              6.8265Amounts
      included in the statements of operations, statements of changes in
      stockholders’ equity and statements of cash flows for the
      period
                            
                            US$1=RMB
                              6.8161
                            
                            US$1=RMB
                              6.8277
                            
                            US$1=RMB
                              6.8330





For the
nine months ended August 31, 2010, a foreign currency translation adjustment of
$113,179 has been reported as other comprehensive income in the consolidated
statements of changes in stockholders’ equity.





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 US 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 consolidated financial condition in terms of US dollar
reporting.





Cash
and Cash Equivalents





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





Term
Deposit-Restricted





Term
deposit-restricted represents deposits held by a bank which are not available
for the Company’s general use.  These deposits are held as collateral for
issuance of notes to vendors for purchase of coal which generally mature between
three to six months.





Accounts
Receivable





Accounts
receivable is stated at cost, net of an allowance for doubtful accounts. 
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the failure of customers to make required payments.  The
Company reviews the accounts receivable on a periodic basis and makes allowances
where there is doubt as to the collectability of individual balances.  In
evaluating the collectability of individual receivable balances, the Company
considers many factors, including the age of the balance, the customer’s payment
history, its current credit-worthiness and current economic trends.  As of
August 31, 2010 and November 30, 2009, the balances of the allowance for
doubtful accounts were $121,201 and $120,853, respectively.  For the
periods presented, the Company did not write off any accounts receivable as bad
debts.




8




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 make any inventory adjustments for the three and nine months
ended August 31, 2010 and 2009.





Property,
Plant and Equipment





Property,
plant and equipment are recorded at cost, less accumulated depreciation. 
Cost includes the price paid to acquire or construct the asset, including
capitalized interest during the construction period, and any 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, plant and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in operations.





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





Investment
Property





Investment
property represents rental property 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 instalments over a six
year period from the date the mining right was granted.  The mine
acquisition cost is amortized using the UOP method over the productive life of
the mine based on proven and probable reserves.




9




Restricted
Cash





Long-term
restricted cash represents the bank deposits placed as a guarantee for the
future payments of rehabilitation costs as required by the PRC government. The
long-term deposits earn interest at 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.





Notes
Payable





Notes
payable represents two bank acceptance bills issued by a bank with no interest,
maturing in November 2010.  The notes are collateralized by a restricted
term deposit.





Deferred
Income





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





Impairment
of Long-lived Assets





The
Company utilizes FASB ASC 360, “Property, Plant and
Equipment” (“ASC 360”), which addresses the financial accounting and
reporting for the recognition and measurement of impairment losses for
long-lived assets. In accordance with ASC 360, long-lived assets are reviewed,
at least annually, for impairment or, 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 three and nine months ended August 31, 2010 and
2009.





Recognition
of Revenue





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





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




10




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 a resource compensation fee of
$210,889 and $70,578 for the nine months ended August, 2010 and 2009,
respectively, and $87,049 and $54,693, respectively, for the three months then
ended, which is included in cost of revenues in the consolidated statements of
operations.





Environmental
Costs





The PRC
has adopted extensive environmental laws and regulations that affect the
operations of the coal mining industry. The potential environmental liabilities
under proposed or future environmental legislation cannot 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 balance sheets of the
Company.





Fair
Value of Financial Instruments





Financial
instruments include accounts receivable, advance to suppliers, other
receivables, short term bank loans, accounts payable, advance from customers,
accrued liabilities, other payables and shareholders’ loans. As of August 31,
2010 and November 30, 2009, 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. The Company, Coal Group and Heat Power do not conduct any
operations in the U.S. and therefore, are not subject to U.S. taxes (see Note
13).




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




11




Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimated.





Net
Income (Loss) Per Share





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





Statutory
Reserves





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





Surplus Reserve Fund: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 issuance is not less than 25% of the registered
capital.





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





Non-Surplus Reserve Fund (Safety and
Maintenance):According to ruling No. 119 (2004) issued on May 21, 2004,
and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of
Finance regarding “Accrual and Utilization of Coal
Production Safety Expense”and “Criterion on Coal Mine Maintenance
and Improvement,” the Company is required to set aside to a safety fund
of RMB 6 per ton and RMB 10 per ton of raw coal mined for 2010 and 2009,
respectively, and RMB 10.5 per ton for a maintenance fund.  As defined
under US GAAP, a liability for safety and maintenance expenses does not exist at
the balance sheet date because there is no present obligation to transfer assets
or to provide services as a result of any past transactions. Therefore, for
financial reporting purposes, this statutory reserve has been recorded as an
appropriation of retained earnings.




12




The
statutory reserves consist of the following:





August 31, 2010
                
                
                November30, 2009Surplus
      Reserve and Common Welfare fund
                
                $
                2,447,598
                
                
                $
                2,447,598Safety
      and Maintenance fund
                
                
                5,942,557
                
                
                
                5,631,167Total
      statutory reserves
                
                $
                8,390,155
                
                
                $
                8,078,765





Stock
Based Compensation





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





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





Asset
Retirement Cost and Obligation





The
Company has adopted FASB ASC 410, “Asset Retirement and Environmental
Obligations”(“ASC 410”). ASC 410
generally requires that the Company’s legal obligations associated with the
retirement of long-lived assets are recognized at fair value at the time the
obligations are incurred. Obligations are incurred at the time development of a
mine commences for underground mines or construction begins for support
facilities, refuse areas and slurry ponds. The obligation’s fair value is
determined using discounted cash flow techniques and is accreted over time to
its expected settlement value. Upon initial recognition of a liability, a
corresponding amount is capitalized as part of the carrying amount of the
related long-lived asset.  The related asset is amortized using the UOP
method over the productive life of the mine based on proven and probable
reserves.  The
Company did not incur and does not anticipate incurring any material
dismantlement, restoration 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 PRCs political, economic and social conditions.
There is also no guarantee that the PRC government’s pursuit of economic reforms
will be consistent or effective.




13




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.





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 will 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.





Reclassifications





Certain
prior periods’ amounts have been reclassified to conform to the current periods’
presentation.





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 94
million (equivalent to US$13.8 million) as of August 31, 2010, 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.




14




Nine Months Ended August 31,2010
                                            
                                            
                                            2009Heat
                                            
                                            
                                            Coal
                                            
                                            
                                            
                                            
                                            
                                            Heat
                                            
                                            
                                            CoalPower
                                            
                                            
                                            Group
                                            
                                            
                                            Total
                                            
                                            
                                            Power
                                            
                                            
                                            Group
                                            
                                            
                                            TotalUS$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$Sales
      to external customers
                                            
                                            
                                            8,094,206
                                            
                                            
                                            
                                            50,977,131
                                            
                                            
                                            
                                            59,071,337
                                            
                                            
                                            
                                            6,863,482
                                            
                                            
                                            
                                            12,392,183
                                            
                                            
                                            
                                            19,255,665Sales
      – government subsidies
                                            
                                            
                                            3,333,539
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,333,539
                                            
                                            
                                            
                                            169,721
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            169,721Finance
      expense, net
                                            
                                            
                                            374,892
                                            
                                            
                                            
                                            1,002,651
                                            
                                            
                                            
                                            1,377,543
                                            
                                            
                                            
                                            157,725
                                            
                                            
                                            
                                            422,487
                                            
                                            
                                            
                                            580,212Depreciation
      and depletion
                                            
                                            
                                            1,914,246
                                            
                                            
                                            
                                            1,105,313
                                            
                                            
                                            
                                            3,019,559
                                            
                                            
                                            
                                            1,837,328
                                            
                                            
                                            
                                            331,287
                                            
                                            
                                            
                                            2,168,615Segment
      profit (loss)
                                            
                                            
                                            859,765
                                            
                                            
                                            
                                            11,865,888
                                            
                                            
                                            
                                            12,725,653
                                            
                                            
                                            
                                            (2,492,790
                                            )
                                            
                                            
                                            537,504
                                            
                                            
                                            
                                            (1,955,286
                                            )





Three Months Ended August 31,2010
                              
                              
                              2009Heat
                              
                              
                              Coal
                              
                              
                              
                              
                              
                              Heat
                              
                              
                              CoalPower
                              
                              
                              Group
                              
                              
                              Total
                              
                              
                              Power
                              
                              
                              Group
                              
                              
                              TotalUS$
                              
                              
                              US$
                              
                              
                              US$
                              
                              
                              US$
                              
                              
                              US$
                              
                              
                              US$Sales
      to external customers
                              
                              
                              618,589
                              
                              
                              
                              17,200,132
                              
                              
                              
                              17,818,721
                              
                              
                              
                              739,149
                              
                              
                              
                              9,217,895
                              
                              
                              
                              9,957,044Sales
      – government subsidies
                              
                              
                              3,333,539
                              
                              
                              
                              -
                              
                              
                              
                              3,333,539
                              
                              
                              
                              5,576
                              
                              
                              
                              -
                              
                              
                              
                              5,576Finance
      expense, net
                              
                              
                              197,737
                              
                              
                              
                              408,805
                              
                              
                              
                              606,542
                              
                              
                              
                              48,502
                              
                              
                              
                              332,988
                              
                              
                              
                              381,490Depreciation
      and depletion
                              
                              
                              555,351
                              
                              
                              
                              355,975
                              
                              
                              
                              911,326
                              
                              
                              
                              609,494
                              
                              
                              
                              117,556
                              
                              
                              
                              727,050Segment
      profit (loss)
                              
                              
                              261,150
                              
                              
                              
                              4,037,745
                              
                              
                              
                              4,298,895
                              
                              
                              
                              (846,609
                              )
                              
                              
                              390,240
                              
                              
                              
                              (456,369
                              )





August 31, 2010
                
                
                November 30, 2009Heat
                
                
                Coal
                
                
                
                
                
                Heat
                
                
                CoalPower
                
                
                Group
                
                
                Total
                
                
                Power
                
                
                Group
                
                
                TotalUS$
                
                
                US$
                
                
                US$
                
                
                US$
                
                
                US$
                
                
                US$Segment
      assets
                
                
                56,235,428
                
                
                
                67,953,308
                
                
                
                124,188,736
                
                
                
                49,346,842
                
                
                
                37,264,070
                
                
                
                86,610,912Construction
      in progress
                
                
                5,542,092
                
                
                
                527,154
                
                
                
                6,069,246
                
                
                
                3,514,152
                
                
                
                722,129
                
                
                
                4,236,281Investment
      property, net
                
                
                -
                
                
                
                1,907,766
                
                
                
                1,907,766
                
                
                
                -
                
                
                
                1,936,278
                
                
                
                1,936,278





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:





August 31, 2010
                    
                    
                    November 30, 2009Ordos
      City YiYuan Investment Co., Ltd.
                    
                    $
                    1,689,810
                    
                    
                    $
                    1,634,404Hangzhou
      Dayuan Group, Ltd.
                    
                    
                    5,047,679
                    
                    
                    
                    5,428,963Xinghe
      County Haifu Coal Transportation&
      Sales Co., Ltd.
                    
                    
                    1,867,274
                    
                    
                    
                    1,807,686Wenxiang
      Ding
                    
                    
                    96,960
                    
                    
                    
                    28,565Yanhua
      Li
                    
                    
                    -
                    
                    
                    
                    1,025,416Yi
      Ding
                    
                    
                    47,381
                    
                    
                    
                    47,245Total
                    
                    $
                    8,749,104
                    
                    
                    $
                    9,972,279




15




The
shareholder loans are due on demand with interest as follows:





August31,2010
                
                
                November30,2009Balance
                
                
                Interest
                  rate
                
                
                Balance
                
                
                Interest
                  rateShareholder
      loans – interest free
                
                $
                144,341
                
                
                
                0
                %
                
                $
                1,101,226
                
                
                
                0
                %Shareholder
      loans – interest bearing
                
                
                6,493,411
                
                
                
                5.310
                %
                
                
                6,964,156
                
                
                
                3.155
                %Interest
      payable
                
                
                2,111,352
                
                
                
                
                
                
                
                1,906,897Total
                
                $
                8,749,104
                
                
                
                
                
                
                $
                9,972,279





5.
            Lease
      Obligation





The
Company leases an office under an operating lease expiring December 31, 2011.
The minimum future annual rent payments under the lease as of August 31, 2010
are approximated as follows:





Year Ending
                            
                            AnnualNovember 30,
                            
                            Amount2010
                            
                            $
                            22,0362011
                            
                            
                            88,1462012
                            
                            
                            7,345Total
                            
                            $
                            117,527





Rent
expense charged to operations for the nine months ended August 31, 2010 and
2009 was $66,020 and $65,908, respectively, and was $22,007 and $21,969 for
the three months then ended.





6. 
 Advances to Suppliers





As is
customary in China, the Company has made advances to various suppliers.  At
August 31, 2010 and November 30, 2009, advances amounted to $4,511,336 and
$5,511,630, respectively.  There is no interest due on these advances; the
advances are offset against billings as they are made by the
suppliers.




16




7.
 Other Receivables





Other
receivables consist of the following:





August 31, 2010
                
                
                November 30, 2009Loans
      to suppliers and other associatedfirms
                
                $
                1,052,493
                
                
                $
                1,332,038Deposit
      funds to secure agreements
                
                
                70,130
                
                
                
                509,392Employee
      expense advances
                
                
                177,149
                
                
                
                217,643Government
      subsidies receivable
                
                
                616,157
                
                
                
                1,464,880Heat
      network access fee receivable
                
                
                925,977
                
                
                
                923,319Total
                
                $
                2,841,906
                
                
                $
                4,447,272





On a
periodic basis, management reviews these balances and establishes allowances
where there is doubt as to the collectability of the individual balance. 
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
August 31, 2010 and November 30, 2009 to be fully collectible and, therefore,
did not provide for an allowance for doubtful accounts.





8. 
 Fixed Assets





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





August 31, 2010
                  
                  
                  November 30, 2009Buildings
                  
                  $
                  9,961,293
                  
                  
                  $
                  9,682,139Machinery
      & equipment
                  
                  
                  49,848,534
                  
                  
                  
                  39,322,399Automotive
      equipment
                  
                  
                  1,077,949
                  
                  
                  
                  919,922Office
      Equipment
                  
                  
                  966,873
                  
                  
                  
                  622,402Construction
      in progress
                  
                  
                  6,069,246
                  
                  
                  
                  4,236,28167,923,895
                  
                  
                  
                  54,783,143Accumulated
      depreciation and depletion
                  
                  
                  (10,180,956
                  )
                  
                  
                  (7,456,849
                  )Fixed
      assets, net
                  
                  $
                  57,742,939
                  
                  
                  $
                  47,326,294





Depreciation
expense charged to operations for the nine months ended August 31, 2010 and 2009
was $2,698,988 and $1,955,370, respectively and was $806,226 and 651,898 for the
three months then ended, respectively.




17




9. 
 Notes Receivable





Certain
loans were made for strategic purposes.  Notes receivable, which are
non-interest bearing except as noted below and payable on demand, consist of the
following:




August
      31, 2010
              
              
              November
      30, 2009Inner
      Mongolia XiangRong InvestmentManagement
      Co., Ltd. (a)
              
              $
              1,382,870
              
              
              $
              1,378,900Inner
      Mongolia Tehong InvestmentCo.,
      Ltd. (a)
              
              
              20,922,440
              
              
              
              3,244,785Inner
      Mongolia Tehong Coal Chemical Co.,Ltd.
      (a)
              
              
              3,208,509
              
              
              
              761,737QuanYing
      Coal Mine
              
              
              354,351
              
              
              
              916,311Inner
      Mongolia XinKe Kaolin FabricationPlant
              
              
              1,645,389
              
              
              
              1,611,367Inner
      Mongolia Tehong Glass Co.,Ltd.with
      interest at 11.16% (a)
              
              
              455,075
              
              
              
              -Total
      notes receivable
              
              $
              27,968,634
              
              
              $
              7,913,100




(a)
            Related
      parties affiliated to the Company by common control. The
      Company lent RMB 94 million (US$13,809,517) to certain affiliates
      controlled by the family of the Company’s Chairman to make an investment
      intended to increase significantly the Company’s mining rights and
      reserves in Inner Mongolia.  The Company plans to unwind this
      loan in order to evaluate alternative structures for making these types of
      investments directly through its operating
    companies.





10.
Short Term Bank Loans




The
Company has bank loans collateralized by the investment property and guaranteed
by two related parties, Inner Mongolia Tehong Glass Co., Ltd. and Inner Mongolia
XiangRong Investment Management Co., Ltd, and a third party
company. Relevant terms of these bank loans are as
follows:




August 31,2010
                      
                      
                      November 30, 2009Bank
      loan due 3/9/11, with interest at 6.372%
                      
                      $
                      5,876,390
                      
                      
                      $
                      -Bank
      loan due 4/15/11, with interest at 6.372%
                      
                      
                      7,345,488
                      
                      
                      
                      -Bank
      loan due 4/22/11, with interest at 6.903%
                      
                      
                      2,938,195
                      
                      
                      
                      -Bank
      loan due 7/27/11, with interest at 5.841%
                      
                      
                      6,464,029
                      
                      
                      
                      -Bank
      loan due 6/29/11, with interest at 5.310%
                      
                      
                      7,345,488
                      
                      
                      
                      -Bank
      loan due 12/5/09, with interest at 6.696%
                      
                      
                      -
                      
                      
                      
                      1,757,855Bank
      loan due 3/15/10, with interest at 6.372%
                      
                      
                      -
                      
                      
                      
                      8,789,277Bank
      loan due 4/21/10, with interest at 6.372%
                      
                      
                      -
                      
                      
                      
                      1,464,880Total
                      
                      $
                      29,969,590
                      
                      
                      $
                      12,012,012





11.
Fair Value Measurement





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





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




18




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 August 31,
2010.





Notes
receivable:  Valued at the net realizable value which
approximates the fair value.





The
method described above may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future values. 
Furthermore, while the Company believes its valuation methods 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 August 31, 2010:





Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    TotalNotes
      receivable
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    27,968,634
                    
                    
                    $
                    27,968,634Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    27,968,634
                    
                    
                    $
                    27,968,634





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





Notes Receivable
                      
                      
                      TotalBalance,
      December 1, 2009
                      
                      $
                      7,913,100
                      
                      
                      $
                      7,913,100Purchases,
      sales, issuance and settlements (net)
                      
                      
                      20,055,534
                      
                      
                      
                      20,055,534Balance,
      August 31, 2010
                      
                      $
                      27,968,634
                      
                      
                      $
                      27,968,634




19




12.
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 $3,333,539 and $169,721 for the nine month
periods ended August 31, 2010 and 2009, respectively, and $3,333,539 and $5,576
for the three months then ended.  All the government subsidies are included
in revenues in the accompanying consolidated statements of
operations.





13.
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 August 31, 2010, the Chinese entities had no net operating
losses available for future use as confirmed by the local tax
authority.





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





August
      31, 2010
                
                
                November
      30, 2009Deferred
      tax assets
                
                $
                -
                
                
                $
                256,010Valuation
      allowance
                
                
                -
                
                
                
                (256,010
                )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 year ended November 30, 2009 since the Company is unable to determine if
and when those benefits will be realized.





The
following tables reconcile the effective income tax rate with the statutory rate
for the periods presented:





Nine months ended
                      August 31, 2010
                    
                    Income Before
                      Income Taxes
                    
                    
                    Tax Provision
                    
                    
                    Rate of
                      TaxAs
      calculated with statutory rate
                    
                    $
                    18,103,784
                    
                    
                    $
                    4,525,946
                    
                    
                    
                    25
                    %Expenses
      not deductible for calculation of taxable income on the tax
      returns
                    
                    
                    (852,185
                    )
                    
                    
                    -
                    
                    
                    
                    1.2
                    %As
      reported on the consolidated statements of operations
                    
                    $
                    17,251,599
                    
                    
                    $
                    4,525,946
                    
                    
                    
                    26.2
                    %




20




Nine months ended
                          August 31, 2009
                        
                        Income Before
                          Income Taxes
                        
                        
                        Tax Provision
                        
                        
                        Rate of
                          TaxAs
      calculated with statutory rate
                        
                        $
                        1,795,112
                        
                        
                        $
                        448,778
                        
                        
                        
                        25
                        %Expenses
      not deductible for calculation of taxable income on the tax
      returns
                        
                        
                        (3,301,620
                        )
                        
                        
                        -
                        
                        
                        
                        (55
                        )%As
      reported on the consolidated statements of operations
                        
                        $
                        (1,506,508
                        )
                        
                        $
                        448,778
                        
                        
                        
                        (30
                        )%





Three months ended
                          August 31, 2010
                        
                        Income Before
                          Income Taxes
                        
                        
                        Tax Provision
                        
                        
                        Rate of
                          TaxAs
      calculated with statutory rate
                        
                        $
                        7,081,416
                        
                        
                        $
                        1,770,354
                        
                        
                        
                        25
                        %Expenses
      not deductible for calculation of taxable income on the tax
      returns
                        
                        
                        (1,012,167
                        )
                        
                        
                        -
                        
                        
                        
                        4.2
                        %As
      reported on the consolidated statements of operations
                        
                        $
                        6,069,249
                        
                        
                        $
                        1,770,354
                        
                        
                        
                        29.2
                        %





Three months ended
                      August 31, 2009
                    
                    Income Before
                      Income Taxes
                    
                    
                    Tax Provision
                    
                    
                    Rate of
                      TaxAs
      calculated with statutory rate
                    
                    $
                    1,893,472
                    
                    
                    $
                    473,368
                    
                    
                    
                    25
                    %Expenses
      not deductible for calculation of taxable income on the tax
      returns
                    
                    
                    (1,876,473
                    )
                    
                    
                    -
                    
                    
                    
                    2,760
                    %As
      reported on the consolidated statements of operations
                    
                    $
                    16,999
                    
                    
                    $
                    473,368
                    
                    
                    
                    2,785
                    %





The
Company has adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes — an
interpretation of SFAS 109.” (“FIN 48”), as codified in ASC 740. 
ASC 740 addresses the determination of whether tax benefits claimed or expected
to be claimed on a tax return should be recorded in the financial
statements.  Under ASC 740, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position.  The tax benefits recognized in the
financial statements from such a position would be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement.  ASC 740 also provides guidance on de-recognition of
income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, and accounting for interest and penalties associated
with tax positions.




21




The
Company did not file its U.S. federal income tax returns, including, without
limitation, information returns on Internal Revenue Service (“IRS”) Form 5471,
“Information Return of U.S.
Persons With Respect to Certain Foreign Corporations” for the years ended
November 30, 2002 through 2005, and 2008.  The Company was also late in
filing for the years ended November 30, 2006 and 2007.  Failure to furnish
any information with respect to any foreign business entity required, within the
time prescribed by the IRS, subjects the Company to certain civil
penalties.  The Company is unable to determine the amount of any penalties
that may be assessed at this time.  Management is of the opinion that
penalties, if any, that may be assessed would not be material to the
consolidated financial statements.





In
addition, because the Company did not generate any income in the United States
or otherwise have any U.S. taxable income, the Company does not believe that it
owes U.S. federal income taxes in respect to any transactions that the Company
or any of its subsidiaries may have engaged in through August 31, 2010. 
However, there can be no assurance that the IRS will agree with the position,
and therefore the Company ultimately could be held liable for U.S. federal
income taxes, interest and penalties.





14.
Stock-Based Compensation





In 2008,
the Company granted to its officers, directors and independent consultants
options to purchase 4,500,000 shares of common stock with exercise price at
$0.5.  In 2010, the options were had either expired or were
cancelled.




On May
31, 2010, the Company granted options to each of its three independent directors
an option to purchase 20,000 shares of common stock at an exercise price of
$2.09 per share.  The options vest over one year in equal, quarterly
installments on the last day of the Company’s fiscal quarter, beginning with the
fiscal quarter ending August 31, 2010, subject to their continued service as a
director.  The Board, or the Compensation Committee of the Board of
Directors will determine if the performance conditions have been
met.


The fair
value of the options is estimated using the Black-Scholes option pricing model.
Expected volatility is based on historical volatility data of the Company’s
stock.  The expected term of stock options granted is based on
historical data and represents the period of time that stock options are
expected to be outstanding.  The risk-free interest rate is based on a
zero-coupon United States Treasury bond whose maturity period equals the
expected term of the options.  The weighted average estimated grant
date fair value for options granted to theindependent
directors was $2.09 per share.


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





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




22




The
stock-based compensation included in general and administrative expenses in the
accompanying consolidated statements of operations was $65,234 for the three and
nine months ended August 31, 2010.





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





Shares
                              
                              
                              Weighted
                                Average
                                Exercise
                                Price
                              
                              
                              Weighted-
                                Average
                                Remaining
                                Contractual
                                Life
                              
                              
                              Aggregate
                                Intrinsic
                                ValueOutstanding
      at November 30, 2009
                              
                              
                              4,500,000
                              
                              
                              $
                              0.5
                              
                              
                              One
      year
                              
                              
                              
                              -Granted
                              
                              
                              60,000
                              
                              
                              
                              2.09
                              
                              
                              10
      years
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Cancelled
      and expired
                              
                              
                              (4,500,000
                              )
                              
                              
                              0.5Forfeited
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding at August 31,
    2010
                              
                              
                              60,000
                              
                              
                              $
                              2.09
                              
                              
                              10 years
                              
                              
                              
                              -Vested and expected to vest atAugust
      31, 2010
                              
                              
                              15,000
                              
                              
                              $
                              2.09
                              
                              
                              10 years
                              
                              
                              
                              -Exercisable at August 31,2010
                              
                              
                              15,000
                              
                              
                              $
                              2.09
                              
                              
                              10 years
                              
                              
                              
                              -





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Company’s common
stock. There were no options that were exercised during the three and nine
months ended August 31, 2010.





As of
August 31, 2010, $60,075 of total unrecognized compensation costs related to non
vested options were scheduled to be recognized through May 31,
2011.





15.
Contingency





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)





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




23




ITEM
2. 
             MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Overview





Through
Coal Group, we produce coal using the longwall method of mining at the LaiYeGou
coal mine located in the Dongsheng coal field near the Dongsheng district of
Ordos City, Inner Mongolia.   In addition to selling coal we produce
at our mine, Coal Group also buys, sells and transports coal as part of its
expanding proprietary coal trading business.  Each year the PRC government
regulates the amount of coal we and other coal producers are able to sell by
allocating space to coal mines in Inner Mongolia to ship their coal on rail cars
to the port in Qinhuangdao, where regional users come to buy the coal on the
open market. In order to capitalize on excess quota for rail space that we may
have from time to time, commencing in 2008, we began to buy excess coal from
other coal producers in Inner Mongolia and then pay to have that coal delivered
by rail from the other companies’ mines to the Qinhuangdao port.   Our
business of buying and re-selling coal on a proprietary basis expanded in 2009
as a result of our receipt of additional quota for space on trains from the
local railway bureau.  Due to the increased quota, we were able to trade
more coal.  Parties are awarded additional quotas based on their successful
use of the quota in the previous year.  Our quota increased from 500,000
tons in 2009 to 840,000 tons in 2010 (the increase to 660,000 tons was
acknowledged in writing by the local railway bureau and the rest was orally
acknowledged).  We believe that, given the demand for coal and our past
track record of successfully filling our extra quota, we will be able to grow
our coal trading business through increased quotas granted to us by the local
railway bureau; however, our ability to use any or all of our quota in 2010 will
vary with market conditions and is dependent on our ability to source
commercially acceptable coal purchases and subsequent trades.  Coal that we
produce and sell directly to our customers is customarily transported at the
buyer’s expense and therefore does not count against our quota.





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





Coal
Group is the major revenue and profit driver of the Company. While the sales
prices of heat and electricity units generated by Heat Power are regulated by
government, sales prices of coal are market driven. Therefore, Coal Group enjoys
a higher gross margin compared to Heat Power.





Coal
Group experiences lower sales volume in Q1 each year due to the Chinese New Year
holidays. Heat Power provides heating from October 15th each year to April 15th
of the next calendar year, resulting in higher sales and profit in Q1, lower
sales in Q2 and Q4, and no sales from heating in Q3 each year.





History





On
November 30, 2004, we entered into a Share Exchange Agreement with Coal Group
and Heat Power, both Chinese corporations, whereby we agreed to acquire all the
issued and outstanding stock of Coal Group and 49% of the issued and outstanding
stock of Heat Power in consideration of 45,000,000 shares of our common stock.
The offers and sales of the 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 the stock of Heat Power is owned by Coal
Group.




24




The
shareholders of both companies unanimously agreed to enter into the Share
Exchange 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 Share
Exchange Agreement we had no assets, liabilities or equity and had not issued
any of our shares. As a result of entering into the Share Exchange Agreement;
the shareholders of Coal Group and Heat Power became our shareholders. The
45,000,000 shares issued to the shareholders of Coal Group and Heat Power were
allocated based on the capital contributions or ownership of such shareholders.
The Agreement therefore was a non-arms length transaction.





As a
result of  PRC merger and acquisition regulations, the Company 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.  The
regulations required the Company, as a foreign investor, to invest cash equity
interest into both operating companies. Accordingly, the Company formulated a
plan pursuant to which it would be able to raise the funds to become an
FIE.  As part of this plan, on December 30, 2007, the Company acquired PPI,
a Nevada company with no assets, liabilities or equity. The Company 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 Heat
Power,  pursuant to which all the shareholders are obligated 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 another five  years. In addition, prior to
the execution of the PPI Trust Agreement, controlling shareholders of the
Company, including Wenxiang Ding, Yanhua Li and members of their immediate
family, transferred their shares of the Company to Georgia Pacific Investments
Inc. (“GPI”) and Axim Holdings Ltd. (“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 cash
equity investment 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. The Company has decided to forgo the FIE plan in
favor of  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 a VIE restructuring as contemplated by a framework contract entered in June
2009, a newly-formed subsidiary of the Company (“CEC China”), will 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 will 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.




25




Operating
Companies





Coal
Group





Coal
Group, organized in China on August 8, 2000, produces coal from the LaiYeGou
coal mine located in Ordos City, Inner Mongolia, PRC.  Since the
acquisition of LaiYeGou in 1999, Coal Group’s principal activities consist of
the production of “powdered” coal and “lump” coal from raw coal and the sale of
products to heating and power industries, distributors and coking factories for
steel production.  Coal Group also buys, sells, and transports coal, as
part of its proprietary coal trading activities.





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 32 heat transfer stations.





Heat
Power obtains its supply of powdered coal required to generate heat production
principally from Zhunger County Guanbanwusu Coal Mine (“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.





In the
XueJiaWan area, hardly anyone owns a domestic heating boiler.  Water is
first heated in the Company’s thermoelectric plant by the high-temperature steam
used for generating electricity, and then piped directly to homes and public
buildings, including private dwellings, factories as well as municipal
facilities, and lastly the water is piped back to the thermoelectric plant to
repeat the process.





Results of
Operations





Results
of operations – Three Months Ended August 31, 2010





Revenues




The
following is an analysis of our revenues and gross profit, details and analysis
of components of expenses, and variance; for the three months ended August 31,
2010 compared to August 31, 2009:





Coal Group
                              
                              Three Months Ended August 31,% of total
                              
                              
                              
                              
                              
                              % of total2010
                              
                              
                              revenue
                              
                              
                              2009
                              
                              
                              revenueRevenues
                              
                              $
                              17,200,132
                              
                              
                              
                              81
                              %
                              
                              $
                              9,217,895
                              
                              
                              
                              93
                              %Cost
      of revenues
                              
                              
                              9,349,004
                              
                              
                              
                              44
                              %
                              
                              
                              6,594,918
                              
                              
                              
                              66
                              %Gross
      Profit
                              
                              $
                              7,851,128
                              
                              
                              
                              37
                              %
                              
                              $
                              2,622,977
                              
                              
                              
                              27
                              %




26




Heat Power
                                                
                                                Three Months Ended August 31,% of total
                                                
                                                
                                                
                                                
                                                
                                                % of total2010
                                                
                                                
                                                revenue
                                                
                                                
                                                2009
                                                
                                                
                                                revenueRevenues
                                                
                                                $
                                                3,952,128
                                                
                                                
                                                
                                                19
                                                %
                                                
                                                $
                                                744,725
                                                
                                                
                                                
                                                7
                                                %Cost
      of revenues
                                                
                                                
                                                3,150,538
                                                
                                                
                                                
                                                15
                                                %
                                                
                                                
                                                1,171,291
                                                
                                                
                                                
                                                12
                                                %Gross
      Profit
                                                
                                                $
                                                801,590
                                                
                                                
                                                
                                                4
                                                %
                                                
                                                $
                                                (426,566
                                                )
                                                
                                                
                                                (5
                                                )%




Coal
Group




For the
three months ended August 31, 2010, revenues for Coal Group were $17,200,132
compared to $9,217,895 in the comparable three months in 2009. The $7,982,237
increase was due to the fact that the production at LaiYeGou coal mine was
partially shut down for the installation of the long wall automatic mining
equipments and normal production resumed in mid July 2009 with the completion of
the installation and adjustment of the equipment and increases in the selling
price of coal in the 2010 period..  In addition, the increase of the volume
of proprietary trading of coal also contributed to the increase of revenue from
Coal Group as compared to the prior comparable quarter in 2009.





Coal
      Trading
                                        
                                        Three
      Months Ended August 31,%
      of tal
                                        
                                        
                                        
                                        
                                        
                                        %
      of total2010
                                        
                                        
                                        revenue
                                        
                                        
                                        2009
                                        
                                        
                                        revenueRevenues
                                        
                                        $
                                        7,551,347
                                        
                                        
                                        
                                        36
                                        %
                                        
                                        $
                                        4,657,537
                                        
                                        
                                        
                                        47
                                        %Cost
      of revenues
                                        
                                        
                                        5,894,313
                                        
                                        
                                        
                                        28
                                        %
                                        
                                        
                                        5,029,074
                                        
                                        
                                        
                                        50
                                        %Gross
      Profit
                                        
                                        $
                                        1,657,034
                                        
                                        
                                        
                                        8
                                        %
                                        
                                        $
                                        (371,537
                                        )
                                        
                                        
                                        (3
                                        )%







Coal
      Production
                            
                            Three
      Months Ended August 31,%
      of total
                            
                            
                            
                            
                            
                            %
      of total2010
                            
                            
                            revenue
                            
                            
                            2009
                            
                            
                            revenueRevenues
                            
                            $
                            9,648,785
                            
                            
                            
                            45
                            %
                            
                            $
                            4,560,358
                            
                            
                            
                            46
                            %Cost
      of revenues
                            
                            
                            3,454,691
                            
                            
                            
                            16
                            %
                            
                            
                            1,565,844
                            
                            
                            
                            16
                            %Gross
      Profit
                            
                            $
                            6,194,094
                            
                            
                            
                            29
                            %
                            
                            $
                            2,994,514
                            
                            
                            
                            30
                            %





Coal
Group produced approximately 215,000 metric tons of coal during the three months
ended August 31, 2010, compared to 136,000 metric tons in the comparable three
months in 2009. Volume of coal sold by our proprietary trading business was
approximately 144,000 metric tons during the three months ended August 31, 2010,
compared to 114,000 metric tons in the comparable three months in 2009. We
expect our 2010 annual production volume to be 800,000 metric tons.





Heat
Power




For the
three months ended August 31, 2010, revenues for Heat Power were $3,952,128
compared to $744,725 in the comparable three months in 2009.




27




For the
three months ended August 31, 2010, revenues generated by Heat Power from its
electricity operations were $752,747 compared to $739,149 in the comparable
three month period in 2009.  Our revenue during the third quarter from our
electricity operations was as follows:





Electricity
Revenue for Quarter Ended August 31,




Units
      ofpowerUnit
      Price*
                        
                        
                        supplied
                        
                        
                        Revenue($/KW.h)
                        
                        
                        (1000KW.h)
                        
                        
                        ($)Period
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        VarianceJune
                        
                        
                        0.03
                        
                        
                        
                        0.03
                        
                        
                        
                        10,954
                        
                        
                        
                        9,557
                        
                        
                        
                        340,102
                        
                        
                        
                        278,975
                        
                        
                        
                        61,127July
                        
                        
                        0.03
                        
                        
                        
                        0.03
                        
                        
                        
                        7,556
                        
                        
                        
                        6,453
                        
                        
                        
                        226,625
                        
                        
                        
                        188,376
                        
                        
                        
                        38,249August
                        
                        
                        0.03
                        
                        
                        
                        0.03
                        
                        
                        
                        6,961
                        
                        
                        
                        9,311
                        
                        
                        
                        186,020
                        
                        
                        
                        271,798
                        
                        
                        
                        (85,778
                        )Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,471
                        
                        
                        
                        25,321
                        
                        
                        
                        752,747
                        
                        
                        
                        739,149
                        
                        
                        
                        13,598




* Unit
price of electricity in the non-heating season is slightly lower than that in
heating season, which is not reflected in this table due to
rounding.





In the
third quarter, we also received one-off government subsidies of $3,333,539 in
connection with providing heating at the reduced rates set by the government to
ensure that the local residents can afford to make the payments.




Cost
of Sales





For the
three months ended August 31, 2010, cost of sales increased by approximately
$4,733,333 from the comparable three months in 2009, as a result of changes in
the following expenses:




Three
      Months Ended August 31,2010
                          
                          
                          2009
                          
                          
                          VarianceCoal
      & freight
                          
                          $
                          10,048,091
                          
                          
                          $
                          6,751,261
                          
                          
                          $
                          3,296,830Heat
      resource rental
                          
                          
                          507,012
                          
                          
                          
                          -
                          
                          
                          
                          507,012Depreciation
      & depletion
                          
                          
                          820,813
                          
                          
                          
                          656,148
                          
                          
                          
                          164,665Salaries
      and welfares
                          
                          
                          259,262
                          
                          
                          
                          138,562
                          
                          
                          
                          120,700Utilities
                          
                          
                          269,348
                          
                          
                          
                          -
                          
                          
                          
                          269,348Operating
      supplies
                          
                          
                          399,265
                          
                          
                          
                          108,233
                          
                          
                          
                          291,032Repairs
                          
                          
                          167,141
                          
                          
                          
                          109,135
                          
                          
                          
                          58,006Other
                          
                          
                          28,610
                          
                          
                          
                          2,870
                          
                          
                          
                          25,740Total
                          
                          $
                          12,499,542
                          
                          
                          $
                          7,766,209
                          
                          
                          $
                          4,733,333




For the
three months ended August 31, 2010 our gross margin was 41% compared with 22% in
the 2009 comparable three month period. The increase in gross margin was due to
a increase in the selling price of coal to our customers. Gross margin for Heat
Power also increased because of the expanded heating supply area and the receipt
of government subsidies for the provision of heat at reduced rates to the local
residents.





Utilities,
operating supplies and repair expenses are expected to increase in line with the
additional heating supply area.





Heat
resource rental: we purchased steam from other suppliers to ensure a stable and
reliable heat supply as we increased our service coverage area since 2009. When
recording the heat resource rental fee, we normally accrue such cost in the heat
season, and adjust the number after we settle the amount with the heat resource
suppliers. Numbers recorded in this quarter were adjustments to the previously
recorded amount.




28




Depreciation
and depletion: increase in depreciation and depletion was mainly due to: (i).an
increase in the heating supply area and the corresponding construction of
additional pipelines and, (ii). the use of the UOP method to amortize the mining
right and the mining equipment which causes the depreciation and depletion
to  increase  with the output of coal.





Salaries
and welfares: salaries increased as a result of a pay increase to approximately
25 upper management at LaiYeGou coal mine since May 2010.and the hiring of new
personnel at Heat Power.




Selling
Expenses





For the
three months ended August 31, 2010, selling expenses increased by approximately
$430,299 compared to the same period in 2009 because our proprietary coal
trading business is continuing to expand in 2010. Volume of coal sold by our
proprietary trading business was approximately 144,000 metric tons during the
three months ended August 31, 2010, compared to 114,000 metric tons in the
comparable three months in 2009.   Selling expenses are expected to
increase in line with coal trading volume.




Three
      Months Ended August 31,2010
                            
                            
                            2009
                            
                            
                            VarianceTransportation
      & Storage
                            
                            $
                            882,101
                            
                            
                            $
                            598,600
                            
                            
                            $
                            283,501Sales
      tax and other expenses
                            
                            
                            283,025
                            
                            
                            
                            157,276
                            
                            
                            
                            125,749Office
                            
                            
                            51,550
                            
                            
                            
                            41,048
                            
                            
                            
                            10,502Salaries
      and welfares
                            
                            
                            47,154
                            
                            
                            
                            41,475
                            
                            
                            
                            5,679Depreciation
                            
                            
                            4,868
                            
                            
                            
                            -
                            
                            
                            
                            4,868Total
                            
                            $
                            1,268,698
                            
                            
                            $
                            838,399
                            
                            
                            $
                            430,299




General
and Administrative Expenses





For the
three months ended August 31, 2010, general and administrative expenses
increased by approximately $14,068 as a result of changes in the following
expenses:




Three
      Months Ended August 31,2010
                              
                              
                              2009
                              
                              
                              VarianceOffice
                              
                              $
                              239,221
                              
                              
                              $
                              372,209
                              
                              
                              $
                              (132,988
                              )Professional
      and other fees
                              
                              
                              288,371
                              
                              
                              
                              250,076
                              
                              
                              
                              38,295Salaries
      and welfares
                              
                              
                              218,576
                              
                              
                              
                              145,771
                              
                              
                              
                              72,805Travel
                              
                              
                              97,591
                              
                              
                              
                              95,856
                              
                              
                              
                              1,735Depreciation
                              
                              
                              74,261
                              
                              
                              
                              62,569
                              
                              
                              
                              11,692Repairs
                              
                              
                              7,738
                              
                              
                              
                              10,061
                              
                              
                              
                              (2,323
                              )Stock
      options
                              
                              
                              65,234
                              
                              
                              
                              -
                              
                              
                              
                              65,234Other
                              
                              
                              25,681
                              
                              
                              
                              66,063
                              
                              
                              
                              (40,382
                              )Total
                              
                              $
                              1,016,673
                              
                              
                              $
                              1,002,605
                              
                              
                              $
                              14,068





Office.
We purchased renovation related articles for the office building of LaiYeGou
coal mine in the third quarter of last year. Such expenses were one-off
expenses.





Professional
and other fees. Professional fees were paid principally to various professionals
including financial advisors, attorneys and accountants. Fees paid to
professionals increased slightly for the three months ended August 31 2010 as
compared to the comparable period in 2009 due to the renewal of several licenses
relating to coal mining in the 2010 quarter.




29




Salaries
and welfares. Salaries increased as a result of a pay increase to approximately
25 upper management employees at LaiYeGou coal mine since May 2010 and the
hiring of new personnel at Heat Power.





Stock
options. On May 31, 2010, we granted options to each of our three independent
directors an option to purchase 20,000 shares of common stock at an exercise
price of US$2.09 per share. The stock-based compensation was $65,234 for the
three months ended August 31, 2010.




Finance
Expenses





For the
three months ended August 31, 2010 and August 31, 2009, finance expenses
amounted to $606,542, and $381,490, respectively. The
interest expense increased because increases in borrowings.





Results
of operations – Nine Months Ended August 31, 2010





Revenues




The
following is an analysis of our revenues and gross profit, details and analysis
of components of expenses, and variance; for the nine months ended August 31,
2010 compared to August 31, 2009.




Coal
      Group
                                                                  
                                                                  Nine
      Months Ended August 31,%
      of total
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  %
      of total2010
                                                                  
                                                                  
                                                                  revenue
                                                                  
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  revenueRevenues
                                                                  
                                                                  $
                                                                  50,977,131
                                                                  
                                                                  
                                                                  
                                                                  82
                                                                  %
                                                                  
                                                                  $
                                                                  12,392,183
                                                                  
                                                                  
                                                                  
                                                                  64
                                                                  %Cost
      of revenues
                                                                  
                                                                  
                                                                  28,763,617
                                                                  
                                                                  
                                                                  
                                                                  46
                                                                  %
                                                                  
                                                                  
                                                                  9,187,923
                                                                  
                                                                  
                                                                  
                                                                  47
                                                                  %Gross
      Margin
                                                                  
                                                                  $
                                                                  22,213,514
                                                                  
                                                                  
                                                                  
                                                                  36
                                                                  %
                                                                  
                                                                  $
                                                                  3,204,260
                                                                  
                                                                  
                                                                  
                                                                  17
                                                                  %




Heat
      Power
                                  
                                  Nine
      Months Ended August 31,%
      of total
                                  
                                  
                                  
                                  
                                  %
      of total2010
                                  
                                  
                                  revenue
                                  
                                  
                                  
                                  2009
                                  
                                  
                                  revenueRevenues
                                  
                                  $
                                  11,427,745
                                  
                                  
                                  
                                  18
                                  %
                                  
                                  $
                                  7,033,203
                                  
                                  
                                  
                                  36
                                  %Cost
      of revenues
                                  
                                  
                                  9,588,230
                                  
                                  
                                  
                                  15
                                  %
                                  
                                  
                                  7,502,477
                                  
                                  
                                  
                                  39
                                  %Gross
      Margin
                                  
                                  $
                                  1,839,515
                                  
                                  
                                  
                                  3
                                  %
                                  
                                  $
                                  (469,274
                                  )
                                  
                                  
                                  (3
                                  )%




Coal
Group




For the
nine months ended August 31, 2010, revenues for Coal Group were $50,977,131
compared to $12,392,183 in the comparable nine months in 2009. The $38,584,948
increase was due to the fact that the production at LaiYeGou coal mine was
partially shut down for the installation of the long wall automatic mining
equipment and normal production resumed in mid July 2009 with the completion of
the installation and adjustment of the equipment and increases in the selling
price of coal in the 2010 period.  In addition, the increase of the volume
of proprietary trading of coal also contributed to the increase of revenue from
Coal Group as compared to the prior comparable nine month period in
2009.





Coal
      Trading
                              
                              Nine
      Months Ended August 31,%
      of total
                              
                              
                              
                              
                              
                              %
      of total2010
                              
                              
                              revenue
                              
                              
                              2009
                              
                              
                              revenueRevenues
                              
                              $
                              25,652,538
                              
                              
                              
                              41
                              %
                              
                              $
                              6,908,747
                              
                              
                              
                              36
                              %Cost
      of revenues
                              
                              
                              19,669,641
                              
                              
                              
                              31
                              %
                              
                              
                              7,197,560
                              
                              
                              
                              37
                              %Gross
      Margin
                              
                              $
                              5,982,898
                              
                              
                              
                              10
                              %
                              
                              $
                              (288,813
                              )
                              
                              
                              (1
                              )%




30




Coal
      Production
                            
                            Nine
      Months Ended August 31,%
      of total
                            
                            
                            
                            
                            
                            %
      of total2010
                            
                            
                            revenue
                            
                            
                            2009
                            
                            
                            revenueRevenues
                            
                            $
                            25,324,593
                            
                            
                            
                            41
                            %
                            
                            $
                            5,483,436
                            
                            
                            
                            28
                            %Cost
      of revenues
                            
                            
                            9,093,976
                            
                            
                            
                            15
                            %
                            
                            
                            1,990,363
                            
                            
                            
                            10
                            %Gross
      Margin
                            
                            $
                            16,230,617
                            
                            
                            
                            26
                            %
                            
                            $
                            3,493,073
                            
                            
                            
                            18
                            %





Coal
Group produced approximately 598,000 metric tons of coal during the nine months
ended August 31, 2010, compared to 158,000 metric tons in the comparable nine
months in 2009. Volume of coal sold by our proprietary trading business is
approximately 497,000 metric tons during the nine months ended August 31, 2010,
compared to 147,000 metric tons in the comparable nine months in
2009.





Heat
Power




For the
nine months ended August 31, 2010, revenues for Heat Power were $11,427,745
compared to $7,033,203 in the comparable nine months in 2009.




For the
nine months ended August 31, 2010, revenues generated by Heat Power from its
electricity operations were $2,765,414 compared to $2,684,577 in the comparable
nine month period in 2009. At the same time, revenues generated by Heat Power
from its heating supply operations were $5,328,792 compared to $4,178,905 in the
comparable nine month period in 2009. This increase is due to the expansion of
our heating supply area to 2.7 million square meters in the second quarter of
this year from 2.1 million square meters in the same period last year.  The
heating supply area increased due to the continued development of the XueJiaWan
area.





We also
received one-off government subsidies of $3,333,539 in the third quarter of 2010
in connection with the provision of heating at the reduced rates set by the
government to ensure that the local residents can afford to make the payments.




Cost
of Sales





For the
nine months ended August 31, 2010, cost of sales increased by approximately
$21,661,447 from the comparable nine months in 2009, as a result of changes in
the following expenses:




Nine
      Months Ended August 31,2010
                            
                            
                            2009
                            
                            
                            VarianceCoal
      & freight
                            
                            $
                            30,702,966
                            
                            
                            $
                            12,032,790
                            
                            
                            $
                            18,670,176Heat
      resource rental
                            
                            
                            1,932,181
                            
                            
                            
                            744,028
                            
                            
                            
                            1,188,153Depreciation
      & depletion
                            
                            
                            2,755,965
                            
                            
                            
                            1,997,126
                            
                            
                            
                            758,839Salaries
      and welfares
                            
                            
                            925,906
                            
                            
                            
                            532,730
                            
                            
                            
                            393,176Utilities
                            
                            
                            872,655
                            
                            
                            
                            463,957
                            
                            
                            
                            408,698Operating
      supplies
                            
                            
                            690,508
                            
                            
                            
                            370,060
                            
                            
                            
                            320,448Repairs
                            
                            
                            252,906
                            
                            
                            
                            137,295
                            
                            
                            
                            115,611Other
                            
                            
                            218,760
                            
                            
                            
                            412,414
                            
                            
                            
                            (193,654
                            )Total
                            
                            $
                            38,351,847
                            
                            
                            $
                            16,690,400
                            
                            
                            $
                            21,661,447




31




For the
nine months ended August 31, 2010 our gross margin was 39% compared with 14% in
the 2009 comparable nine month period. The increase in gross margin is due to
the increase in the selling price of coal to our customers.  Under normal
production conditions, Coal Group’s gross margin is higher than other business
segment. As the production at LaiYeGou coal mine was partially shut down due to
the installation of the new mining equipments, and normal production resumed in
the third quarter of last year, Coal Group contributed less to the total gross
profit of the Company in 2009, which made the lower gross margin in last year.
Gross margin from Heat Power also increased because of the expanded heating
supply area and the receipt of government subsidies for the provision of heat at
reduced rates to the local residents.





Heat
resource rental, utilities, operating supplies and repair expenses are expected
to increase in line with the additional heating supply area. .





Salaries
and welfares: salaries increased as a result of a high level increase in pay to
employees and the hiring of new personnel at Heat Power.




Selling
Expenses





For the
nine months ended August 31, 2010, selling expenses increased by approximately
$2,414,427 compared to the same period in 2009 partially due to the expansion of
our proprietary coal trading business in 2010. Our railway transportation quota
increased from 500,000 tons in 2009 to 840,000 tons in 2010. Volume of coal sold
by our proprietary trading business was approximately 497,000 metric tons during
the nine months ended August 31, 2010, compared to 147,000 metric tons in the
comparable nine months in 2009.  Selling expenses are expected to increase
in line with increases in our coal trading volume.




Nine
      Months Ended August 31,2010
                            
                            
                            2009
                            
                            
                            VarianceTransportation
      & Storage
                            
                            $
                            2,270,279
                            
                            
                            $
                            758,345
                            
                            
                            $
                            1,511,934Sales
      tax and other expenses
                            
                            
                            902,716
                            
                            
                            
                            210,114
                            
                            
                            
                            692,602Office
                            
                            
                            196,043
                            
                            
                            
                            47,399
                            
                            
                            
                            148,644Salaries
      and welfares
                            
                            
                            109,065
                            
                            
                            
                            60,694
                            
                            
                            
                            48,371Depreciation
                            
                            
                            12,876
                            
                            
                            
                            -
                            
                            
                            
                            12,876Total
                            
                            $
                            3,490,979
                            
                            
                            $
                            1,076,552
                            
                            
                            $
                            2,414,427




General
and Administrative Expenses





For the
nine months ended August 31, 2010, general and administrative expenses increased
by approximately $515,770 as a result of changes in the following
expenses:




Nine
      Months Ended August 31,2010
                                  
                                  
                                  2009
                                  
                                  
                                  VarianceOffice
                                  
                                  $
                                  707,943
                                  
                                  
                                  $
                                  582,839
                                  
                                  
                                  $
                                  125,104Professional
      and other fees
                                  
                                  
                                  761,669
                                  
                                  
                                  
                                  736,163
                                  
                                  
                                  
                                  25,506Salaries
      and wages
                                  
                                  
                                  603,345
                                  
                                  
                                  
                                  397,615
                                  
                                  
                                  
                                  205,730Travel
                                  
                                  
                                  294,732
                                  
                                  
                                  
                                  181,007
                                  
                                  
                                  
                                  113,725Depreciation
                                  
                                  
                                  216,676
                                  
                                  
                                  
                                  178,726
                                  
                                  
                                  
                                  37,950Repairs
                                  
                                  
                                  43,284
                                  
                                  
                                  
                                  50,327
                                  
                                  
                                  
                                  (7,043
                                  )Stock
      options
                                  
                                  
                                  65,234
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  65,234Other
                                  
                                  
                                  55,636
                                  
                                  
                                  
                                  106,072
                                  
                                  
                                  
                                  (50,436
                                  )Total
                                  
                                  $
                                  2,748,519
                                  
                                  
                                  $
                                  2,232,749
                                  
                                  
                                  $
                                  515,770




Office.
The increase is a result of the purchase of miscellaneous office equipment at
our Laiyegou coal mine in Q1 2010.




32




Salaries
and wages. Salaries and wages increased due to (i) a pay increase to
approximately 25 upper management employees at LaiYeGou coal mine since May 2010
and the hiring of new personnel at Heat Power; and (ii) purchases of safety and
other articles for coal mine workers and management.





Travel.
Travel expenses increased due to the work of government inspectors conducting
coal mine inspections and our external service providers such as financial
advisors and investor relations consultants.





Stock
options. On May 31, 2010, we granted an option to each of our three independent
directors to purchase 20,000 shares of common stock at an exercise price of
US$2.09 per share. The stock-based compensation was $65,234 for the nine months
ended August 31, 2010.




Finance
Expenses





For the
nine months ended August 31, 2010 and August 31, 2009, finance expenses amounted
to $1,377,543, and $580,212, respectively. The interest expense increased
because we borrowed more money from lenders.





Liquidity
and Capital Resources





As of
August 31, 2010 we had a working capital deficit of approximately
$39,814,061. Please note that although shareholder loans are payable on
demand and therefore classified as short-term loans, we may not need to pay back
the loan within one year. We do not expect the shareholders to demand payment on
such loans this fiscal year.  We anticipate that the combination of our
sales and collection of accounts receivable, customer deposits and proceeds from
bank and shareholder loans will generate sufficient cash flow to sustain our
working capital needs. However we may require other sources of
capital.





We do not
know of any trends, events or uncertainties that are likely to have a material
impact on our short-term or long-term liquidity other than those factors
discussed below.





Sources
of Capital





If
additional capital is needed, we will explore financing options such as
shareholder loans. Shareholders loans are granted from time–to-time as required
to meet current working capital needs. We have no formal agreement that ensures
that we will receive such loans. We may exhaust this source of funding at any
time.  Shareholder loans are payable on demand and interest is calculated
at the range from zero to 5.310% per annum.





The
outstanding balances and interest rate of short-term bank loans obtained by the
Company at August 31, 2010, were as follows:




Balance
                                            
                                            
                                            Interest
                                              RateBank
      of Communications, due 3/9/11
                                            
                                            $
                                            5,876,390
                                            
                                            
                                            
                                            6.372
                                            %HuaXia
      Bank, due 4/15/11
                                            
                                            
                                            7,345,488
                                            
                                            
                                            
                                            6.372
                                            %China
      Construction Bank, due 4/22/11
                                            
                                            
                                            2,938,195
                                            
                                            
                                            
                                            6.903
                                            %China
      Merchant Bank, due 6/29/11
                                            
                                            
                                            7,345,488
                                            
                                            
                                            
                                            5.310
                                            %Agricultural
      Bank of China, due 7/27/11
                                            
                                            
                                            6,464,029
                                            
                                            
                                            
                                            5.841
                                            %Total
                                            
                                            $
                                            29,969,590




33




Cash
Flows





Operating
Activities:





Our cash
flows provided by operating activities was $9,810,623 for the nine months ended
August 31, 2010 as compared to $299,729 for the nine months ended August 31,
2009. The following summarizes the inflow and outflow of cash for these
periods:





Nine
      Months Ended
                                      August
      31,2010
                                    
                                    
                                    2009Net
      income (loss)
                                    
                                    $
                                    12,725,653
                                    
                                    
                                    $
                                    (1,955,286
                                    )Depreciation
      and amortization
                                    
                                    
                                    3,019,559
                                    
                                    
                                    
                                    2,168,615(Increase)
      in term deposit
                                    
                                    
                                    (7,345,488
                                    )
                                    
                                    
                                    -(Increase)
      in restricted cash
                                    
                                    
                                    (385,603
                                    )
                                    
                                    
                                    -(Increase)
      in accounts receivable
                                    
                                    
                                    (3,803,690
                                    )
                                    
                                    
                                    (2,986,260
                                    )Decrease
      in other receivables
                                    
                                    
                                    1,605,366
                                    
                                    
                                    
                                    1,252,468(Increase)
      in advance to suppliers
                                    
                                    
                                    (637,916
                                    )
                                    
                                    
                                    (787,908
                                    )Decrease
      (increase) in inventory
                                    
                                    
                                    738,387
                                    
                                    
                                    
                                    (4,388,091
                                    )(Decrease)
      increase in deferred income
                                    
                                    
                                    (50,763
                                    )
                                    
                                    
                                    306,525Increase
      in accounts payable
                                    
                                    
                                    660,882
                                    
                                    
                                    
                                    2,090,381(Decrease)
      increase in advance from customers
                                    
                                    
                                    (4,709,338
                                    )
                                    
                                    
                                    7,907,009Increase
      in notes payable
                                    
                                    
                                    7,345,488
                                    
                                    
                                    
                                    -Increase
      (decrease) in accrued liabilities and other payables
                                    
                                    
                                    607,852
                                    
                                    
                                    
                                    (3,981,658
                                    )Others
                                    
                                    
                                    40,234
                                    
                                    
                                    
                                    673,934Net
      cash provided by operating activities
                                    
                                    $
                                    9,810,623
                                    
                                    
                                    $
                                    299,729





Term
deposit: “Term deposit” represents amounts legally held by a bank which are not
available for the Company’s general use.  These deposits are held as
collateral for issuance of notes to vendors for purchase of coal which generally
mature between three to six months. The increase in term deposit is in line with
the increase in notes payable.





Accounts
receivable. The increase in accounts receivable is mainly attributable to an
increase in Coal Group’s sales. Coal Group’s sales on account were outstanding
less than one month. We have already collected these amounts to
date.





Other
receivables. Other receivables decreased as we received government subsidies of
supplying heat to residential units, which was recorded under other
receivables.





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





Inventory.
Inventory mainly consists of coal for trading purposes. The balance of coal
inventory decreased during the third quarter of 2010 mainly due to the fact that
the coal was not picked up from the suppliers by the quarter end cut-off
time.





Advance
from customers. Decrease in advances from customers was mainly due to the
recognition of the one off subsidies previously received from the local
government in connection with the construction of the additional heating supply
pipelines . We temporarily recorded such subsidies as advances from customers
when we initially received the subsidies.





Accrued
liabilities and other payables. These amounts consist of accruals made for loan
interest, repairs and maintenance of heating plants, labour union fees, social
insurance, technical training for our employees and etc. Increase in accrual
liabilities and other payables was mainly due to increase in interest accrued
for bank loans and rental fees.




34




Investing
Activities:


Our cash
flows used in investing activities were $27,282,928 for the nine months ended
August 31, 2010 and cash flows used in investing activities were $10,808,176 for
the nine months ended August 31, 2009. We lent RMB 94 million (US$13,809,517) to
certain of our affiliates controlled by the family of our Chairman to make an
investment intended to increase significantly our mining rights and reserves in
Inner Mongolia.  We plan to unwind this loan in the fourth quarter in order
to evaluate alternative structures for making these types of investments
directly through our operating companies.





Financing
Activities:


Our cash
flows provided by financing activities were $16,447,946 for the nine months
ended August 31, 2010 and cash flows provided by financing activities were
$15,832,775 for the nine months ended August 31, 2009.





The
outstanding balances and interest rate of shareholder loans at August 31, 2010,
were as follows:




Balance
                                      
                                      
                                      Interest
                                        RateHangzhou
      Dayuan Group, Ltd.
                                      
                                      $
                                      5,047,679
                                      
                                      
                                      
                                      5.310
                                      %Xinghe County
      Haifu Coal Transportation &Sales
      Co., Ltd.
                                      
                                      
                                      1,867,274
                                      
                                      
                                      
                                      5.310
                                      %Ordos
      City YiYuan Investment Co. Ltd.
                                      
                                      
                                      1,689,810
                                      
                                      
                                      
                                      5.310
                                      %Wenxiang
      Ding
                                      
                                      
                                      96,960
                                      
                                      
                                      
                                      -Yi
      Ding
                                      
                                      
                                      47,381
                                      
                                      
                                      
                                      -Total
                                      
                                      $
                                      8,749,104
                                      
                                      
                                      
                                      -




Material
Commitments




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




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




Seasonal
Aspects




Coal
Group’s business is seasonal in that sales are particularly low in the first
quarter of a year, due to the Chinese New Year holiday. During this time our
business is closed for about two weeks.




Heat
Power heating sales decrease from April through October as the climate in the
region is warm, reducing heating requirements.




Off
Balance Sheet Arrangements




We have
no off balance sheet arrangements.




ITEM
3. 
              QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




Not
applicable to smaller reporting companies.




35




ITEM
4. 
              CONTROLS
AND PROCEDURES





A. 
         Evaluation of Disclosure
Controls and Procedures




As of the
end of the fiscal quarter covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. The
Company’s disclosure controls and procedures are designed to provide a
reasonable level of assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and
forms.  As a result of outstanding significant weaknesses in internal
controls over financial reporting, theCompany’s Chief Executive
Officer and Chief Financial Office have concluded that the Company’s disclosure
controls and procedures were ineffective.





B. 
         Changes in Internal
Controls Over Financial Reporting




In
connection with the evaluation of the Company’s internal controls during the
quarter ended August 31, 2010, the Company’s Chief Executive Officer and Chief
Financial Officer have determined that there are no changes to the Company’s
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.




PART
II. 
            OTHER
INFORMATION




ITEM
1.                LEGAL
PROCEEDINGS.




None.




ITEM
1A.             RISK
FACTORS




Not
applicable to smaller reporting companies.




ITEM
2.                UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None.




ITEM
3.                DEFAULTS
UPON SENIOR SECURITIES




None.




ITEM
4.                (REMOVED
AND RESERVED).




ITEM
5.                OTHER
INFORMATION.




None.




36




ITEM
6                 EXHIBITS




(a)           Exhibits








Exhibit
                  No.
                
                Document Description31.1
                
                Certification
      of Chief Executive Officer (Principal Executive Officer) pursuant to Rule
      13A-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
                
                Certification
      of the Chief Financial Officer (Principal Financial Officer) pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of
2002).




37




SIGNATURES




In
accordance with the Securities Exchange Act of 1934, this Quarterly Report on
Form 10-Q has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.





CHINA
      ENERGY CORPORATIONDate:
      October 15, 2010By:
                  /s/ WenXiang DingWenXiang
      DingPresident,
      Chief Executive Officer, Director &SecretaryBy:
                  /s/ Alex
GongAlex
      GongChief
      Financial Officer