UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-K /A
 (Amendmendment
No. 1)
 x
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the fiscal year ended December 31, 2007
  OR
 o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the transition period from

to
  Commission
file number: 333-66994
  SONGZAI
INTERNATIONAL HOLDING GROUP INC.
 (Exact
name of registrant as specified in its charter)
 Nevada
            
            43-1932733(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)20337
      Rimview Place
              Walnut, California
            
            91789(Address
      of principal executive offices)
            
            (Zip
      Code)
  Registrant’s
telephone number: (909)
468-2840
  Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o No þ
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o No þ
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
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 þ No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained herein, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated
filer                                           o                                Accelerated
filer                                                      o
  1
  Non-accelerated
filer                                           o                                Smaller reporting
company                                    þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes o No þ
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:  $3,466,187 computed by reference to $0.05 as of June 29,
2007 which is less than $75 millions.
 
 Number of
shares of common stock outstanding as of March 31, 2008: 6,932,582
 
 
  2
 
 EXPLANATORY
NOTE
  Songzai
International Holding Group, Inc. (referred to in this discussion as “we”, “us”,
“our”, “Songzai” or the “Company”) is amending its Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 (the “Original Report”) to correct
some inadvertent drafting errors contained in the Original
Report.
 
 This
Form 10-K/A includes all of the information contained in the Original Report,
and we have made no attempt in this Form 10-K/A to modify or update the
disclosures presented in the Original Report, except as identified
below.
 
 This
Form 10-K/A amends the disclosures in the Original Report primarily as
follows: (i) in the description of the Tong Gong coal mine under Item I, replace
reference of management estimate of the amount of in-place resources with
management estimate of the amount of reserve, and remove the description of
in-place resources; (ii) in the discussion of the Hong Yuan and Sheng Yu coal
mines under Item 9B, revise the estimated amounts of coal reserve, remove
reference to in-place resource, and revise the table showing the sulfur and ash
content and calorific value of the coal; and (iii) in the description of our
directors and officers under Item 10, expanded the description of our interim
chief financial officer.
 The
disclosures in this Form 10-K/A continue to speak as of the date of the Original
Report, and do not reflect events occurring after the filing of the Original
Report unless expressly noted otherwise. Accordingly, this Form 10-K/A should be
read in conjunction with our other filings made with the Securities and Exchange
Commission subsequent to the filing of the Original Filing, including any
amendments to those filings. The filing of this Form 10-K/A shall not be deemed
an admission that the Original Report when made included any untrue statement of
a material fact or omitted to state a material fact necessary to make a
statement not misleading.
 TABLE OF
CONTENTS
 TO
ANNUAL REPORT ON FORM 10-KSB
 FOR
YEAR ENDED DECEMBER 31, 2006
 
 PART
      I
            
            PageItem
      1.
            Business
            4Item
      1A.
            Risk
      Factors
            15Item
      1B.
            Unresolved
      Staff Comments
            24Item
      2.
            Properties
            24Item
      3.
            Legal
      Proceedings
            24Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            24PART
      IIItem
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            24Item
      6.
            Selected
      Financial Data
            26Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
            26Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            32Item
      8.
            Financial
      Statements and Supplementary Data
            33Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            34Item
      9A(T).
            Controls
      and Procedures
            34Item
      9B.
            Other
      Information
            36PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            42Item
      11.
            Executive
      Compensation
            44Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            46Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            48Item
      14.
            Principal
      Accounting Fees and Services
            49PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            49Signatures
            
            52
 
 3
  CAUTION
REGARDING FORWARD-LOOKING INFORMATION
 
 This
Report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
risks and uncertainties. In evaluating such statements, prospective investors
should carefully review various risks and uncertainties identified in this
Report, including the matters set forth under the captions “Risk Factors” and in
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements. The Company undertakes no obligation to update or
publicly announce revisions to any forward-looking statements to reflect future
events or developments.
  Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Relating to Our Business” below,
as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the Securities and Exchange Commission (“SEC”). You can read and copy any
materials we file with the SEC at the SEC’s Public Reference Room, 100 F.
Street, NE, Washington, D.C. 20549 on official business days during the hours of
10 a.m. to 3 p.m. You can obtain additional information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including the Company.
  We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this Annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
 
 
 PART I
 
 ITEM
      1.
            BUSINESS
 
 Overview
 
 Songzai
International Holding Group, Inc. (sometimes referred to in this Annual Report
as “Songzai”, “Company”, “we” or “our”) is a company engaged in coal production
by locating, assembling, assessing, permitting and developing coal properties in
the People’s Republic of China (“PRC”). After obtaining permits from the
National Land and Resources Office and Heilongjiang Province Economy
Committee, we mine to extract coal minerals, and then sell most of the
coal on a per ton basis in cash on delivery, primarily to power plants, cement
factories, wholesalers and individuals for home heating. Through the end of
March 2008, our business consisted of the operations of Tong Gong coal mine in
northern PRC, located approximately 175 km southwest of Heihe City in
Heilongjiang Province.
 
 On
December 31, 2007, we entered into an agreement to acquire two mining companies
in the PRC, Heilongjiang Xing An Group Hong Yuan Coal Mining Co., Ltd. (“Hong
Yuan”) and Heilongjiang Xing An Group Sheng Yu Ming Co., Ltd. (“Sheng Yu”, and
with Hong Yuan collectively referred to as the “Xing An Companies”). The Xing An
Companies operate two coal mines, Hong Yuan and Sheng Yu mines, located in Mohe
City in Heilongjiang Province. We completed our acquisition of the Xing An
Companies on April 4, 2008, after which our business now consist of the
operations of Tong Gong coal mine as well as the two Xing An coal mines. Our
acquisition of the Xing An Companies and their mining operations and business
are more fully described below in this section under “Recent Developments” and
in Item 9B (“Other Information”).
  4
  History and Development of
the Company
  Songzai
was incorporated in the State of Nevada on June 7, 2001, under the name Heritage
Companies, Inc., and initially engaged in the on-line gift cards and related
products business. The Company operated this business through October 2004 when
it was discontinued.
  On
September 29, 2003, we executed a plan of exchange, between and among the
Company and Rohit Patel, our former chairman, on the one hand, and Harbin
YongHeng Ke Ji Fa Zhan You Xian Ze Ren Gong Si, a PRC limited liability company
(“Yong Heng”), and its shareholders (the “Yong Heng Shareholders”) on the other
hand. At the closing of the transactions pursuant to the plan of exchange, the
Yong Heng Shareholders exchanged all their shares of capital stock in Yong Heng
for 67,000,000 shares of common stock of the Company, or 98.4% of the Company’s
then to be outstanding common stock. Concurrently, Mr. Patel returned all
of his shares of the Company’s common stock, 1,188,088 shares, to the Company
for cancellation for a payment of $450,000. Upon completion of the share
exchange transaction, Yong Heng became a wholly-owned subsidiary of the
Company.  On November 5, 2003, we changed our name from “Heritage
Companies, Inc.” to our present name “Songzai International Holding Group,
Inc.”
  On
September 23, 2004, we acquired a 75% equity interest in Heilongjiang Tong Gong
Mining Co., Ltd. (“Tong Gong”), a PRC limited liability company and the operator
of the Tong Gong coal mine, pursuant to a purchase and sales agreement, dated as
of April 5, 2004. In order to acquire 75% of Tong Gong’s registered capital of
33,200,000 Renminbi (“RMB”) (approximately $4,009,662), we issued 400,000 shares
of our convertible preferred stock, which at the time of issuance was
convertible into 40,000,000 shares of our common stock at the ratio of 1:100.
The convertible preferred stock is part of a class of 8,000,000 shares of
so-called “blank check” preferred stock that was authorized on July 16, 2004. On
December 19, 2006, the conversion ratio was amended to 1:10 such that the
400,000 shares of convertible preferred stock are now convertible into 4,000,000
shares of common stock. We acquired the 75% equity interest in Tong Gong from
Hongwen Li, our current chairman. In addition to the 75% equity interest of Tong
Gong, we acquired the net profit rights attached to the remaining 25% equity
interest of Tong Gong, which was held by Harbin Green Ring Biological
Degradation Products Developing Co., Ltd. (“Harbin Green”), a PRC limited
liability company under the control of Mr. Li. In November 2004, Harbin Green
assigned the entire 25% equity interest to us, as a result of which we now
beneficially own 100% of the equity interests in Tong Gong.
  In
October 2004, we terminated our on-line gift cards and related products business
activity by discontinuing the operations of our Yong Heng subsidiary, which had
not earned any revenue since the quarter ended September 30, 2004. On December
28, 2005, we sold the Yong Heng subsidiary to a third party pursuant to a
purchase and sale agreement for the consideration of $241,000, and we recorded a
gain of $107,798 on the sale.
  The
Tong Gong Coal Mine
  The Tong
Gong coal mine is located in the western slope of the Xiaoxinganling Mountain in
the Heilongjiang Province in Northeastern China.
 
 
  Initial
exploration of Tong Gong coal mine dates back to 1958-1959 when geological
surveys were performed by teams from the PRC Provincial Geology and Mineral
Bureau. A regional geologic survey was conducted between 1972 and 1974 to
determine coal bearing stratigraphy. An exploratory drilling program was
undertaken in 1986 and continued through 1991. The mine was originally
established in 1995 under the name Jinchang coal mine, and produced coal from
1996 through 1998. Tong Gong purchased the mining rights to the coal mine in
June 2004 from Hongwen Li and renamed it Tong Gong coal mine.
  5
  Tong Gong
coal mine is an underground coal mine located in the western slope of the
Xiaoqinganling Mountain in northern PRC. The mine is accessible by both railway
and public roads. The coal reserves are located in the middle of the
Heibaoshan-Muer coal basin, as secondary sedimentary basin. Several faults occur
in, and define the coal fields with throws ranging from 20 meters to 270 meters.
Coal bearing strata in the mine area are contained in the Jiufengshan
Group.
  The land
on which Tong Gong coal mine is located, the land on which most of our mining
facilities are located and all mineral rights are owned by the PRC. We operate
the coal mine pursuant to a Coal Production Right Permit issued by the
Heilongjiang Province Economy Committee. The Coal Production Right Permit
presently authorizes us to mine 150,000 tons of coal per year in a 1.1193 square
kilometer area, which comprises the entire area of the mine. The effective
period of the Coal Production Right Permit is from January 25, 2006 through
April 30, 2015, which may be extended depending upon the reserve level in the
future.  Currently the Company is applying to increase the annual
production capacity under its Coal Production rights Permits from 150,000 tons
to 180,000 tons, and we expect the application to be approved by during the
second quarter of 2008. Any material change or revocation in the permit by the
PRC or the Heilongjiang Province Economy Committee could materially and
adversely affect our operations and financial condition.
  There are
two coal seams in the mine area. Based on information as of December 31, 2005
from John T. Boyd Company, independent mining and geological consultants (the
“Boyd Report”), as well as core drillings and surface exploration as well as
mine maps, our management estimates that the Tong Gong coal mine
has  reserve of approximately 1.53 million tons. The first seam is
the stratigraphically lowest seam and is 2 meters to 5 meters thick and
typically contains two to three partings. The other seam overlies the first seam
and is thin and split and is generally not considered to be mineable. Reserves
in the mine are only considered from the first seam.
 
 The
Mining Operations at the Tong Gong Coal Mine
  The mine,
which was originally established in 1995 as the Jinchang coal mine, was renamed
Tong Gong coal mine after its mining rights were purchased by Tong Gong in
2004.The Tong Gong coal mine was rehabilitated for production in mid-2004. Coal
mined at the Tong Gong coal mine is for both industrial and home use. Steam coal
is trucked to a nearby railroad cargo station, which is approximately 500 meters
from the mine. The 500 meter road from the coal mine to the railroad cargo
station is being improved to reduce trucking time.
  Mine
design capacity is estimated at 150,000 to 200,000 tons per annum (“tpa”) based
on mine operating conditions. The coal mine currently has governmental approval
for 150,000 tpa capacity. Mine service life, based on a reserve base of 1.53
million tons as estimated according to the Boyd Report, is 10
years.
  The
“longwall” coal mining method employed at the Tong Gong coal mine, typical for
the Chinese coal mining industry, uses longwall panels and retreating face
methods to produce approximately 80% to 90% of the mine’s output. Incline
development and longwall gate entries account for the remaining output. The
general mine layout is a series of longwall panels extending from the left and
right of three parallel inclines. The inclines currently extend for
approximately 300 meters following the coal seam, and may be further extended up
to 1,000 meters covering the entire length of the seam. The main incline houses
compressed air lines, telephone and signal lines, high voltage cable and rail
for hoisting operations. A service incline houses surface water supplies for
fire fighting and underground water discharge lines. A secondary parallel intake
incline adjacent to the main incline assists in ventilation. Longwall panels
extend from the inclines to the reserve boundaries defined by property limits or
geological features. The entire main block reserve area is currently recovered
from the present inclines and planned extensions.
  The
longwall technique in use at the mine is semi-mechanized sublevel caving. It
consists of a single hydraulic support with a 40 kilowatt motor powered by a
small capacity advanced fuel cell. Drilling and blasting methods are used to
break up the coal face and sublevel caving recovers the remaining coal. As the
face line retreats along the strike of a seam, the roof strata collapses and
allows the coal face to operate under manageable stresses. Sublevel caving
techniques are widely used in the PRC.
  6
  All raw
coal is hand loaded and transported down the face line by a chain convey or by
coal cars. Rock material is used for floor ballast with the excess sent to the
surface for disposal. The mine is equipped with a 2-meter diameter hoist that is
capable of hoisting eight coal cars, each with a 1-ton capacity. Two air
compressors are provided for underground air tool use. Diesel locomotives, 3-
and 5-ton capacity, are used for underground haulage. We receive our electrical
power from state-controlled power lines as well as local power lines. Power is
supplied to underground workings through a high voltage cable.
  Normal
water inflow into the mine is controlled by three multistage centrifugal pumping
units and dual discharge lines. During high water periods all three pumps can be
utilized . The mine’s ventilation system includes an exhaustive fan on the
surface of the main incline. Auxiliary fans are used as needed. The present mine
fan is capable of satisfying projected ventilation demands.
  In
addition to our production permit, we must also maintain our resource mining
permit issued by the Heilongjiang Province National Resources Administration
Bureau. Our resource mining permit allows us to operate on a property with
resources of 5.8 million tons, formulated according to Chinese standard resource
estimate that includes all of the coal resources in the mining area, which
differs from the formulation based on current drilled hole under
SEC Industry Guide 7.
  Certain
of our facilities and equipment, including slopes, mining equipment, hoisting
equipment and surface facilities, were refurbished or replaced when the coal
mine was rehabilitated in 2004 by Hongwen Li, the current chairman of our board
of directors, for approximately $456,000. We reimbursed Mr. Li for all such
expenses during 2005. Our facilities and equipment are technologically
sufficient to support the mine’s production capacity, and are in safe working
condition under regular maintenance. In addition, the Company will budget
portions of the total retained profit for the acquisition of new equipments and
maintenance as dictated by the requirements of the ongoing mining operation. We
may acquire additional driving belts and diesel trailers in order to increase
our operating efficiency, but we do not believe that there will be any required
material equipment purchase costs in the next 12 months.
  Our
Products
  There are
four types of coal: lignite, sub-bituminous, bituminous and anthracite. Each has
characteristics that make it more or less suitable for different end uses. In
general, coal of all geological composition is characterized by end use as
either “steam coal” or “metallurgical coal,” sometimes known as “met coal.”
Steam coal is used by electricity generators and by industrial facilities to
produce steam, electricity or both. Metallurgical coal is refined into coking
coal, which is used in the production of steel. Heat value and sulfur content,
the two most important coal characteristics, determine the best end use of
particular types of coal. The heat value of coal is commonly measured in British
thermal unit (Btu) per pound of coal. Sulfur content can vary from seam to seam
and sometimes within each seam. Coal combustion produces sulfur dioxide, the
amount of which varies depending on the chemical composition and the
concentration of sulfur in the coal. Also, ash is the inorganic residue
remaining after the combustion of coal. As with sulfur content, ash content
varies from seam to seam. Ash content is an important characteristic of coal
because electric generating plants must handle and dispose of ash following
combustion. Moisture content of coal varies by the type of coal, the region
where it is mined and the location of coal within a seam. In general, high
moisture content decreases the heat value and increases the weight of the coal,
thereby making it more expensive to transport. Moisture content in coal, as
sold, can range from approximately 5% to 30% of the coal’s weight. When some
types of coal are super-heated in the absence of oxygen, they form a hard, dry,
caking form of coal called “coke.” Steel production uses coke as a fuel and
reducing agent to smelt iron ore in a blast furnace.
  Coal
mined at the Tong Gong coal mine is sold raw, without additional processing
except for manual sorting, based on size, for different markets as
follows:
  Coal
      Size
            Market+50
      mm
            Home
      use and local factories50
      mm to 25 mm
            Local
      industrial25
      mm to 0 mm
            Steam
      coal
  The mine
is currently screening product at 250 mm with manual hand-cleaning to remove
larger impurities. To the extent practicable, coal is selectively separated from
the parting bands during the mining process to minimize product
contamination.
  7
  Our
Distribution Methods
  We sell
our coal on a per ton basis in cash on delivery, primarily to power plants,
cement factories, whole sellers and individuals for home heating. Industrial and
home use coal is sold directly to customers at the mine, and the buyer provides
required transportation. We currently require that most of our customers pay for
their coal purchases cash on delivery, and we rarely extend credit to customers
due to high demand for coal. We currently are not required to provide
distribution or delivery services in order to meet the demand for industrial or
home use coal. Once our coal is extracted, it is typically picked up immediately
by customers or loaded immediately for delivery to customers so we do not
currently maintain an inventory of extracted coal. Steam coal  is
trucked approximately 15 kilometers to the nearest rail siding and sold f.o.b.
railcar. The railroad was extended in 2005 and now passed within 1000
meters of the mine.
  As of
December 31, 2007, we did not have any material long term supply contracts.
While the price of coal did not change significantly between 2005 (averaging
170.46 RMB per ton) and 2006 (averaging 174.05 RMB per ton), there was a
significant increase in 2007 (averaging 192.48 RMB per ton) driven by market
demands. Under such conditions, we require our customers do pay against delivery
of coal, as a result of which we did not carry any accounts receivable at
December 31, 2007.
 
 Our top
three customers by value, who collectively accounted for 35.7% of our revenue in
2007, are as follows:
 
 ·
            Nenjiang
      County Hong Yu Trading Co. (“Hong Yu”) is our biggest customer. We sold
      approximately 65,000 tons of coal to Hong Yu in 2007, generating
      $1,710,196 in sales, or 13.8% of our total sales
  revenue.
  ·
            Lin
      Kou Tong Sheng Co. (“Tong Sheng”) is our second biggest customer. We sold
      approximately 53,500 tons of coal to Tong Sheng in 2007, generating
      $1,410,456 in sales, or 11.4% of our total sales
  revenue.
 
 ·
            Heilongjiang
      Railroad JiCheng Coal Ltd. (“JiCheng”) is our third biggest customer. We
      sold approximately 49,300 tons of coal to JiCheng in 2007, generating
      $1,299,561 in sales, or 10.5% of our total sales
  revenue.
 
 Research
and Development
 
 We had no
research and development expenses in 2007 and in 2006. We currently have no
plans for any research and development activities and do not anticipate any
material research and development costs.
 
 Intellectual
Properties and Licenses
 
 We have
no material patents, licenses or other intellectual property.
  Competition
 
 In the
area where we operate the Tong Gong coal mine, there are other two coal mines
which directly compete with us:  No. 151 coal mine the Fu Hong coal
mine. The No. 151 coal mine has an annual production capacity of 400,000 tons
and the Fu Hong Coal Mine has an annual production capacity of 200,000 tons.
However, because demand for coal currently outpaces supply, we do not face any
meaningful competition for the sale of our coal.
 
 Regulatory
Overview
 
 Coal
Law
 
 On
August 29, 1996, the PRC Government promulgated the People’s Republic of
China Coal Law (the “Coal Law”), which became effective on December 1,
1996. The Coal Law sets forth requirements for all coal mines, including
state-owned mines and privately owned mines, mainly providing for resource
exploitation planning, approval of new mines, the issuance of mining and safety
production permits, implementation of safety standards, processing of coal,
business management, protection of mine areas from destructive exploitation, and
safety protection for miners and administrative supervision.
 
 According
to the Coal Law, entities seeking to establish mining enterprises must apply to
the relevant government office and obtain all necessary approvals. Upon
obtaining such approvals, the entities concerned will be granted a mining permit
from the Ministry of Land and Resources. Thereafter, an entity must obtain a
coal production permit and a coal operation permit and other related quality
permits in order to commence coal production and sell coal products in the PRC.
The PRC Government is in the process of amending the Coal Law, in response to
concerns over the lack of a well-coordinated development plan for mining, which
contributed to a significant amount of waste of valuable coal resources. The
lack of effective penalty provisions or the lenient enforcement of existing
provisions in the Coal Law has been cited as another important reason for the
current rulemaking effort.
  8
  Mining
activities in the PRC are also subject to the People’s Republic of China Mineral
Resources Law (“Mineral Resources Law”), which was promulgated by the PRC
Government on March 19, 1986 and amended on August 29, 1996. The
Mineral Resources Law regulates any matters relating to the planning or engaging
in the exploration, exploitation and mining of mineral resources. According the
Mineral Resources Law all mineral resources, including coal, are owned by the
state. Except under limited circumstances, any enterprise planning to engage in
the exploration, exploitation and mining of mineral resources must first apply
for and obtain exploration rights and mining rights before commencing the
relevant activities. The Mineral Resources Law prohibits the transfer of
exploration and exploitation rights in general unless the transfer falls within
certain specified circumstances.
 
 We are
principally subject to governmental supervision and regulation by the following
agencies of the PRC Government:
  •
            the
      State Council, which is the highest level of the executive branch, is
      responsible for the examination and approval of major investment projects
      specified in the 2004 Catalogue of Investment Projects released by the PRC
      Government;
  •
            the
      National Development and Reform Commission”“, which formulates and
      implements major policies concerning China’s economic and social
      development, examines and approves investment projects exceeding certain
      capital expenditure amounts or in specified industry sectors, including
      examination and approval of foreign investment projects, oversees reform
      of state-owned enterprises and formulates industrial policies and
      investment guidelines for the natural resource industries, such as coal
      production. In addition, the NDRC administers coal export activities and
      export quotas jointly with the Ministry of Commerce. The NDRC is also
      responsible for the evaluation and implementation of the price-linking
      mechanism between the prices of coal and
power;
  •
            the
      Ministry of Land and Resources (“MLR”), which has the authority to grant
      land use licenses and mining right permits, approves transfer and lease of
      mining rights, and reviews mining rights premium and reserve
      valuation;
  •
            the
      State Administration of Coal Mine Safety (“SACMS”), which is responsible
      for the implementation and supervision of the relevant safety laws and
      regulations applicable to coal mines and coal mining
      operations;
  •
            the
      State Environmental Protection Administration of China (“SEPA”), which
      supervises and controls environmental protection and monitors China’s
      environmental system at the national level;
and
  •
            the
      Ministry of Construction (“MOC”), which is responsible for the management
      of survey and design of construction projects, including but not limited
      to the survey and design of coal
mines.
 
 The
following is a brief summary of the principal laws, regulations, policies and
administrative directives to which we are subject.
 
 Pricing
 
 Until
2002, the production and pricing of coal have largely been subject to close
control and supervision by the PRC Government, which centrally manages the
production and pricing of coal. Previously, the price of coal was determined
based on a government-devised pricing guideline which set out the suggested
prices for coal. However, in order to effectuate the transformation from planned
economy to market economy practices, from January 1, 2002 China eliminated
the state guidance price for coal and allowed prices for all types of coal to be
determined in accordance with market demand. However, as the PRC Government
continues to maintain control over the national railway system, which is the
primary means for coal transportation in China, the PRC Government still may
exert influence over the pricing of coal through its allocation of railway
transportation capacity for coal.
  9
  In
addition, under the Price Law of the People’s Republic of China, promulgated on
December 29, 1997, effective from May 1, 1998, in the event of an
actual increase or potential increase in the prices of important products such
as coal, the State Council and the provincial governments, autonomous regions
and municipalities directly under the PRC Government may adopt intervention
measures, such as restricting the ratio of price differentials or of profits,
and imposing price limits, etc. In August 2004, the NDRC issued a notice setting
forth temporary measures to be imposed on thermal coal prices for certain
regions. In December 2004, the NDRC issued a notice setting forth guidelines for
pricing of thermal coal sales in 2005. Under these guidelines, the coal
suppliers and their customers may not negotiate for the sale of coal at prices
exceeding the government suggested price range.
 
 Similar
to coal pricing, the production and supply of coal, which is dictated by the PRC
Government’s annual state coal allocation plan, has been gradually liberalized
and largely subject to market forces. Major domestic coal suppliers and coal
purchasers attend the Annual National Coal Trading Convention to negotiate and
discuss the price and quantity of coal to be supplied and purchased for the
coming year through the signing of letters of intent and short and long-term
supply contracts.
 
 On
December 18, 2006, the National Development and Reform Committee issued the
Notice Relating to the Good Preparation for Inter Provincial Coal Production
Transportation Works (Fa Gai Yun Xing [2006] No. 2867). According to the
notice, in 2007, policies should be implemented to encourage the reform of the
market system for determining coal prices by allowing parties to determine
prices through discussions in accordance with market demand, and to encourage
price determination based on quality. On December 27, 2006, the relevant
government departments and units, such as the National Development and Reform
Committee for railway operations, and the Transportation Department, convened a
2007 coal industry video and telephone conference. This symbolized the end of
the Annual National Coal Trading Convention that has been in place for over 50
years. Under the State’s macroeconomic controls, the new mechanism for
enterprises to freely determine prices through negotiations was put in
place.
 
 Fees
and Taxes
 
 The table
below sets forth material taxes and fees that are imposed upon coal producers in
Heilongjiang Province, as well as reserves which the Xing An Companies are
required to set aside.
 Item
            
            Base
            
            RateCorporate
      income tax
            
            Taxable
      income
            
            33.0%VAT
            
            Revenue
      form domestic sales
            
            13.0%City
      construction tax
            
            Amount
      of VAT and business tax
            
            7.0%Education
      surcharge
            
            Amount
      of VAT and business tax
            
            3.0%Resource
      tax
            
            Aggregate
      volume of raw coal or coal products sold
            
            RMB2.3
      per tonCompensation
      for the depletion of coal resources
            
            Proceeds
      form the sale of coal
            
            0.1%Future
      development pension fund
            
            Volume
      of raw coal produced
            
            RMB8.7
      per tonSafety
      fund
            
            Volume
      of raw coal produced
            
            RMB3
      per tonEnvironment
      fund
            
            Volume
      of raw coal produced
            
            RMB1
      per ton
 
 Under the
Mineral Resources Law, if mining results in damage to arable land, grasslands or
forest areas, the mining enterprise must take effective measures to return the
land to an arable state, plant trees or grass or take other measures. The
Mineral Resources Law and other applicable laws and regulations also state that
anyone who causes others to suffer loss in terms of production or in terms of
living standards is held liable for the loss under the law and is required to
compensate the persons affected and to remedy the situation. In addition, the
Mineral Resources Law also provides for (i) regulations concerning labor
safety and hygiene and (ii) environmental protection.
 
 All coal
producers are subject to PRC environmental protection laws and regulations which
currently impose fees for the discharge of waste substances, require the payment
of fines for serious pollution and provide for the discretion of the PRC
Government to close any facility which fails to comply with orders requiring it
to cease or cure operations causing environmental damage. All environmental
protection facilities must be inspected and certified by relevant governmental
authorities as being in compliance with PRC environmental protection laws and
regulations.
  10
  Domestic
Trading of Coal
 
 Pursuant
to the Measures for the Regulation of Coal Operations promulgated by the NDRC on
December 27, 2004, the state implemented a system to examine coal operation
qualifications in respect of coal operations, including the wholesale and retail
of raw coal and processed coal products, and the processing and distribution of
coal for civilian use. Before an enterprise can engage in coal operations, it
must obtain a coal operation qualification certificate. A coal production
enterprise that deals in coal products which it did not itself produce and
process is required to obtain coal operation qualifications. The enterprise is
also prohibited from dealing in coal products produced and/or processed by a
coal mine enterprise that does not have a coal production permit. An enterprise
is also prohibited from selling coal products to a coal operation enterprise
that does not have coal operation qualifications.
 
 Although
the PRC Government indirectly influences coal prices through its broad
regulation of electricity prices and control over the allocation of national
railway capacity, domestic coal prices have mainly been market-driven since
2002, when the PRC Government eliminated the price control measures for coal
used in electric power generation. Prior to 2006, however, the PRC Government
continued to implement temporary measures to prevent and control any unusual
fluctuations in thermal coal prices. This, among other reasons, has caused
thermal coal contract prices for major users to be generally lower than spot
market prices during this period. On January 1, 2006, the NDRC announced
the elimination of such temporary intervention practices on thermal coal price,
thus completely removing control over thermal coal prices, including contract
prices for major users.
 
 Environmental
Protection Laws and Regulations
 
 Pursuant
to the Environmental Protection Law, SEPA is empowered to formulate national
environmental quality and discharge standards and to monitor China’s
environmental system at the national level for the purpose of preventing and
eliminating environmental pollution and damage to ecosystems. Environmental
protection bureaus at the county level and above are responsible for
environmental protection within their areas of jurisdiction.
 
 Environmental
regulations require companies to file an environmental impact report with the
relevant environmental authority for approval before undertaking the
construction of a new production facility or any major expansion or renovation
of an existing production facility. New facilities built pursuant to this
approval are not permitted to operate until the relevant environmental authority
has performed an inspection and has found that the facilities are in compliance
with environmental standards.
 
 Mining
operations, including both open pit mines and underground mines, may result in
disturbances of surface and underground land and cause water pollution,
landslides and other types of environmental damage. To manage the adverse
effects that the coal industry has on the environment, China has promulgated a
series of laws and regulations. Through these laws and regulations, China has
established national and local environmental protection legal frameworks and
issued standards applicable to emission controls, discharges of wastes and
pollutants to the environment, generation, handling, storage, transportation,
treatment and disposal of waste materials by production facilities, land
rehabilitation and reforestation.
 
 The
Environmental Protection Law, promulgated by the National People’s Congress on
December 26, 1989, is the cardinal law for environmental protection in
China. The law establishes the basic principle for coordinated advancement of
economic growth, social progress and environmental protection, and defines the
rights and duties of governments at all levels. Local environmental protection
bureaus may set stricter local standards than the national standards and
enterprises are required to comply with the stricter of the two sets of
standards. The Environmental Protection Law requires any entity operating a
facility that produces pollutants or other hazards to incorporate environmental
protection measures into its operations and to establish an environmental
protection responsibility system, which must adopt effective measures to control
and properly dispose of waste gases, waste water, waste residue, dust or other
waste materials.
 
 New
construction, expansion or reconstruction projects and other installations that
directly or indirectly discharge pollutants to the environment shall be subject
to relevant state regulations governing environmental protection for such
projects. Entities undertaking such projects must submit a pollutant discharge
declaration statement detailing the amount, type, location and method of
treatment to the competent authorities for examination. The authorities will
allow the construction project operator to release a certain amount of
pollutants into the environment and will issue a pollutant discharge license for
that amount of discharge subject to the payment of discharge fees. The release
of pollutants is subject to monitoring by the competent environmental protection
authorities. If an entity discharges more than the amount permitted by the
pollutant discharge license, the local environmental protection bureau can fine
the entity up to several times the discharge fees payable by the offending
entity for its allowable discharge, require the offending entity to close its
operations, or take other measures to remedy the problem.
  11
  In the
environmental impact statement of a construction project, the project operator
shall make an assessment regarding the pollution and environmental hazards the
project is likely to produce and its impact on the ecosystem, and measures for
their prevention and control. The operator shall submit the statement according
to the specified procedure to the competent environmental protection authority
for examination and approval. The building of sewage outlets within any water
conservancy projects, such as canals, irrigation channels and reservoirs, shall
be subject to the consent of the competent authority in charge of water
conservancy projects.
 
 The
facilities for the prevention and control of pollution must be designed,
constructed and put into use or operation simultaneously with the main part of a
construction project. Such facilities must be inspected by the competent
environmental protection authority. If they do not conform to the specified
requirements, the operator shall not be permitted to put the new facility into
operation or use.
 
 The
rehabilitation of mining sites is another important issue the PRC Government has
sought to address. Under the Law of Land Administration of the People’s Republic
of China, promulgated on June 15, 1986, and amended on August 28,
2004, and the Land Rehabilitation Regulations, issued by the State Council in
1988 and effective January 1, 1989, coal producers must undertake measures
to restore the mining site to its original state within a prescribed time frame
if mining activities result in damage to arable land, grassland or forest. The
rehabilitated land must meet rehabilitation standards, as required by law from
time to time, and may only be subsequently used upon examination and approval by
the land authorities. A coal producers’ failure to comply with this requirement
or its failure to return the mining site to its original state will result in
the imposition of fines, rehabilitation fees and/or rejection of applications
for land use rights by the local bureau of land and resources.
 
 Emissions
of waste water by coal mines and coking plants are regulated by the Law on
Prevention and Control of Water Pollution of the People’s Republic of China,
promulgated by the National People’s Congress in 1984 and effective as amended
in 1996, and the Administrative Regulations on the Levy and Use of Discharge
Fees, issued by the State Council on January 2, 2003 and effective
July 1, 2003. Any new construction projects, such as coal mines and coking
plants, must submit an environmental impact statement, which shall include an
assessment on the water pollution hazards the project is likely to produce and
its impact on the ecosystem. The environment impact statement must also contain
measures to prevent and control the water pollution hazards. Every new
production facility must be equipped with waste water processing facilities
which must be put in use together with the production facilities. Construction
projects that discharge pollutants into water shall pay a pollutant discharge
fee in accordance with state regulations.
 
 Violators
of the Environmental Protection Law and various environmental regulations may be
subject to warnings, payment of damages and fines. Any entity undertaking
construction work or manufacturing activities before the pollution and waste
control and processing facilities are inspected and approved by the
environmental protection department may be ordered to suspend production or
operations and may be fined. The violators of relevant environment protection
laws and regulations may be exposed to criminal liability if violations resulted
in severe loss of property, personal injuries or death.
 
 In
addition to the PRC environmental laws and regulations, China is a signatory to
the 1992 United Nations Framework Convention on Climate Change and the 1998
Kyoto Protocol, which propose emission targets to reduce greenhouse gas
emissions. The Kyoto Protocol came into force on February 16, 2005. At
present, the Kyoto Protocol has not set any specific emission targets for
certain countries, including China.
 
 Mineral
Resources Laws and Regulations
 
 Exploration,
exploitation and mining operations must comply with the relevant provisions of
the Mineral Resources Law and other relevant regulations, and are under the
supervision of the Ministry of Land and Resources. Exploration and exploitation
of mineral resources are also subject to examination and approval by the
Ministry of Land and Resources and relevant local authorities. Upon approval, a
mining permit is issued by the relevant administrative authorities, which are
responsible for supervision and inspection of mining exploitation in their
jurisdiction. The holders of mining rights are required to file Annual Reports
with the relevant administrative authorities.
  12
 
 The
Mineral Resources Law governs, among other things, the assignment of mining
rights. If the entity holding the mining rights is to be changed due to a sale
of enterprise assets or other circumstances that may cause a change in the
property rights to the assets of the enterprise, the enterprise may assign its
mining rights, subject to approval according to the Coal Law, the Mineral
Resources Law and other laws and regulations.
 
 The PRC
Government permits mine operators of collectively owned mines to exploit mineral
resources in designated areas and individuals to mine scattered mineral
resources. Such mine operators and individuals are subject to government
regulation. Mining activities by individuals are restricted. Individuals are not
permitted to exploit mineral reserves allocated for exploitation by a mining
enterprise or company or protected reserves. Indiscriminate mining that damages
mineral resources is prohibited.
 
 It is
unlawful for an entity or individual to conduct mining operations in areas
designated for other legal mining operators. A mining operator whose
exploitation causes harm to others in terms of production or in terms of living
standards is liable for compensation and is required to take necessary remedial
measures. When a mine is closed, a mine closure report and information
concerning the mining facilities, hidden dangers, remediation and environmental
protection must be submitted for examination and approval in accordance with the
relevant law.
 
 Mineral
products illegally extracted and incomes derived from such activities may be
confiscated and may result in fines, revocation of the mining permit and, in
serious circumstances, criminal liability.
 
 Mining
safety
 
 On
June 7, 2005, the State Council promulgated Several Opinions on Promoting
the Healthy Development of the Coal Industry (the “Opinions”), announcing the
PRC Government’s policies with respect to the development and restructuring of
the coal industry. The Opinions resonated with the NDRC’s announcement on the
revision of the Coal Law and reiterated the PRC Government’s policies with
respect to the administration of coal reserves, enhancement of coal mine safety,
encouragement of industry consolidation among coal producers, acceleration of
the construction of large coal production bases, improvement of mining
techniques and equipment for coal production and the organization and regulation
of small coal mines.
 
 The
Measures for Implementing Work Safety Permits in Coal Mine
Enterprises
 
 The State
Administration of Work Safety and the SACMS issued “The Measures for
Implementing Work Safety Permits in Coal Mine Enterprises”, which came into
effect on May 17, 2004. Pursuant to this document, a coal mine enterprise
without a work safety permit may not engage in coal production activities. Coal
mining enterprises and their mines that do not satisfy the safety conditions set
forth in this document, or those that violate the provisions of this document,
will be punished accordingly.
 
 Special
Regulations by the State Council on Preventing Work Safety Related Accidents in
Coal Mines and Five Sets of Supplemental Rules and Regulations
 
 The
Special Regulations by the State Council on Preventing Work Safety Related
Accidents in Coal Mines were promulgated and entered into effect on
September 3, 2005. This regulation specifies that coal mine enterprises are
responsible for preventing coal mine work safety-related accidents. If a coal
mine has not obtained, in accordance with the law, a mining right permit, work
safety permit, coal production permit or business license and if the mine
manager has not obtained, in accordance with the law, a mine manager
qualification certificate and a mine manager safety qualification certificate,
the coal mine may not engage in production. A coal mine should have adequate
safety equipment, facilities and resources and should have in place measures to
guard against the occurrence of work safety related accidents, as well as a
sound contingency plan to deal with emergencies. Coal mining enterprises should
establish a sound system for the detection, elimination, treatment and reporting
of latent work safety-related dangers. If a major latent work safety-related
danger as specified exists in a coal mine, the enterprise should immediately
suspend production and eliminate the latent danger. Coal mining enterprises
should provide their personnel working underground and their special operation
personnel with safety education and training in accordance with relevant state
regulations. The person in charge of a coal mine and the production and
operation management personnel should go into mines and act as foremen on a
rotating basis in accordance with state regulations, while a file recording
their entry into the mine should be maintained. In addition, the State
Administration of Work Safety issued five sets of supplemental
measures:
  13
  (i) The
Measures for Determining Major Latent Work Safety Related Dangers in Coal Mines
(for Trial Implementation) stipulates the specific criteria for determining
major latent work safety-related dangers. It further defines each of the latent
safety related dangers specified in the Special Regulations of the State Council
on Preventing Work Safety Related Accidents in Coal Mines, and lists more than
60 major latent safety related dangers.
 
 (ii) The
Implementing Measures for the Detection and Elimination of Latent Dangers in
Coal Mines and the Rectification and Closure of Such Mines (for Trial
Implementation) specifies that coal mining enterprises are responsible for the
detection and elimination of latent work safety-related dangers and that the
main persons in charge of coal mining enterprises are fully responsible for the
detection, elimination and treatment of latent work safety-related dangers in
their enterprises.
 
 (iii) The
Measures for the Supervision and Inspection of Coal Mine Safety Training (for
Trial Implementation) specifies that coal mining enterprises must arrange and
provide safety education and training to all of their mining personnel in
accordance with relevant regulations; select and send their principal persons in
charge, work safety management personnel and special operation personnel to
qualified coal mine safety training institutions for training in a timely
manner; and obtain the corresponding qualification certificates.
 
 (iv) The
Guiding Opinions on Persons in Charge of Coal Mines and Production and Operation
Management Personnel Going into Mines as Foremen requires the various types of
coal mines to arrange for their persons in charge and production and operation
management personnel to go into the mines to act as foremen and to ensure that
each shift has at least one such person on site directing the operations. Coal
mining enterprises are required to establish such procedures, clarify foremen’s
duties and responsibilities and strictly implement internal management and
performance appraisal.
 
 (v) The
Measures for Rewarding the Reporting of Major Latent Work Safety Related Dangers
in, and Violations of the Law by, Coal Mines (for Trial Implementation)
specifies that all units or individuals have the right to report major latent
work safety-related dangers in, and violations of law by, coal
mines.
 
 Special
Regulation by the State Council on Shutting Down Small Coal Mines
 
 The
Special Regulation by the State Council on Shutting Down Small Coal Mines went
into effect on September 28, 2006. The passage of regulation is the launch
of a national campaign to close down small coal mines defined as having annual
coal production capacity of 30,000 tons or less, as well as coal mines
without proper licenses or permits. The intent of the regulation is to reduce
both the high rate of accidents and pollution in the PRC coal mining industry.
Under this regulation, 9,887 small and/or illegal coal mines are to be shut down
by the end of 2008. The regulation specifies that the Central Government
will support the development of big coal mining operations, defined as having
annual coal production capacity of 300,000 tons or more. However, the regulation
is silent as to the PRC government’s position on coal mine operations having
annual production capacity of more than 30,000 tons but less than 300,000
tons.
 
 Employees
  As of
March 31, 2008, we had 300 full-time employees, including management. None of
these employees are represented by any collective bargaining agreements. We have
not experienced a work stoppage. Management believes that our relations with our
employees are good.
 
 Recent
Developments
 
 Reverse
Stock Split
 
 On
January 7, 2008, we amended our Articles of Incorporation to effect a 10-to-1
reverse stock split and a proportional decrease of our authorized number of
shares of common stock (the “Amendment”) by filing a Certificate of Change
pursuant to Nevada Revised Statutes Section 78.209 with the Secretary of State
of Nevada. The Amendment had been previously authorized by our board of
directors on December 21, 2007.
  Pursuant
to the Amendment, each ten shares of our common stock, par value $0.001 per
share, issued and outstanding immediately prior to the record date of January 7,
2008 was automatically reclassified as and converted into one share of our
common stock, par value $0.001 per share. No fractional shares were issued.
Further, our total number of authorized shares of common stock was decreased
from 1,000,000,000 to 100,000,000 shares.
  14
 
 Completion
of Acquisition
 
 On
December 31, 2007, we entered into a stock purchase agreement with Heilongjiang
Xing An Group Hong Yuan Coal Mining Co., Ltd. (“Hong Yuan”), Heilongjiang Xing
An Group Sheng Yu Ming Co., Ltd. (“Sheng Yu”, and collectively with Hong Yuan,
the “Xing An Companies”), and their owners: Heilongjiang Xing An Mining
Development Group Co., Ltd., a PRC limited liability company, Mingshu Gong,
Yunjia Yue, Yunpeng Yue and Guoqing Yue (collectively the “Xing An
Shareholders”). Pursuant to the terms of the stock purchase agreement, we agreed
to acquire 90% of the registered capital, representing 90% of the outstanding
equity interests, of the Xing An Companies from the Xing An Shareholders for the
aggregate purchase price of $30,000,000 and 80,000,000 shares of our common
stock (subject to proportional adjustments in the event of subdivision,
combination or additional of our common stock). The transactions contemplated
under the stock purchase agreement are collectively referred to as the
“Acquisition”.
 
 On April
4, 2008, we completed the Acquisition and, pursuant to the terms of the stock
purchase agreement, issued our promissory notes in the aggregate of $30,000,000
and 8,000,000 common shares (as proportionally adjusted following our 10-to-1
reverse stock split in January 2008) to the Xing An Shareholders. Concurrently,
we entered into an escrow agreement with the Xing An Companies, the Xing An
Shareholders and U.S. Bank National Association as escrow agent, pursuant to
which the 8,000,000 common shares are placed in escrow as security for certain
indemnification obligations of the Xing An Shareholders in connection with the
Acquisition. Additionally, we entered into a trust agreement with the Xing An
Shareholders and Anping Cang as trustee, pursuant to which all of the beneficial
interests to the 10% of the registered capital in the Xing An Companies still
held by the Xing An Shareholders are placed in trust for the benefit of Songzai.
In connection with the closing of the Acquisition, both Hong Yuan and Sheng Yu
were issued a Certificate of Approval by the Heilongjiang Office of the State
Administration for Industry and Commerce, classifying these companies as
sino-foreign enterprise and listing Songzai as owner of 90% of their respective
registered capitals.
 
 The Acquisition, including the
promissory notes, the escrow agreement and the trust agreement, as well as the
business operations of the Xing An Companies are discussed in greater details in
Item 9B (“Other Information”) below.
 
 ITEM
      1A.
            RISK
      FACTORS
 
 RISK FACTORS
 
 You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Our
business and results of operations are dependent on coal markets, which may be
cyclical.
 
 As all of
our revenue is derived from sales of coal in the PRC, our business and operating
results are substantially dependent on the domestic Chinese demand for coal. The
Chinese coal market is cyclical and exhibit fluctuation in supply and demand
from year to year. They are subject to numerous factors beyond our control,
including, but not limited to, the economic conditions in the PRC and
fluctuations in industries with high demand for coal, such as the power and
steel industries. Fluctuations in supply and demand for coal have effects on
coal prices, which in turn affect our operating and financial performance. We
have experienced substantial price fluctuations in the past and believe that
such fluctuations will continue. The average selling price of coal products per
ton from Tong Gong Coal Mine was RMB 170.46 per ton in 2005, RMB 174.05 per ton
in 2006 and RMB 192.48 per ton in 2007. The average selling price of coal
products per ton from Hong Yuan and Sheng Yu coal mines was RMB 200 per ton in
2005, RMB 200 per ton in 2006 and RMB 225 per ton in 2007. The demand for coal
is primarily affected by the overall economic development and the demand for
coal from the electricity generation, steel and construction industries. The
supply of coal, on the other hand, is primarily affected by the geographical
location of the coal supplies, the volume of coal produced by the domestic and
international coal suppliers, and the quality and price of competing sources of
coal. Alternative fuels, such as natural gas, oil and nuclear power, and
alternative energy sources, such as hydroelectric power also have influences on
the market demand for coal. Excess supply of coal or significant reduction in
the demand for our coal by domestic electricity generation or steel industries
may have an adverse effect on coal prices, which would in turn cause a decline
in our profitability. In addition, any significant decline in domestic coal
prices could materially and adversely affect our business and result of
operations.
  15
  Our
mining operations are inherently subject to changing conditions that can affect
our profitability.
  Our
mining operations are inherently subject to changing conditions that can affect
levels of production and production costs for varying lengths of time and can
result in decreases in our profitability. We are exposed to commodity price risk
related to our purchase of diesel fuel, explosives and steel.  In
addition, weather conditions, equipment replacement or repair, fires, variations
in thickness of the layer, or seam, of coal, amounts of overburden, rock and
other natural materials and other geological conditions can be expected in the
future to have, a significant impact on our operating
results.  Prolonged disruption of production at our mine would result
in a decrease in our revenues and profitability, which could be
material.  Other factors affecting the production and sale of our coal
that could result in decreases in our profitability include:
 
 ·
            sustained
      high pricing environment for our raw materials, including, among other
      things, diesel fuel, explosives and
steel;
 
 ·
            changes
      in the laws and/or regulations that we are subject to, including
      permitting requirements;
 
 ·
            labor
      shortages; and
 
 ·
            changes
      in coal market and general economic
conditions.
  Our
coal operations are extensively regulated by the PRC Government and government
regulations may limit our activities and adversely affect our business
operations.
 
 Our coal
operations, like those of other Chinese energy companies, are subject to
extensive regulations established by the PRC Government. Central governmental
authorities, such as the National Development and Reform Commission, the State
Environmental Protection Administration, the Ministry of Land and Resources, the
State Administration of coal mine Safety, the State Bureau of Taxation, and
provincial and local authorities and agencies exercise extensive control over
various aspects of China’s coal mining and transportation (including rail and
sea transport). These controls affect the following material aspects of our
operations:
 
 ·
            exploration,
      exploitation and mining rights and
licensing;
 
 ·
            rehabilitation
      of mining sites after mining is
completed;
 
 ·
            recovery
      rate requirements;
 
 ·
            industry-specific
      taxes and fees;
 
 ·
            target
      of our capital investments;
 
 ·
            pension
      funds appropriation; and
 
 ·
            environmental
      and safety standards.
 
 We
believe that our operations are in compliance with applicable legal and
regulatory requirements. However, there can be no assurance that the central or
local governments in the PRC will not impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures. We may face significant constraints on our ability to implement
our business strategies or to carry out or expand our business operations. Our
business may also be materially and adversely affected by future changes in
certain regulations and policies of the Chinese Government in respect of the
coal industry. New legislation or regulations may be adopted that may materially
and adversely affect our coal operations, our cost structure or the demand for
our products. In addition, new legislation or regulations or different or more
stringent interpretation of existing laws and regulations may also require us to
substantially change our existing operations or incur significant
costs.
  16
  The
Chinese government has become increasingly concerned with workplace safety and
environmental issues, particularly in light of several recent accidental
explosions in coal mines due to poor internal safety measures, and as reflected
by the implementation of the State Council’s Regulation on Shutting Down Small
Coal Mines. Moreover, additional new legislation or regulations may be
adopted, or the enforcement of existing laws could become more stringent, either
of which may have a significant impact on our mining operations or our
customers’ ability to use coal and may require us or our customers to
significantly change operations or to incur substantial
costs.
 
 Our
business operations may be adversely affected by present or future environmental
regulations.
 
 As a
producer of coal products, we are subject to significant, extensive, and
increasingly stringent environmental protection laws and regulations in China.
These laws and regulations:
 
 ·
            impose
      fees for the discharge of waste
substances;
 
 ·
            require
      the establishment of reserves for reclamation and
      rehabilitation;
 
 ·
            require
      the payment of fines for serious environmental offences;
    and
 
 ·
            allow
      the Chinese Government, at its discretion, to close any facility that
      fails to comply with orders requiring it to correct or stop operations
      causing environmental damage.
 
 Our coal
mining operations may produce waste water, gas and solid waste materials.
Currently, the PRC Government is moving toward more rigorous enforcement of
applicable laws and regulations as well as the adoption and enforcement of more
stringent environmental standards. Our current amounts of capital expenditure
for environmental regulatory compliance may not be sufficient if additional
regulations are imposed and we may need to allocate additional funds for such
purpose. If we fail to comply with current or future environmental laws and
regulations, we may be required to pay penalties or fines or take corrective
actions, any of which may have a material adverse effect on our business
operations and financial condition.
 
 In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases. Efforts to control greenhouse gas emission in
China could result in reduced use of coal if power generators switch to sources
of fuel with lower carbon dioxide emissions, which in turn could reduce the
revenues of our coal business and have a material adverse effect on our results
of operations.
 
 Demand for coal and coal prices are
closely linked to consumption patterns of the electric industry in
China.  Any changes in consumption patterns could affect our
operations and profitability.
  Demand
for coal and the prices that we will be able to obtain for our coal are closely
linked to coal consumption patterns of the electric generation industry in
China, which has accounted for approximately 58% of overall coal consumption in
China in recent years.  These coal consumption patterns are influenced
by factors beyond our control, including the demand for electricity (which is
dependent to a significant extent on summer and winter temperatures and the
strength of the economy); government regulation; technological developments and
the location, availability, quality and price of competing sources of coal;
other fuels such as natural gas, oil and nuclear; and alternative energy sources
such as hydroelectric power. Any reduction in the demand for our coal by the
domestic electric generation industry may cause a decline in
profitability.
  If
transportation for our coal becomes unavailable or uneconomic for our customers,
our ability to sell coal could suffer.
 
 Transportation
costs represent a significant portion of the total cost of coal and, as a
result, the cost of transportation is a critical factor in a customer’s
purchasing decision.  Increases in transportation costs could make
coal a less competitive source of energy or could make some of our operations
less competitive than other sources of coal.
  Our future success depends upon our ability to continue acquiring
and developing coal reserves that are economically recoverable.
  Our
recoverable reserves decline as we produce coal.  We may not be able
to mine all of our reserves as profitably as we do at our current
operations.  Our profitability depends substantially on our ability to
mine coal reserves that have the geological characteristics that enable them to
be mined at competitive costs.  As we can only increase our existing
production capacity by a limited amount, the future increase in our coal
production will depend on our already developed new coal reserves, acquisitions
of new mines or the expansion of our existing coal mines.
  17
  Replacement
reserves may not be available when required or, if available, may not be capable
of being mined at costs comparable to those characteristics of the depleting
mines.  We may in the future acquire coal reserves from third
parties.  We may not be able to accurately assess the geological
characteristics of any reserves that we acquire, which may adversely affect our
profitability and financial condition.
 
 In
addition to the Tong Gong coal mine which we began mining in 2004, we recently
acquired the Xing An Companies which mine the Hong Yuan and Sheng Yu mines.
Exhaustion of reserves at these mines, as well those mines that we may acquire
in the future, can also have an adverse effect on operating results that is
disproportionate to the percentage of overall production represented by such
mines.
 
 We cannot
give any assurance that we will be able to continue identifying suitable targets
in the PRC for acquisition or acquire suitable targets on competitive terms. Nor
can we assure you that we will be able to successfully develop new coal mines or
expand our existing ones in accordance with our development plans or at all. Our
failure to timely or successfully acquire suitable targets on competitive terms,
or to successfully complete the development of new coal mines or to expand our
existing coal mines could have an adverse effect on the results of operation and
our financial condition.
 
 The
acquisition and/or the development of new mines in the PRC require approval of
the Chinese Government. Delay or failure in securing the relevant governmental
approvals or permits as well as any adverse change in government policies may
cause a significant adjustment to our development and acquisition plans, which
may materially adversely affect our profitability and growth
prospects.
 
 Risks inherent to mining could
increase the cost of operating our business.
  Our
mining operations are subject to conditions beyond our control that can delay
coal deliveries or increase the cost of mining at particular mines for varying
lengths of time.  These conditions include weather and natural
disasters, unexpected maintenance problems, key equipment failures, variations
in coal seam thickness, variations in the amount of rock and soil overlying the
coal deposit, variations in rock and other natural materials and variations in
geologic conditions.
 
 As with
all underground coal mining companies, our operations are affected by mining
conditions such as a deterioration in the quality or thickness of faults and/or
coal seams, pressure in mine openings, presence of gas and/or water inflow and
propensity to spontaneous combustion, as well as operational risks associated
with industrial or engineering activity, such as mechanical breakdowns. Although
we have conducted geological investigations to evaluate such mining conditions
and adapt our mining plans to address them, there can be no assurance that the
occurrence of any adverse mining conditions would not result in an increase in
our costs of production, a reduction of our coal output or the temporary
suspension of our operations.
 
 Underground
mining is also subject to certain risks such as methane outbursts and accidents
caused by roof weakness and ground-falls. There can be no assurance that the
occurrence of such events or conditions would not have a material adverse impact
on our business and results of operations.
 
 Our
product delivery relies on the Chinese railway transportation
system.
 
 Approximately
80% of Tong Gong’s 2007 net sales, and approximately 100% of the Xing An
Companies’ 2007 net sales, were derived from sales of coal transported by the
Chinese national railway system. As the railway system has limited
transportation capacity and cannot fully satisfy coal transportation
requirements, discrepancies between capacity and demand for transportation exist
in certain areas of the PRC. We generally utilize the national rail system to
transport coal to our customers. No assurance can be given that we will continue
to be allocated adequate railway transport capacity or acquire adequate rail
cars, or that we will not experience any material delay in transporting our coal
as a result of insufficient railway transport capacity or rail
cars.
 
 Some of
our mines depend on a single transportation carrier or a single mode of
transportation. Disruption of any of these transportation services due to
weather-related problems, flooding, drought, accidents, mechanical difficulties,
strikes, lockouts, bottlenecks, and other events could temporarily impair our
ability to supply coal to our customers. Our transportation providers may face
difficulties in the future that may impair our ability to supply coal to our
customers, resulting in decreased revenues.
  18
 
 We
may suffer losses resulting from industry-related accidents and lack of
insurance.
 
 We
operate coal mines and related facilities that may be affected by water, gas,
fire or structural problems. As a result, we, like other coal mining companies,
have experienced accidents that have caused property damage and personal
injuries. Although we have implemented safety measures at our mining operations,
and provide on-the-job training for our employees, and, in accordance with
relevant laws set aside approximately 2.0% of employees’ total remuneration for
employees’ injury insurance, there can be no assurance that industry-related
accidents will not occur in the future. At the Tong Gong mine, where the miners
are employees of the Company, we purchase work-related death and injury
insurance at the cost of RMB 900 in annual insurance premium per worker. Under
this insurance policy, the insurance company will pay up to RMB 100,000
(approximately $13,680) for each work-related death or injury. Mine workers at
the Hong Yuan and Sheng Yu coal mines are sub-contracted from general
contractors who borne the costs of such insurance.
 
 However,
we do not currently maintain fire, or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles. In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims in respect of personal injury,
property or environmental damage arising from accidents on our properties, other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could have a material adverse effect on
our financial condition and results of operations.
 
 We
may be required to allocate additional funds for land subsidence.
 
 A
consequence of the underground mining methods used at our mines is land
subsidence above underground mining sites. Depending on the circumstances, we
may be required to relocate inhabitants from the land above the underground
mining sites prior to mining those sites or we may be required to compensate the
inhabitants for losses or damages from land subsidence after the underground
sites have been mined. We may also be required to make payments for land
subsidence, restoration, rehabilitation or environmental protection of the land
after the underground sites have been mined. Where such payment is required
under applicable law or regulations, an estimate of such costs is recognized in
the period in which the obligation is identified and is charged as an expense in
our income statement in proportion to the coal extracted. The estimate of costs
for land subsidence, restoration, rehabilitation or environmental protection of
the land may be subject to change in the future as actual costs become apparent
and standards established by the PRC Government change from time to time.
Therefore, there can be no assurance that such estimates are accurate or that
our land subsidence, restoration, rehabilitation and environmental protection
costs will not substantially increase in the future or that the PRC Government
will not impose new fees in respect of land subsidence. Any such substantial
increases or new fees could have a material adverse effect on our results of
operations.
 
 Our
estimates of coal reserves are based on estimates that may not be
correct.
  We base
our reserve information on geological data assembled and analyzed by our staff,
which includes various engineers and geologists, and periodically reviewed by
outside firms.  The reserve estimates are annually updated to reflect
production of coal from the reserves and new drilling or other data
received.  There are numerous uncertainties inherent in estimating
quantities of recoverable reserves, including many factors beyond our
control.  Estimates of economically recoverable coal reserves and net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as geological and mining conditions which may not be fully identified by
available exploration data or may differ from experience in current operations,
historical production from the area compared with production from other
producing areas, the assumed effects of regulation by governmental agencies, and
assumptions concerning coal prices, operating costs, taxes, development costs,
and reclamation costs, all of which may cause estimates to vary considerably
from actual results.  For these reasons, estimates of the economically
recoverable quantities attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of net
cash flows expected therefrom, prepared by different engineers or by the same
engineers at different times, may vary substantially.  Actual coal
tonnage recovered from identified reserve areas or properties, and revenues and
expenditures with respect to our reserves, may vary from estimates, and such
variances may be material.  These estimates thus may not accurately
reflect our actual reserves.
  19
  If
we are unable to expand our operations through acquisitions of other business or
assets, our profitability may be negatively affected.
  We are
seeking to expand our operations and coal reserves both in the regions in which
we operate as well as in other parts of China through acquisitions of businesses
and assets, including leases of coal reserves.  Acquisition
transactions involve inherent risks, such as:
 
 ·
            uncertainties
      in assessing the value, strengths, weaknesses, contingent and other
      liabilities and potential profitability of acquisition or other
      transaction candidates;
 
 ·
            the
      potential loss of key personnel of an acquired
  business;
 
 ·
            the
      ability to achieve identified operating and financial synergies
      anticipated to result from an acquisition or other
      transaction;
 
 ·
            problems
      that could arise from the integration of the acquired
      business;
 
 ·
            unanticipated
      changes in business, industry or general economic conditions that affect
      the assumptions underlying the acquisition or other transaction rationale;
      and
 
 ·
            unexpected
      development costs that adversely affect our
  profitability.
 
 In
addition, we may not be able to successfully negotiate new leases or mining
contracts for properties containing additional reserves or maintain our
leasehold interests in properties on which mining operations are not commenced
during the term of the lease.
  Our ability to operate our company
effectively could be impaired if we lose key personnel or fail to attract
qualified personnel.
  We manage
our business with a number of key personnel, the loss of a number of who could
have a material adverse effect on us.  In addition, as our business
develops and expands, we believe that our future success will depend greatly on
our continued ability to attract and retain highly skilled and qualified
personnel.  We cannot assure you that key personnel will continue to
be employed by us or that we will be able to attract and retain qualified
personnel in the future.  We do not have “key person” life insurance
to cover our executive officers.  Failure to retain or attract key
personnel could have a material adverse effect on us.
 
 RISKS
RELATED TO OUR ACQUISITION OF THE XING AN COMPANIES
  If
we are unable to timely repay the promissory notes in connection with our
acquisition of the Xing An Companies, the approval and designation of the Xing
An Companies as sino-foreign enterprises and Songzai as the owner of 90% of
their respective registered capitals may be revoked, and the Acquisition may be
deemed void.
 
 Under
applicable PRC law and regulations, while our acquisition of the Xing An
Companies was deemed completed upon the issuances of a Certificate of Approval
classifying these companies as sino-foreign enterprises and listing Songzai as
the owner of 90% of their respective registered capitals, we are required to
make full payment on the promissory notes issued to the Xing An Shareholders
within three months from the issuance date of the Certificate of Approval, which
may be extended for up to an additional nine months subject to governmental
approval. If we are unable to do so, we cannot guarantee that we will be able to
secure the necessary governmental approval for an extension, nor can we
determine, at this time, the length of the extension we may receive
assuming that we are able to secure the necessary governmental approval. In the
event that we are unable to timely repay the promissory notes, the Heilongjiang
Office of the State Administration for Industry and Commerce may revoke the
approval both of the Xing An Companies as sino-foreign enterprises and Songzai
as the 90% owner of their respective registered capital, thereby voiding the
Acquisition. In the event that the Acquisition is voided, we will not have any
equity interests in the Xing An Companies, and as a result, these companies will
no longer be our subsidiaries. Should this occur, we may seek to acquire the
equity interests of the Xing An Companies through other means, although we
cannot guarantee that we will do so, nor can we guarantee that we will be
successful if we do.
   20
  RISKS RELATED TO DOING BUSINESS IN
CHINA
 
 Our
operations are primarily located in China and may be adversely affected by
changes in the policies of the Chinese government.
  The
political environment in the PRC may adversely affect the Company’s business
operations.  The PRC has operated as a socialist state since 1949 and
is controlled by the Communist Party of China.  In recent years,
however, the government has introduced reforms aimed at creating a “socialist
market economy” and policies have been implemented to allow business enterprises
greater autonomy in their operations.  Changes in the political
leadership of the PRC may have a significant effect on laws and policies related
to the current economic reforms program, other policies affecting business and
the general political, economic and social environment in the PRC, including the
introduction of measures to control inflation, changes in the rate or method of
taxation, the imposition of additional restrictions on currency conversion and
remittances abroad, and foreign investment.  These effects could
substantially impair the Company’s business, profits or prospects in
China.  Moreover, economic reforms and growth in the PRC have been
more successful in certain provinces than in others, and the continuation or
increases of such disparities could affect the political or social stability of
the PRC.
  The
Chinese government exerts substantial influence over the manner in
which companies in China must conduct their business
activities.
  The PRC
only recently has permitted greater provincial and local economic autonomy and
private economic activities.  The government of the PRC has exercised
and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership.  Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in the PRC or
particular regions thereof, and could require the Company to divest the
interests it then holds in Chinese properties or joint ventures.  Any
such developments could have a material adverse effect on the business,
operations, financial condition and prospects of the Company.
  Future
inflation in China may inhibit economic activity and adversely affect the
Company’s operations.
  In recent
years, the Chinese economy has experienced periods of rapid expansion and within
which some years with high rates of inflation and deflation, which have led to
the adoption by the PRC government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation.  While inflation has moderated since 1995, high
inflation may in the future cause the PRC government to impose controls on
credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby adversely affect the Company’s business
operations and prospects in the PRC.
 
 We may be restricted from freely converting the Renminbi to other
currencies in a timely manner.
  The
Renminbi is not a freely convertible currency at present.  The Company
receives all of its revenue in Renminbi, which may need to be converted to other
currencies, primarily U.S. dollars, and remitted outside of the
PRC.  Effective July 1, 1996, foreign currency “current account”
transactions by foreign investment enterprises, including sino-foreign joint
ventures, are no longer subject to the approval of State Administration of
Foreign Exchange (“SAFE,” formerly, “State Administration of Exchange Control”),
but need only a ministerial review, according to the Administration of the
Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996
(the “FX regulations”). “Current account” items include international
commercial transactions, which occur on a regular basis, such as those relating
to trade and provision of services.  Distributions to joint venture
parties also are considered a “current account transaction.”  Other
non-current account items, known as “capital account” items, remain subject to
SAFE approval.  Under current regulations, the Company can obtain
foreign currency in exchange for Renminbi from swap centers authorized by the
government.  The Company does not anticipate problems in obtaining
foreign currency to satisfy its requirements; however, there is no assurance
that foreign currency shortages or changes in currency exchange laws and
regulations by the Chinese government will not restrict the Company from freely
converting Renminbi in a timely manner.  If such shortages or change
in laws and regulations occur, the Company may accept Renminbi, which can be
held or re-invested in other projects.
  Future
fluctuation in the value of the Renminbi may negatively affect the Company’s
ability to convert its return on operations to U.S. dollars in a profitable
manner and its sales globally.
  Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including U.S. dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi
relative to the U.S. Dollar has appreciated approximately 15%. Countries,
including the U.S., have argued that the Renminbi is artificially undervalued
due to China’s current monetary policies and have pressured China to allow the
Renminbi to float freely in world markets.
  21
  We
may be unable to enforce our rights due to policies regarding the regulation of
foreign investments in China.
  The PRC’s
legal system is a civil law system based on written statutes in which decided
legal cases have little value as precedents, unlike the common law system
prevalent in the United States. The PRC does not have a well-developed,
consolidated body of laws governing foreign investment enterprises. As a result,
the administration of laws and regulations by government agencies may be subject
to considerable discretion and variation, and may be subject to influence by
external forces unrelated to the legal merits of a particular
matter. China’s regulations and policies with respect to foreign
investments are evolving. Definitive regulations and policies with respect
to such matters as the permissible percentage of foreign investment and
permissible rates of equity returns have not yet been
published.  Statements regarding these evolving policies have been
conflicting and any such policies, as administered, are likely to be subject to
broad interpretation and discretion and to be modified, perhaps on a
case-by-case basis. The uncertainties regarding such regulations and
policies present risks that the Company will not be able to achieve its business
objectives. There can be no assurance that the Company will be able to
enforce any legal rights it may have under its contracts or
otherwise.
  RISKS
RELATED TO CORPORATE AND STOCK MATTERS
  We
have a limited operating history and if we are not successful in continuing to
grow our business, then we may have to scale back or even cease our ongoing
business operations.
  We have a
limited operating history and must be considered in the development
stage. The Company’s operations will be subject to all the risks inherent
in the establishment of a developing enterprise and the uncertainties arising
from the absence of a significant operating history. We may be unable to
locate recoverable reserves or operate on a profitable basis. We are in the
development stage and potential investors should be aware of the difficulties
normally encountered by enterprises in the development stage. If our
business plan is not successful, and we are not able to operate profitably,
investors may lose some or all of their investment in the Company.
  All
of our directors and officers are outside the United States, with the result
that it may be difficult for investors to enforce within the United States any
judgments obtained against us or any of our directors or officers.
  All of
our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of such persons’ assets
are located outside the United States. As a result, it may be difficult for
investors to effect service of process on our directors or officers, or enforce
within the United States or Canada any judgments obtained against us or our
officers or directors, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state
thereof. Consequently, you may be effectively prevented from pursuing
remedies under U.S. federal securities laws against them. In addition,
investors may not be able to commence an action in a Canadian court predicated
upon the civil liability provisions of the securities laws of the United
States.
 
 If
we issue additional shares in the future, this may result in dilution to our
existing stockholders.
  Our
articles of incorporation, as amended, authorize the issuance of 100,000,000
shares of common stock and 8,000,000 shares of preferred stock.  Our
board of directors has the authority to issue additional shares up to the
authorized capital stated in the certificate of incorporation. Our board of
directors may choose to issue some or all of such shares to acquire one or more
businesses or to provide additional financing in the future.  The
issuance of any such shares may result in a reduction of the book value or
market price of the outstanding shares of our common stock.  If we do
issue any such additional shares, such issuance also will cause a reduction in
the proportionate ownership and voting power of all other
stockholders.  Further, any such issuance may result in a change of
control of our corporation.
  The
authorized preferred stock constitutes what is commonly referred to as "blank
check" preferred stock.  This type of preferred stock allows the Board
of Directors to divide the preferred stock into series, to designate each
series, to fix and determine separately for each series any one or more relative
rights and preferences and to issue shares of any series without further
stockholder approval.  Preferred stock authorized in series allows our
Board of Directors to hinder or discourage an attempt to gain control of us by a
merger, tender offer at a control premium price, proxy contest or otherwise.
Consequently, the preferred
stock could entrench our management.  In addition, the market price of
our common stock could be materially and adversely affected by the existence of
the preferred stock.
  22
  Our
stock is a penny stock. Trading of our stock may be restricted by the SEC’s
penny stock regulations, which may limit a stockholder’s ability to buy and sell
our stock.
  Our stock
is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9
which generally defines “penny stock” to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions.  Our securities
are covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and “accredited investors”.  The term “accredited investor”
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse.  The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document in a
form prepared by the SEC, which provides information about penny stocks and the
nature and level of risks in the penny stock market.  The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation.  In addition, the penny stock rules require that prior
to a transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction.  These disclosure requirements may have
the effect of reducing the level of trading activity in the secondary market for
the stock that is subject to these penny stock rules.  Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities.  We believe that the penny stock rules discourage investor
interest in and limit the marketability of our common stock.
  NASD sales practice requirements may also limit a stockholder’s
ability to buy and sell our stock.
  In
addition to the “penny stock” rules described above, the NASD has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer.  Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information.  Under
interpretations of these rules, the NASD believes that there is a high
probability that speculative low priced securities will not be suitable for at
least some customers.  The NASD requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which
may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.
  Stockholders
should have no expectation of any dividends.
 
 The
holders of our common stock are entitled to receive dividends when, as and if
declared by the board of directors out of funds legally available
therefore.  To date, we have not declared nor paid any cash
dividends.  The board of directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings,
if any, for use in our business operations.
 
 If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent
fraud.
 We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its Annual Report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management’s assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
  23
  Item 1B.
            UNRESOLVED
      STAFF COMMENTS
  None.
 
 ITEM
      2.
            DESCRIPTION
      OF PROPERTY
 
 Our
Headquarters
 
 Our
principle headquarters are located in an approximately 7,000 square feet
facility in Harbin, China. The Company has no written agreement or formal
arrangement pertaining to the use of this space and currently pays no rent.
These headquarters house all of our administrative and clerical staff. If
necessary, we believe that we would be able to find replacement office space
without unreasonable expense or delay.
 
 Tong
Gong Coal Mine
  The land
on which the Tong Gong coal mine is located and on which most of our mining
facilities are located are owned by the PRC. We also have a building at the mine
site, approximately 32,000 square feet in size, which houses both our operations
office and dormitory for the mine workers. Tong Gong’s mining operations are
controlled from this office. While we do not own the underlying 44,000 square
meter land, we currently pay US$10,512 annually for use of this space. We
have no written agreement or formal arrangement pertaining to the use of this
space, but we believe that use of the land and office space is authorized by the
Coal Production Right Permit and confirmed by Hei He City Administration of Land
and Resources.
  ITEM
      3.
            LEGAL
      PROCEEDINGS
 
 The following discussion discusses
all known or anticipated material legal proceedings commenced by or against
us.  Occasionally we may be named as a party in claims and legal
proceedings arising out of the normal course of our business. These claims and
legal proceedings may relate to contractual rights and obligations, employment
matters, or to other matters relating to our business and operations. In the
opinion of management, the ultimate outcome of claims and litigation of which
management is aware will not have a material adverse effect on our consolidated
financial position or results of operation.
 
 We were
threatened with litigation arising from contracts with Greentree Financial
Group, Inc. (“Greentree”). Greentree claimed that it rendered financial
consulting services to the Company was therefore owed compensation. The Company
contended that Greentree never provided the services for which it sought
compensation. On November 21, 2006, the Company and Greentree settled the
dispute through arbitration. The Company agreed to pay Greentree $125,000,
payable over a 12 month period in installments beginning in January 2007. As of
December 31, 2007, the entire amount was paid to Greentree.
  We know
of no other material, active or pending legal proceedings against our company,
nor are we involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholder, is an adverse party or
has a material interest adverse to our interest.
 
 ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  We did
not submit any matters to a vote of security holders during the fourth quarter
of fiscal year 2007.
  
 PART
II
  ITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS
  Market
Information
 
 Our
common stock, par value $0.001 per share (“Common Stock”), is traded on the
Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “SGZH”. There was no
active trading market for the Common Stock before May 22, 2000. The following
table sets forth, for the periods indicated, the reported high and low closing
bid quotations for our common stock as reported on the OTCBB. The bid prices
reflect inter-dealer quotations, do not include retail markups, markdowns or
commissions and do not necessarily reflect actual transactions.
  24
  Common
Stock
 
 Quarter
      Ended
            
            High
      Bid
            
            Low
      BidMarch
      31, 2008*
            
            
            8.00
            
            
            3.50December
      31, 2007
            
            
            0.53
            
            
            0.47September
      30, 2007
            
            
            0.70
            
            
            0.55June
      30, 2007
            
            
            0.05
            
            
            0.05March
      31, 2007
            
            
            0.07
            
            
            0.07December
      31, 2006
            
            
            0.29
            
            
            0.28September
      30, 2006
            
            
            0.13
            
            
            0.13June
      30, 2006
            
            
            0.08
            
            
            0.08March
      31, 2006
            
            
            0.05
            
            
            0.04__________
              *
      Increase in stock price commencing in the first quarter of our 2008 fiscal
      year reflect the effect of a 1-for-10 reverse stock split of the Company’s
      common stock that became effective on January 7, 2008.
 As of
March 31, 2008, we had approximately 6,932,559 shares of common stock issued and
outstanding, and 400,000 shares of preferred stock issued and
outstanding.
 
 Holders
  We
currently have approximately 936 record holders of our common stock and one
record holder of our preferred stock.
  Dividend
Policy
  While
there are no restrictions that limit our ability to pay dividends, we have not
paid, and do not currently intend to pay cash dividends on our common stock in
the foreseeable future. Our policy is to retain all earnings, if any, to provide
funds for operation and expansion of our business. The declaration of dividends,
if any, will be subject to the discretion of our Board of Directors, which may
consider such factors as our results of operations, financial condition, capital
needs and acquisition strategy, among others.
 
 Securities
Authorized for Issuance under Equity Compensation Plans
 
 Please
see the discussion in Item 12 titled “Equity Compensation Plan Information”
below.
 
 Sales
of Unregistered Securities
 
 As of
December 31, 2007, we e have had no sales of unregistered securities within the
past three fiscal years.
 
 Recent
Developments
 
 On April
4, 2008, pursuant to a stock purchase agreement that we entered on December 31,
2007, we issued 8,000,000 shares of our common stock to the owners of Hong Yuan
and Sheng Yu in connection with our acquisition of these two companies. The
issuance of these shares was exempt from registration pursuant to Regulation S
under the Securities Act of 1933. We made this determination based on the
representations of the shareholders of Hong Yuan and Sheng Yu, which included,
in pertinent part, that such shareholders were not a "U.S. person" as that term
is defined in Rule 902(k) of Regulation S under the Act, and that such
shareholders were acquiring our common stock, for investment purposes for their
own respective accounts and not as nominees or agents, and not with a view to
the resale or distribution thereof, and that such shareholders understood that
the shares of our common stock may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
  25
  Our
acquisition of Hong Yuan and Sheng Yu and the operations and business of the
Hong Yuan and Sheng Yu coal mines are more fully described in Item 1 above under
“Recent Developments” and in Item 9B (“Other Information”) below.
 
 ITEM
6.             
   SELECTED FINANCIAL DATA
 
 Not
applicable.
 
 ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
  MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 The following discussion and
analysis of our results of operations and financial condition for the fiscal
years ended December 31, 2007 and 2006 should be read in conjunction with
Selected Consolidated Financial Data and our financial statements and the notes
to those financial statements that are included elsewhere in this prospectus.
Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking Statements” and
“Description of Business” sections and elsewhere in this prospectus. We use
words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,”
“predict,” and similar expressions to identify forward-looking
statements. Although we
believe the expectations expressed in these forward-looking statements are based
on reasonable assumptions within the bound of our knowledge of our business, our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include, but are not limited
to, those discussed in the “Risk Factors” section of this Registration
Statement. We undertake no obligation to update publicly any forward-looking
statements for any reason even if new information becomes available or other
events occur in the future.
 
 Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
(“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and
for pertinent periods.
 
 Overview
 
 We are
engaged in extracting and selling coal in PRC. After obtaining permits from the
National Land and Resources Office and Heilongjiang Province Economy
Committee, we mine to extract coal minerals, and then sell most of the
coal on a per ton basis in cash on delivery, primarily to power plants, cement
factories, wholesalers and individuals for home heating. Through the end of
March 2008, our business consisted of the operations of Tong Gong coal mine in
northern PRC, located approximately 175 km southwest of Heihe City in
Heilongjiang Province.
 
 As
discussed more fully under the section “Recent Developments” in Item 1 above and
in Item 9B (“Other Information”) below, we completed our acquisition of the Xing
An Companies on April 4, 2008, after which our business now consist of the
operations of Tong Gong coal mine as well as the two Xing An coal mines. The
following management’s discussion and analysis pertains only to our operations
at the Tong Gong coal mine.
 
 Critical Accounting Policies
 
 We suggest that our significant accounting
policies, as described in or consolidated financial statements in the Summary of
Significant Accounting Policies, be read in conjunction with this Management’s
Discussion and Analysis of Financial Condition and Results of Operations. We
have identified one accounting policy area as critical to the understanding
of
our consolidated financial statements. The preparation of our consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of sales and expenses during the reporting
periods. Costs to obtain coal lands and leased mineral rights are capitalized
and amortized to operations as depletion expense on the units-of-production
method utilizing only proven and probable reserves in the depletion base.
Depletion expense is included in depreciation, depletion and amortization on the
accompanying statements of consolidated operations and comprehensive income
(loss). Costs of mine development, expansion of the capacity of or extending the
life of our mine are capitalized and principally amortized using the
units-of-production method over proven and probable reserves directly benefiting
from the capital expenditure. Mobile mining equipment and other fixed assets are
stated at cost and depreciated on a straight-line basis over the estimated
useful lives ranging from 1 to 20 years or on a units-of-production basis.
Leasehold improvements are amortized over their estimated useful lives or the
term of the lease, whichever is shorter. 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.
  26
  There are
numerous uncertainties inherent in estimating quantities of economically
recoverable coal reserves, many of which are beyond our control. As a result,
estimates of economically recoverable coal reserves are by their nature
uncertain. Information about our reserves consists of estimates based on
engineering, economic and geological data assembled by our internal engineers
and geologists. We also recently received a report regarding reserves as of the
end of 2005 from a third party consultant. Some of the factors and assumptions
that impact economically recoverable reserve estimates include:
 
 ·
            geological
      and mining conditions;
 ·
            historical
      production from the area;
 ·
            the
      assumed effects of regulations and taxes by governmental
      agencies;
 ·
            assumptions
      governing future prices;
 ·
            future
      operating costs; and
 ·
            mining
      technology improvements.
 
 Each of
these factors may in fact vary considerably from the assumptions used in
estimating reserves. For these reasons, estimates of the economically
recoverable quantities of coal from our mine may vary substantially. Actual
production, revenues and expenditures with respect to reserves will likely vary
from estimates, and these variances may be material.
 
 With
respect to net realizable value of the Company’s accounts receivable and
inventories, significant estimation judgments are made and actual results could
differ materially from these estimates.
 
 Basis
of Presentations
 
 Our
financial statements are prepared in accordance with GAAP and the requirements
of Regulation S-X promulgated by the Securities and Exchange
Commission.
 
 Use
of Estimates
 
 In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
 
 Accounts
Receivable
  The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable.  Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.
 
 Inventories
 
 Inventories
consists of coal extracted from the ground that is available for delivery to
customers, as well as extracted coal which has been removed from the ground but
not yet processed through a wash plant. Inventories of coals are valued at the
lower of average cost or market, cost being determined on a first in, first out
method and include labor costs and all expenditures directly related to the
removal of coal.
  27
  Prepaid
Mining Right
 
 Prepaid
mining right is the amount paid to acquire the right to mine the coal
reserves.  Prepaid mining right is amortized over the life of the
reserves that are proven and probable.
 
 Asset
Retirement Cost and Obligation
 
 The
Company uses Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations. This Statement generally requires
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. Amortization of
the related asset is recorded on a straight line basis over the useful lives of
the 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.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.  When
property and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations.
  Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives. The estimated useful lives are as
follows:
  Plant and
Machinery                                                                  10-15
Years
 Motor
Vehicles                                                                           
5 Years
 Building
and Mining
Structure                                                 10
Years
 
 Building
and mining structure includes the main and auxiliary mine shafts and underground
tunnels. Depreciation is provided to write off the cost of the mining structure
using the units of production method based on the estimated production volume
for which the structure was designed.
  Revenue
Recognition
 
 The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104.  Coal sales revenues include sales to
customers of coal produced at Company operations and coal purchased from other
coal mining companies. Sales revenue is recognized when a formal arrangement
exists, which is generally represented by a contract between the Company and the
buyer; the price is fixed or determinable; title has passed to the buyer, which
generally is at the time of delivery; no other significant obligations of the
Company exist and collectibility is reasonably assured.  Payments
received before all of the relevant criteria for revenue recognition are
recorded as unearned revenue.
 
 Foreign
Currency Translation and Comprehensive Income (Loss)
 
 Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period.
 
 Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
  28
 
 The
Company uses SFAS No. 130 “Reporting Comprehensive Income”. Comprehensive income
is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.
 
 Recent
Accounting Pronouncements
  Fair
Value Measurements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements required under the accounting pronouncements, but
does not change existing guidance as to whether or not an instrument is carried
at fair value. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for fiscal year, including financial statements for an
interim period within the fiscal year. The Company is currently evaluating the
impact, if any, that SFAS No. 157 will have on its financial
statements.
 
 Fair
Value Option for Financial Assets and Financial Liabilities
 
 In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.”  The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company believes that the
adoption of SFAS 159 will not have a significant impact on its financial
statements.
  Business
Combinations
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
  ·
            Acquisition
      costs will be generally expensed as
incurred;
 ·
            Noncontrolling
      interests (formerly known as “minority interests” – see SFAS 160
      discussion below) will be valued at fair value at the acquisition
      date;
 ·
            Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies
 ·
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;
 ·
            Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and
 ·
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.
 
 SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first Annual Reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.
 
   29
  Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and cash
flows.
 
 Results
of Operations
 
 Year
Ended December 31, 2007 Compared To Year Ended December 31, 2006
 
 Year
      Ended December 31
            2007
            
            2006$
            
            %
      of Sales
            
            $
            
            %
      of SalesSales
            
            12,351,166
            
            100%
            
            3,835,427
            
            100%Gross
      Profit
            
            6,764,698
            
            54%
            
            1,364,987
            
            36%Operating
      Expenses
            
            1,808,966
            
            15%
            
            771,044
            
            20%Income
      from Operations
            
            4,955,732
            
            40%
            
            654,338
            
            17%Other
      Income (Expenses), net
            
            49,423
            
            0.4%
            
            (6,866)
            
            0.2%Net
      Income
            
            4,087,871
            
            33%
            
            647,472
            
            17%
 
 Net
Sales
 
 We
commenced coal mining operations in September 2004 and discontinued the on-line
gift cards and related products business. Our coal mining production and sales,
in tons, from inception through the end of 2007 are set forth
below:
 
 Tong Gong Coal Mine
      Production and SalesYear
            Quarter
            Production
      (tons)
            Sales
      (tons)2004
            3
            15,261
            15,2614
            43,437
            43,402Sub-total
            58,698
            58,6632005
            1
            10,145
            10,1812
            29,908
            29,9083
            42,654
            42,6544
            46,741
            46,741Sub-total
            129,448
            129,4832006
            1
            27,652
            27,6522
            46,236
            46,2363
            32,673
            32,6734
            70,284
            69,328Subtotal
            176,844
            175,8892007
            1
            41,310
            41,3102
            142,705
            145,5693
            167,931
            165,0674
            0
            123,066Subtotal
            351,946
            475,012Total
            716,936
            839,047
  30
  Net sales
for 2007 were approximately $12.3 million as compared to our net sales of $3.9
million in 2006, an increase of $8.5 million or 222%. During 2007, in addition
to mining the Tong Gong mine, we also brokered coal from several small coal mine
operations nearby in order to meet demands from our customers.
 
 Cost
of Sales and Gross Profit Margin
  Our cost
of sales currently consists of cost of coal sales and all depreciation,
depletion and amortization attributable to mining operations. Cost of sales
increased by $3.1 million, or 133% from 2006 of $2.4 million to 2007 of $5.6
million. The increase in cost of sales resulted from an increase in production
of coal from year to year. Cost of sales as a percentage of sales was
approximately 45% for 2007 and was approximately 62% for 2006, the decreased
cost of sale as percentage of sales was mainly due to our increased brokerages
sales of coal which had lower cost than production of the coal.
 
 Selling,
General and Administrative Expenses
 
 Selling and Distribution.Selling and distribution expenses consist primarily of costs associated
with the accommodation of the Company’s customers while purchasing and loading
coal, including food and housing. Selling and distribution expenses were $0 in
2007 and approximately $13,000 for 2006.  The $0 selling expense was
due to market conditions that allowed us to require that our customers pay their
respective shipping and distribution cost.
 
 General and Administrative.
General and administrative expense consists primarily of salaries and related
expenses for executive, finance, accounting, legal, information technology,
facilities and human resources personnel. General and administrative expenses
increased to approximately $1.8 million in 2007 from approximately $700,000 in
2006. The general and administrative expenses increased due to increased in
resource compensation fee, managerial and administrative expenses and a one-time
appraisal fee regarding our coal reserve during 2007, all of which are in
proportion to our increased sales and production.
 
 Net
income
 
 Our net
income for the year ended December 31, 2007 was $4.08 million as compared to
approximately $708,000 for the year ended December 31, 2006, an increase of $3.4
million or 480%.  This increase was the benefit from the economic of
scale which combined by the rapid growth in sales and production of the coal
mine.
 
 Liquidity and Capital
Resources
  As of
December 31, 2007, the Company had cash and cash equivalents of approximately
$4,494,978, other current assets of approximately $958,472 and current
liabilities of approximately $1.9 million.
 
 The
following is a summary of cash provided by or used in each of the indicated
types of activities during year ended December 31, 2007 and 2006:
  Year Ended December
      312007
            
            
            2006Cash provided by (used
      in):Operating
      Activities
            
            $
            4,721,629
            
            
            $
            621,471Investing
      Activities
            
            
            (1,020,227
            )
            
            
            (689,025
            )Financing
      Activities
            
            
            479,003
            
            
            
            110,211
  31
  Cash
provided by operating activities increased by approximately $4.1 million during
2007 compared to 2006 primarily as a result of an increase in net income and
decreased in accounts receivable of approximately $380,269 and prepaid expenses
of approximately $1.28 million.  During 2007, we’ve paid approximately
$1.3 million for mining right.
 
 Cash used
in investing activities increased during 2007 compared to 2006 by approximately
$331,000. The increase was related to an increase in capital expenditures
including the purchase of mining equipment, maintenance and improvements made to
the railway depot from which our coal is transported, in the total amount of
$809,000, as well as $151,000 expended in connection with our ongoing effort to
expand our mine well.
 
 Cash
provided by financing activities in 2007 increased by approximately $368,000.
The increase was related to increased advance of $526,080 from stockholder for
the business expenses incurred in our US parent company.
 
 We
believe we have sufficient cash to continue our current business throughout 2008
due to increased sales revenue and net income. We do not believe that we will be
required to make any material capital expenditures in 2008. We would like to
acquire additional coal mine assets, but we will finance such acquisitions
through the issuance of debt or equity securities. Failure to obtain such
financing could have a material adverse effect on our business
expansion.
 
 We do not
anticipate any additional material research and development expenses during the
next 12 months.
 
 We do not
believe that inflation had a significant negative impact on our results of
operations during 2007.
 
 Contractual Obligations and
Off-Balance Sheet Arrangements
  Contractual
Obligations
  As of December 31, 2007, we did not
have any contractual obligations, including long-term debt obligations, capital
lease obligations, operating lease obligations or purchase obligations, as
reflected on our balance sheet at December 31, 2007.
 
 Off-balance
Sheet Arrangements
 
 We do no have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our investors.
 
 ITEM 7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK
 
 Interest
Rates
 
 Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. At December 31, 2007, we had approximately $4,494,978 in cash
and cash equivalents. A hypothetical 1% increase or decrease in either short
term or long term interest rates would not have a material impact on our
earnings or loss, or the fair market value or cash flows of these
instruments.
 
 Exchange
Rates
 
 We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents.
  32
  We
maintain our books and records in Renminbi (“RMB”), the lawful currency of
China. In general, for consolidation purposes, we translate our assets and
liabilities into US Dollars using the applicable exchange rates prevailing at
the balance sheet date, and the statement of income is translated at average
exchange rates during the reporting period. Adjustments resulting from the
translation of our financial statements are recorded as accumulated other
comprehensive income.
 
 Until
July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00. On
July 21, 2005, the Chinese government reformed the exchange rate system into a
managed floating exchange rate system based on market supply and demand with
reference to a basket of currencies. In addition, the exchange rate of RMB to
US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
China announces the closing price of a foreign currency such as US$ traded
against RMB in the inter-bank foreign exchange market after the closing of the
market on each working day, which will become the unified exchange rate for the
trading against RMB on the following working day. The daily trading price of US$
against RMB in the inter-bank foreign exchange market is allowed to float within
a band of  ±0.3% around the unified exchange rate published by the
People’s Bank of China. This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies. All foreign exchange
transactions continue to take place either through the Bank of China or other
banks 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 Bank
of China or other institutions requires submitting a payment application form
together with invoices, shipping documents and signed contracts.
 
 Following
the removal of the peg to the U.S. dollar and pressure from the United States,
the People’s Bank of China also announced that the RMB would be pegged to a
basket of foreign currencies, rather than being strictly tied to the U.S.
dollar, and would be allowed to float trade within a narrow 0.3% daily band
against this basket of currencies. The PRC government has stated that the basket
is dominated by the U.S. Dollar, Euro, Japanese Yen and South Korean Won, with a
smaller proportion made up of the British Pound, Thai Baht, Russian Ruble,
Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no
assurance that the relationship between the RMB and these currencies will remain
stable over time, especially in light of the significant political pressure on
the Chinese government to permit the free flotation of the RMB, which could
result in greater and more frequent fluctuations in the exchange rate between
the RMB, the U.S. dollar and the Euro. For additional discussion regarding our
foreign currency risk, see the section titled “Risk Factors—Fluctuation in the
value of RMB relative to other currencies may have a material adverse effect on
our business and/or investment in our shares.”
 
 The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:
 
 December
      31, 2007
            December
      31, 2006Assets
      and liabilities
            USD
      0.1370:
              RMB1
            USD
      0.12820:
              RMB1Statements
      of operations
              and
      cash flows for the
              period/year
      ended
            USD
      0.1314:
              RMB1
            USD
      0.12557:
              RMB1
 
 No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.
 
 Inflation
 
 We
believe that inflation has not had a material effect on our operations to
date.
 
 ITEM 8.
            FINANCIAL
      STATEMENTS
 
 The
Consolidated Financial Statements are included in this Annual Report on Form
10-K beginning on Page F-1.
  33
  ITEM
9.                 CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
  As approved by our board of directors, we
dismissed Jimmy C.H. Cheung & Co. (“Cheung & Co.”) as our independent
auditors effective October 19, 2007.  Cheung & Co. served as our
independent auditors for the fiscal years ended December 31, 2006 and December
31, 2005, and the interim periods since the quarter ended September 30,
2005.  Cheung & Co.’s reports on our financial statements for the
fiscal years ended December 31, 2006 and December 31, 2005 (the “Reports”) did
not contain an adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting
principles.
  During
the fiscal years ended December 31, 2006 and December 31, 2005, and until Cheung
& Co’s dismissal, there were no disagreements with Cheung & Co. within
the meaning of Item 304 of Regulation S-B or any matter of accounting principles
or practices, financial disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Cheung & Co.’s satisfaction, would have
caused Cheung & Co. to make reference to the subject matter of the
disagreements in connection with its Reports.
  During
the fiscal years ended December 31, 2006 and December 31, 2005, and until Cheung
& Co.’s dismissal, there were no “reportable events” (as such term is
defined in Item 304(a)(1)(v) of Regulation S-B).
 
 On
October 23, 2007, we filed a Current Report on Form 8-K disclosing the dismissal
of Cheung & Co. We requested Cheung & Co. to review the disclosure
contained therein and asked Cheung & Co. to furnish us with a letter
addressed to the Commission containing any new information, clarification of the
Registrant's expression of Cheung & Co.’s views, or the respects in which
Cheung & Co. does not agree with the statements contained herein. Such Form
8-K indicated that we would file Cheung & Co.’s letter by amendment at a
later date. A copy of Cheung & Co.’s letter was filed as an exhibit to
Amendment No. 1 to such Form 8-K on November 1, 2007.
  On
December 12, 2007, we engaged Goldman Parks Kurland Mohidin , LLP (“GPKM
LLP”) as our Registered Independent Public Accounting Firm.  This
action was also approved by our board of directors.  During our two
most recent fiscal years and any subsequent interim period prior to the
engagement of Goldman Parks, neither us nor anyone on our behalf consulted
with GPKM regarding either (i) the application of accounting principles to a
specified transaction, either contemplated or proposed, or the type of audit
opinion that might be rendered on our financial statements, or (ii) any matter
that was the subject of a “disagreement” or a “reportable
event.”
 
 ITEM
9A(T). CONTROLS AND PROCEDURES
 
 Evaluation
of Internal Controls and Procedures
 
 We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under
the Exchange Act) that are designed to ensure that
information  required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including to the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
 
 As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer, and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2007. Based on that evaluation, our management
concluded that as of December 31, 2007, our disclosure controls and procedures
were not effective because of  the material weaknesses in our internal
control over financial reporting discussed immediately below under the caption
“Management’s Report on Internal Control over Financial Reporting”
 
 Management’s
Report on Internal Control over Financial Reporting
 
 Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. The Company's internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
 
 Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
  34
  Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on
that evaluation, our management concluded that as of December 31, 2007, our
internal control over financial reporting was not effective because of the
material weaknesses described below.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the registrant's annual or interim financial statements will not
be prevented or detected on a timely basis.  In its assessment of the
Company’s internal control over financial reporting as of December 31,
2007, management determined that our internal control over financial reporting
was subject to the following material weaknesses:
 
 Inadequate
staffing and supervision within the accounting operations of our
company-The relatively small number of employees who are responsible for
accounting functions prevents us from segregating duties within our internal
control system.  The inadequate segregation of duties is a weakness because
it could lead to the untimely identification and resolution of accounting and
disclosure matters or could lead to a failure to perform timely and effective
reviews.
  Lack of
expertise in U.S accounting principles among the personnel in our Chinese
headquarters- Our books are maintained at our executive offices in the City of
Harbin, then translated into English and adjusted to reflect U.S accounting
principles at our executive offices in Los Angeles.  The lack of personnel
in our Harbin office who are trained in U.S. accounting principles is a weakness
because it could lead to improper classification of items and other failures to
make the entries and adjustments necessary to comply with U.S.
GAAP.
 
 Lack of
Internal Audit
System - The company lacked of internal audit department, which was
ineffective in preventing and detecting control lapses and errors in the
accounting of certain key areas like revenue recognition, purchase approvals,
inter-company transactions, cash receipt and cash disbursement authorizations,
inventory safeguard and proper accumulation for cost of products, in accordance
with the appropriate costing method used by the company.
 
 The
Company’s management has identified the steps necessary to address the material
weaknesses existing in 2007 described above, as follows:
 
 1.
              Hiring
      additional accounting and operations personnel and engaging outside
      contractors with technical accounting expertise, as needed, and
      reorganizing the accounting and finance department to ensure that
      accounting personnel with adequate experience, skills and knowledge
      relating to complex, non-routine transactions are directly involved in the
      review and accounting evaluation of our complex, non-routine
      transactions;
 
 2.
              Involving
      both internal accounting and operations personnel and outside contractors
      with technical accounting expertise, as needed, early in the evaluation of
      a complex, non-routine transaction to obtain additional guidance as to the
      application of generally accepted accounting principles to such a proposed
      transaction;
 
 3.
              Documenting
      to standards established by senior accounting personnel and the principal
      accounting officer the review, analysis and related conclusions with
      respect to complex, non-routine
transactions;
 
 4.
              Requiring
      senior accounting personnel and the principal accounting officer to review
      complex, non-routine transactions to evaluate and approve the accounting
      treatment for such transactions;
 
 5.
              Interviewing
      prospective new Directors for our Board including a member who is
      appropriately credentialed as a financial expert with a goal to establish
      both an Audit and Compensation committee as well as sufficient independent
      Directors; and
 
 6.
              Evaluating
      the internal audit function in relation to the Company’s financial
      resources and requirements.
 35
  This
Annual Report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this Annual Report.
 
 Changes
in Internal Controls
 
 There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our international
control over financial reporting.
  ITEM
      9B.
            OTHER
      INFORMATION
 
 Entry
into a Material Definitive Agreement
 
 As
reported on our Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 7, 2008, we entered into a stock purchase
agreement on December 31, 2007 to acquire 90% of the outstanding equity
interests of Hong Yuan and Sheng Yu (the “Acquisition”) from their owners (the
“Xing An Shareholders”) for $30,000,000 in the form of our promissory notes and
80,000,000 shares of our common stock (subject to proportional adjustments in
the event of subdivision, combination or additional of our common stock). The
closing of the transactions contemplated by the stock purchase agreement was
contingent upon, among other conditions, (i) the appointment of an escrow agent
pursuant to an escrow agreement to hold the common shares issued to the Xing An
Shareholders, and (ii) the appointment of a trustee pursuant to a trust
agreement under which the remaining 10% of Hong Yuan and Sheng Yu’s equity
interests not being acquired by us would be placed in trust for our
benefits.
 
 On April
4, 2008, we completed the Acquisition and, pursuant to the terms of the stock
purchase agreement, issued our promissory notes in the aggregate of $30,000,000
and 8,000,000 common shares (as proportionally adjusted following our 10-to-1
reverse stock split in January 2008) to the Xing An Shareholders. Concurrently,
we entered into an escrow agreement with the Xing An Companies, the Xing An
Shareholders and U.S. Bank National Association as escrow agent, pursuant to
which the 8,000,000 common shares are placed in escrow as security for certain
indemnification obligations of the Xing An Shareholders in connection with the
Acquisition. Additionally, we entered into a trust agreement with the Xing An
Shareholders and Anping Cang as trustee, pursuant to which all of the beneficial
interests to the 10% of the registered capital in the Xing An Companies still
held by the Xing An Shareholders are placed in trust for the benefit of
Songzai.
 
 The
following is a brief description of the terms and conditions of the promissory
notes, the escrow agreement and the trust agreement that are material to the
Company:
  36
  The
Promissory Notes
  We issued
a series of promissory notes to the Xing An Shareholders in proportion to their
respective ownership percentages of the Xing An Companies that we have acquired.
The promissory notes bear no interests and are payable in two installments, the
first due six months after the closing of the Acquisition in the amount of
$18,000,000 and the second on the first anniversary of the closing of the
Acquisition in the amount of $12,000,000, provided that the promissory notes
will be immediately due and payable on the completion of a financing of at least
$30,000,000.
 
 The
foregoing description of the promissory notes is qualified in its entirety by
the contents of the promissory notes, a form of which is attached as Exhibit 4.1
to this Annual Report.
 
 The
Escrow Agreement
 
 Under the
terms of the stock purchase agreement, the Xing An Shareholders agree to
indemnify the Company against certain claims arising from any material breach or
failure to perform under the stock purchase agreement. Accordingly, the
8,000,000 shares issued to them at the closing of the Acquisition are placed
into escrow for two years pursuant to the escrow agreement as security for these
indemnity obligations.
 
 The
following is a brief description of the terms and conditions of the escrow
agreement that are material to Songzai:
 
 (1)           While
in escrow, the escrowed shares are not subject to any lien, attachment, trustee
process or any other judicial process of any creditor of any party to the escrow
agreement.
 
 (2)           While
in escrow, any securities distributed based on or in exchange for any of the
escrowed shares are to be issued in the name of the escrow agent or its nominee,
and delivered to the escrow agent to be held in escrow together with the
escrowed shares. Any distribution (other than securities) based on the escrow
shares shall be distributed to the Xing An Shareholders.
 
 (3)           While
in escrow, the escrow agent may, at its discretion, vote the escrowed shares
pursuant to the written request of the Xing An Shareholders pertaining their pro
rata portion of the escrowed shares.
 
 (4)           While
in escrow, the escrowed shares may not be assignable or transferable, unless
otherwise required by operation of law.
 
 (5)
            While
      in escrow, the escrowed shares may only be distributed as
      follows:
 
 (i)           pursuant
to written instruction of both Songzai and the Xing An
Shareholders;
 
 (ii)           within
5 business days after the first day of each calendar quarter after April 4, 2008
(each a “Interim Distribution Date”), to each Xing An Shareholder in such number
of the escrowed shares then held in escrow that such owner may sell on the
relevant Interim Distribution Date pursuant to Rule 144 promulgated under the
Securities Act of 1933, registered in the name of such owner; provided, however,
if the escrow agent is notified of a claim covered by the Xing An Shareholders’
indemnity obligations under the stock purchase agreement, the escrow agent must
retain in escrow after the relevant Interim Distribution Date such number of the
escrowed shares having a value (as defined in Section 4 of the escrow
agreement) equal to 150% of the amount of the indemnity claim. These share are
to remain in escrow and can only be distributed with the written instruction of
both Songzai and the Xing An Shareholders;
 
 (iii)           within
5 business days after the second anniversary from April 4, 2008, to the Xing An
Shareholders all of the escrowed shares then held in escrow, registered in the
name of the owners; provided, however, if the escrow agent is notified of a
claim covered by the Xing An Shareholders’ indemnity obligations, the escrow
agent must retain in escrow after the relevant Interim Distribution Date such
number of the escrowed shares having a value (as defined in Section 4 of
the escrow agreement) equal to 150% of the amount of the indemnity claim. These
shares are to remain in escrow and can only be distributed with the written
instruction of both Songzai and the Xing An Shareholders; and
 
 (iv)           within
five business days after receipt of a certification from Songzai to the escrow
agent that the Acquisition has been rescinded, did not take effect or has been
deemed to have not been completed, to Songzai all of the escrowed shares then
held in escrow, registered in the name of Songzai.
  37
  (6)           Songzai
shall pay the escrow agent for its services and reimburse the escrow agent for
its reasonable expenses (including reasonable attorney’s fees and expenses)
incurred in connection with the performance of its duties under the escrow
agreement.
 
 (7)           Songzai
shall indemnify the escrow agent for, and hold it harmless against, any loss,
liability or expense incurred without gross negligence or willful misconduct on
the part of the escrow agent, arising out of or in connection with its carrying
out of its duties under the escrow agreement.
 
 The
foregoing description of the escrow agreement is qualified in its entirety by
the contents of the escrow agreement attached as Exhibit 10.1 to this Current
Report on Form 8-K.
 
 The
Trust Agreement
 
 Under the
terms of the stock purchase agreement, the Xing An Shareholders agree to
transfer into a trust, at the closing of the Acquisition , the 10% equity
interests in the Xing An Companies that we did not acquire. These non-acquired
equity interests are held in the trust, created by the trust agreement, by the
trustee for the benefits of Songzai as the sole beneficiary of the
trust.
 
 The
following is a brief description of the terms and conditions of the escrow
agreement that are material to Songzai:
 
 (1)           During
the term of the trust agreement, we are entitled to all of the rights, powers,
privileges and benefits to and derived from the entrusted equity interests of
the Xing An Companies, including voting and dividend rights.
 
 (2)           The
trustee shall act, with respect to the entrusted equity interests, in accordance
with the our written instructions, and we may directly exercise the voting
rights to the entrusted equity interests pursuant to a power of attorney from
the trustee.
 
 (3)
            The
      trust may be terminated if and
when:
 
 (i)
            the
      entrusted equity trust may be legally transferred to Songzai in accordance
      with then applicable Chinese law and regulations, and is accordingly
      transferred to us;
 
 (ii)
            the
      existence or the purpose of the trust violates then applicable Chinese law
      or regulations; or
 
 (iii)
            the
      intent and purpose of the trust can no longer be achieved by the trust
      agreement and/or the trust.
 
 The
foregoing description of the trust agreement is qualified in its entirety by the
contents of the trust agreement attached as Exhibit 10.2 to this Current Report
on Form 8-K.
 
 Except
for the stock purchase agreement, the promissory notes, the escrow agreement and
the trust agreement, as well as the transactions contemplated by these
agreements, neither Songzai nor our directors and officers had any material
relationship with the Xing An Companies or the Xing An Shareholders prior to the
closing of the Acquisition.
 
 Completion
of Acquisition or Disposition of Assets
 
 As
described under “Entry into a Material Definitive Agreement” above, we completed
the acquisition of the Xing An Companies on April 4, 2008. In connection with
the Acquisition, we issued 8,000,000 shares of our common stock to the Xing An
Shareholders, as a result of which the Xing An Shareholders collectively own
approximately 53.57% of Songzai’s issued and outstanding common shares and have
become our controlling shareholders. After the closing of the Acquisition, Hong
Yuan and Sheng Yu have become our subsidiaries, and our business operations now
consist of the operations of three coal mines in the PRC.
 
 Description
of the Acquired Business
 
 Heilongjiang Xing An Hong
Yuan Coal Mining Co., Ltd.
 
 Heilongjiang
Xing An Group Hong Yuan Coal Mining Co., Ltd. (“Hong Yuan”) was originally
organized as a limited liability company under the laws of the PRC on August 18,
2003. After the Xing An Acquisition, it has been granted the Certificate of
Approval for Establishment of Enterprises with Foreign Investment by the
Government of Heilongjiang Province on March 24, 2008 (No. 2300002414). Its
registered address is Xi Lin Ji Town, Mo He County, Da Xing’an Mountain
District, Heilongjiang Province. Hong Yuan operates the Hong Yuan coal mine
under license from Heilongjiang Administration of Land and Resources granting
Hong Yuan mining rights, with an estimated coal reserve of 5.34
million tons reported as of June 30, 2007 and for which the company is licensed
to produce up to 450,000 tons of coal annually.
  38
  Heilongjiang Xing An Sheng
Yu Mining Co., Ltd.
  Heilongjiang
Xing An Group Sheng Yu Coal Mining Co., Ltd. (“Sheng Yu”) was originally
organized as a limited liability company under the laws of the PRC on July 28,
2003. After the Xing An Acquisition, it has been granted the Certificate of
Approval for Establishment of Enterprises with Foreign Investment by the
Government of Heilongjiang Province on March 24, 2008 (No. 2300002415). Its
registered address is Cross Area between Zhenxing Road and Zhonghua Road, Xi Lin
Ji Town, Mo He County, Da Xing’an Mountain District, Heilongjiang Province.
Sheng Yu operates the Sheng Yu coal mine under license from Heilongjiang
Administration of Land and Resources granting Sheng Yu mining rights, with an
estimated coal reserve of 3.54 million tons reported as of June 30,
2007 and for which the company is licensed to produce up to 150,000 tons of coal
annually.
 
 Geographical Description of
the Hong Yuan and Sheng Yu Mines
 
 The Hong
Yuan and Sheng Yu coal mines (collectively the “Xing An mines”) are adjacent
underground mines. Both mines contain four principal coal seams – No. 3, No. 4,
No. 5 and No. 6 – ranging from 1.7 to 4.0 meters in thickness.
  Due to
the significant costs of coal transport, the location of a coal mine can
significantly affect its profitability and competitiveness. We believe that the
Xing An mines are well-situated given their existing access to both railway and
public roads, as well as the demand for coal in Northeastern China/Heilongjiang
Province driven by the region’s rapid economic growth, and the substantial costs
involved in transporting coal to these regions from major coal-producing
provinces such as Shaanxi Province, Shanxi Province and the Inner Mongolia
Autonomous Region.
 
 The Xing
An mines are located in the Da Qing’an Ling Mountain Range in Northeastern
China, just outside of the town of Mohe which is less than two miles from the
Russian border:
 
 
  Hong
Yuan’s principal office is located at No.9 Renmin Road, Jiadedaqi, Heilongjiang
Province. The entire premises, approximately 87,700 square feet, also houses
Sheng Yu’s principle office and serves as residence for some of the employees of
the Xing An Companies. Hong Yuan entered into a lease agreement for the premises
in July 2005, which expires in July 2015, with annual rent at RMB 150,000
(approximately $20,550). After the closing of the Acquisition, this office
continues to control the mining operations of the Xing An mines as a branch
office of the Company.
  39
  Coal
Production
 
 The
principal coal reserves at the Xing An mines consist of prime quality,
low-sulphur coal, capable of yielding a product with an ash content as low as
5.79%. Such coal is suitable for both industrial use (such as large-scale
electric power plants and industrial boilers for cement factories), and for home
heating and home boilers. The following table sets out the sulphur and ash
content, and calorific value of the coal mined from the Xing An
mines:
 
 Sulphur
              Content
              (%)
      Dry
            
            Ash
              Content
              (%)
      Dry
            
            Calorific
              Value
              (kcal/
      kg
              gross)
      DryCoal
      Seam No. 3
            
            0.60
            
            39
            
            4100Coal
      Seam No. 4
            
            0.70
            
            21
            
            5500Coal
      Seam No. 5
            
            0.80
            
            29
            
            5300Coal
      Seam No. 6
            
            0.70
            
            22
            
            5500
 
 The Xing
An mines together produced approximately 712,690 tons of coal during fiscal
2007, an increase of 18,188 tons or 2.6%, as compared with their total coal
production in 2006.
 
 Current
mining operations at the Xing An mines take advantage of the region’s weather
conditions. For approximately 100 days from October to April, the frigid weather
causes permafrost at the mines, thereby enabling coal to be extracted by
dynamite mining. Additionally, the permafrost eliminates the need for any shaft
support. Thus, mining is operated during the entire 100-day period, with three
shifts of eight hours each per day. To extract coal, controlled amounts of
explosive charges are placed into holes that are drilled into a coal seam. After
the explosives separate coal from the seam, a backhoe loader scoops the coal up
from the ground and into a waiting haul truck with 8-ton capacity. Once the
truck is loaded, it is driven to the surface where the coal is emptied on to a
sorting machine. The sorting machine sorts the coal into three sizes and
separates out rock through centrifugal action.
 
 Brokered
Coal
 
 In addition to mining coal, Hong Yuan
also brokers coal from small independent mines operating in the surrounding
area. Because operators of these small mines often lack the means to transport
coal from the mines, they must sell to Hong Yuan at competitive pricing. Hong
Yuan currently brokers approximately 400,000 tons of coal annually at
approximately the same costs as the coal that the company mines. The brokered
coal enables Hong Yuan to fulfill its sales obligations despite the short
100-day mining season.
 
 Sales and
Marketing
 
 The
majority of the Xing An Companies’ sales are generated by sales contracts signed
prior to the beginning of each mining season, which is consistent with local
coal industry practice. These sales contracts generally specify the quantities
and timing of purchases planned over a time period generally no longer than one
year. The balance of the sales is from purchase orders issued by customers that
have additional requirement for coal during the year.
 
 Coal is
sold to electric power plants, metallurgical mills and fuel trading companies.
Net coal sales represent the invoiced value of coal sold and are net of sales
taxes, transportation costs and various miscellaneous fees relating to sales if
the invoiced value includes transportation costs to the customers. Coal is sold
to major customers with long-term relationships on a delivery against cash
basis. Other customers are required to pay for the coal before taking delivery.
Coal sales are concentrated in Heilongjiang and Jilin Provinces in Northeastern
China. The following table sets out the net coal sales by geographic region for
the years ended December 31, 2005, 2006 and 2007:
  40
  
 Year
      Ended December 31,2005
            
            
            2006
            
            
            2007Net
              Sales
            
            
            % of Net
              Coal Sales
            
            
            Net
              Sales
            
            
            % of Net
              Coal Sales
            
            
            Net
              Sales
            
            
            % of Net
              Coal Sales(RMB
              million)
            
            
            
            
            
            (RMB
              million)
            
            
            
            
            
            (RMB
              million)Heilongjiang
      Province
            
            
            17
            
            
            
            56.3
            
            
            
            120
            
            
            
            71
            
            
            
            200
            
            
            
            76
            %Jilin
      Province
            
            
            13
            
            
            
            43.7
            
            
            
            50
            
            
            
            29
            
            
            
            63
            
            
            
            24
            %Total
            
            
            30
            
            
            
            100
            
            
            
            170
            
            
            
            100
            
            
            
            263
            
            
            
            100
            %
  The Xing
An Companies’ top three (3) customers by value, who accounted for 98 % of
revenue as of December 31, 2007, are as follows:
 
 ·
            Heilongjiang
      TieRan Coal Industrial Company was the largest customer in fiscal 2007.
      Sales to this customer accounted for 49% of Xing An’s 2007
      revenue.
  ·
            Zhongliang
      Biochemical Energy Resources Co., Ltd. was the second largest customer.
      Sales to this customer accounted for 25% of the 2007
    revenue.
 
 ·
            Changchun
      Railway Vehicle Co., Ltd. was the third largest customer in fiscal 2007.
      Sales to this customer accounted for 24% of the 2007 revenue.
 Sales
personnel of Xing An conducts routine customer visits and customer satisfaction
surveys. Xing An has established long-term business relationship with their
major customers, and the relationship is stable.
 
 Product
Pricing
 
 Coal
prices are generally determined by market price or are based on contractual
terms. However, the price for certain thermal coal used for power generation is
determined among coal suppliers and power plant buyers in accordance with the
pricing guidance published by the PRC Government.
 
 Currently,
Xing An set pricing by taking into account: (i) prices in the relevant
local coal markets (inclusive of transportation costs); (ii) grade and
quality of the coal; and (iii) relationships with customers. Most of the
transportation costs are borne by the customers. The average price for our raw
coal in 2007 is RMB 225 per ton, which is RMB 25 higher or 12.5% higher than the
average price in 2006 and in 2005. The average prices for our raw coal in both
2006 and 2005 are RMB 200 per ton.
 
 Product
Delivery
 
 All of
Xing An’s major customers are located in Northeastern China, in the provinces of
Heilongjiang and Jilin. Coal is transported to these customers principally by
railways. Xing An passes on a portion of the maintenance costs for the private
railway tracks to the customers.  In 2007, about 1,167,000 tons of our
raw coal products were delivered to our customers by railways; in 2006, about
851,000 tons of our raw coal products were delivered to our customers by
railways.
 
 Sources and Availability of
Raw Materials and the Principal Suppliers
 
 The Xing
An Companies purchase certain materials to conduct its coal mining and
processing operations, consisting principally of: (i) tires for mining
equipment and vehicles; (ii) lift cylinders; and (iii) iron boards.
Tires and lift cylinders are sourced principally from Mohe County Yongsheng
Metal Products Shop, and iron boards principally from Mohe Shuangli Steel Store.
The price of these items are set at market rates or determined through
negotiations. We believe that the Xing An Companies have established stable
cooperative relationships with these suppliers to ensure a reliable supply of
the materials required for their mining operations. Additionally, these items
are readily available from numerous alternative suppliers.
  41
  Employees
  As of
March 31, 2008, the Xing An Companies collectively had 47 full-time employees,
including their management personnel, none of whom are represented by any
collective bargaining agreements. During each mining season, there are up to 374
miners working the two mines, none of these miners are employees.  The
Xing An Companies contract with various general contractors who provide the
miners and who are fully responsible for the miners’ wages, including all
state-mandated insurance. The Xing An Companies have not experienced a work
stoppage, and the management believes that relations with both the employees and
the miners are good.
 
 Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant
 
 The
discussion of the Acquisition under “Entry into a Material Definitive Agreement”
above, including the description of the promissory notes, are incorporated in
this section by reference.
 
 Changes
in Control of Registrant
 
 As more
fully described under “Entry into a Material Definitive Agreement” above, in
connection with our acquisition of the Xing An Companies, we issued 8,000,000
shares of our common stock to the Xing An Shareholders, as a result of which the
Xing An Shareholders collectively own approximately 53.57% of Songzai’s issued
and outstanding common shares and have become our controlling
shareholders.
 
 Financial Statements of Businesses
Acquired
 
 The
audited consolidated financial statements of the Xing An Companies as of
December 31, 2007 and 2006 are filed as Exhibit 99.4 to this Annual Report and
are incorporated herein by reference.
 
 Pro
Forma Financial Information
 
 Incorporated
by reference to Exhibit 99.5 filed herewith.
 
 
 PART III
  ITEM
    10.
            DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE
  The
following table includes the names, age, positions held, and dates of
appointment of our executive officers and directors as of December 31, 2007:
  Name
            
            Age
            
            Position
            
            Date
      of AppointmentHongwen
      Li
            
            
            51
            
            
            Chairman
      of the Board of Directors
            
            
            December
      15, 2003Hongjun
      Li
            
            
            45
            
            
            President,
      Chief Financial Officer* and Director
            
            
            December
      15, 2003September
      26, 2006*Yvonne
      Zhang
            
            
            33
            
            
            Interim
      Chief Financial Officer
            
            
            August
      13, 2007Huan
      Liu
            
            
            27
            
            
            Secretary
            
            
            July
      12, 2007
 
 
 Business
Experience Descriptions
  Hongwen
Li, Chairman of the Board
 
 Mr.
Hongwen Li has served as chairman of our board of directors since the share
exchange transaction with Yong Heng was completed in December 2003. Mr. Li
is the founder of Fellow Workers Group, a holding company with subsidiaries in
different industries such as HuaFeng Trading Co. in the field of Chinese-Russian
trading, SongZai Metal in the field of heavy industry, SenDa Hotel in the field
of real estate, and HeiHe JinChang Coal Mine in the field of mining, etc. Within
several years, Mr. Li’s company grew from a small corporation with several
employees to a holding company with more than 300 employees.
 
 42
  Hongjun Li, President and Director
 
 Mr.
Hongjun Li has served as a director and our president since the share exchange
transaction with Yong Heng was completed in December 2003. Mr. Li also served as
our acting chief financial officer from September 2006 until Ms. Yvonne Zhang
was appointed as interim chief financial officer in August 2007. His knowledge
in business management was applied to his organization of Rui Gen Te Industrial
Resources Co. in the U.S. in 1996. He is the Registered Agent of the company. At
the same time, Mr. Li set up Heilongjiang Song Zai Metal Co., Ltd., which
is another Chinese company in the business of trading metal parts between China
and Russia. Mr. Hongjun Li is the brother of Mr. Hongwen Li, chairman
of our board of directors.
 
 Yvonne
Zhang, Interim Chief Financial Officer
 
 Ms. Yvonne was appointed as our interim
chief financial officer on August 18, 2007. In that position, she has been
working ad hoc for the preparation of our financial statements included in our
quarterly and Annual Reports, as well as advising the Company on our internal
control.  Ms. Zhang is also the owner of V Trust Accounting and Tax
Services, a CPA firm that provides tax return preparation, accounting and
auditing services.  Prior to V Trust, she worked as the
auditor-in-charge for various CPA firms that primarily audits public
companies.  Ms. Zhang has over eight years experience in auditing, tax
return preparation and accounting services.  Ms. Zhang is a
licensed CPA andreceived her bachelor degree in accountancy from
California State University at Northridge.
 
 Huan
Liu, Secretary
 
 Mr. Huan Liu graduated from Harbin
Engineering University in 2005, where he received a Bachelor’s degree in both
finance and law. In March 2005, Mr. Liu joined the Company as personal assistant
to Mr. Hongwen Li, chairman of our board of directors. From April 2006 to June
2007, Mr. Liu was a manager in the Company's finance department.
 
 Family
Relationships
 
 Mr. Li
Hongwen and Mr. Li Hongjun are brothers.
 
 Involvement
in Certain Legal Proceedings
  None of
the directors or executive officers has, during the past five
years:
 
 (a)
            Had
      any bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer either at the time of
      the bankruptcy or within two years prior to that
  time;
 
 (b)
            Been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;
 
 (c)
            Been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities, futures, commodities or
      banking activities; and(d)
            Been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.
 
 Compliance
with Section 16(a) of the Exchange Act
 
 Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and certain of our officers, as well as persons who own more than 10% of a
registered class of our equity securities (“Reporting Persons”), to file reports
with the Securities and Exchange Commission. To our knowledge, based solely on
review of the copies of such reports furnished to us and written representations
that no other reports were required, during the fiscal year ended December 31,
2007 all Section 16(a) filing requirements applicable to its officers, directors
and greater than ten percent shareholders were complied with, except that Form
3s were inadvertently filed late by Huan Liu on July 20, 2007 and by Yvonne
Zhang on August 29, 2007.
  43
  Code
of Ethics
 
 The
Company has not adopted a formal code of ethics. However, the Company intends to
develop a formal code of ethics that will apply to all of its employees
(including its executive officers). Upon completion, the Company will provide to
any person, without charge and upon request, a copy of the code of
ethics.
  Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors
  There
have been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors.
  Audit Committee Expert
 
 Our Board
of Directors does not have a separate audit committee. The board has determined
that it does not have a member of the board that qualifies as an “audit
committee financial expert”, and is “independent” as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
 
 We
believe that the members of our board of directors are collectively capable of
analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. However, we are considering
appointing an independent qualified financial expert to our board of directors
in order to strengthen and improve its internal disclosure controls and
procedures.
 
 ITEM 11.
            EXECUTIVE
      COMPENSATION
 
 Summary
of Compensation
 
 The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2007 and
2006 by our principal executive officer, principal financial officer, and three
most highly compensated executive officers whose total compensation exceeded
$100,000 (if any) during the fiscal year ended December 31, 2007 and
2006.
 
 Summary
Compensation
  SUMMARY
      COMPENSATION TABLEName
      and
              Principal
              Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              (
      $)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            
            Nonqualified
              Deferred
              Compensation
      Earnings
              ($)
            
            All
      Other
              Compensation
              (
      $)
            
            Total
              ($)Hongjun
      Li,
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-CEO
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Yvonne
      Zhang,
            
            
            2007
            
            
            9,167
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            9,167Interim
      CFO (1)
            
            
            2006
            
            
            n/a
            
            
            n/a
            
            
            n/a
            
            
            n/a
            
            
            n/a
            
            
            n/a
            
            
            n/a
            
            
            n/a
  (1) Ms.
Zhang became our interim chief financial officer on August 1,
2007.
 
 Outstanding
Equity Awards at Fiscal Year-End
  There are
no unexercised options, unvested stock awards or equity incentive plan awards
for any of the above-named executive officers outstanding as of December 31,
2007.
 
 Compensation
of Directors
 
 We did
not pay any compensation to members of our board of directors for fiscal year
2007.
 
 44
  Grants
of Plan-Based Awards
 
 We did
not make any grants of plan-based awards to our directors or named executive
officers during our fiscal year-ended December 31, 2007.
 
 Outstanding
Equity Awards
 
 There are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our directors or named executive officers outstanding as of
December 31, 2007.
 
 Option
Exercises and Stock Vested
 
 There
were no exercises of stock options, stock appreciation rights, or similar
instruments, and no vesting of stock, including restricted stock, restricted
stock units and similar instruments, during the last completed fiscal year for
any of our directors or named executive officers.
 
 Pension
Benefits
 
 We
currently have no plans that provide for payments or other benefits at,
following, or in connection with retirement of our directors or named executive
officers.
 
 Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
 
 We currently have no defined contribution or other plans that provide for the
deferral of compensation to our directors or named executive officers on a basis
that is not tax-qualified.
 
 Potential
Payments upon Termination of Employment and Change-In-Control
Arrangements
 
 Other
than any employment agreements described in this report, we currently have no
contract, agreement, plan or arrangement, whether written or unwritten, that
provides for payments to a named executive officer at, following, or in
connection with any termination, including without limitation resignation,
severance, retirement or a constructive termination of a named executive
officer, or a change in control of the registrant or a change in the named
executive officer’s responsibilities, with respect to each named executive
officer.
 
 Employment
Agreements
  In
connection with the appointment of Ms. Yvonne Zhang as our interim chief
financial officer in August 2007, we entered in to a one-year employment
agreement with her which expires in July 2008. The agreement provides for a
yearly salary of $22,000 payable in monthly installments on the first day of the
month, as well as reimbursement of expenses. Under the terms of the employment
agreement, Ms. Zhang has the right to terminate her employment by giving us
prior notice with or without cause, and we hold an equal right subject to a
longer notice period. A copy of the employment agreement is included as an
exhibit to this Annual Report as Exhibit 99.7.
 
 Indemnification
of Officers and Directors
 
 The only
statutes, charter provisions, by-laws, contracts or other arrangements under
which any controlling person, director or officer of the Company is or may be
insured or indemnified against any liability which he may incur in that
capacity, are as follows:
  (1)           Sections
78.037, 78.7502, 78.751, and 78.752 of the Nevada Revised Statutes offer
limitation of liability protection for officers and directors, indemnification
protection of officers, directors, employees and agents of a Nevada corporation,
and provide that Nevada corporations may purchase insurance to protect
directors, officers, employees and agents. They generally provide
that:
 
 (a)           a
Nevada corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful;
 
 45
 (b)           a
Nevada corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper; and
 
 (c)           to
the extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter
therein, the corporation shall indemnify him against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with the
defense.
 
 (2)           The
Company's articles of incorporation provides that to the fullest extent allowed
by law, the directors and executive officers of the Company shall be entitled to
indemnification from the Company for acts or omissions taking place in
connection with their activities in such capacities.
 
 (3)           The
Company's by-laws provides indemnification rights to the Company's officers,
directors or controlling persons in a manner similar to the Nevada statutes
described above.
 
 (4)           Although
Nevada law provides that Nevada corporations may purchase liability insurance to
protect officers and directors, the Company has no directors and officers
insurance or any other type of insurance that insures its officers, directors or
controlling persons against liabilities that may arise against them those
capacities.
 
 ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  Securities
Authorized for Issuance under Equity Compensation Plan
 
 The
following table provides information as of December 31, 2007 with respect to
compensation plans, under which securities are authorized for issuance,
aggregated as to (i) compensation plans previously approved by stockholders, and
(ii) compensation plans not previously approved by stockholders.
  Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options,
              warrants
      and rights
            Weighted-average
              exercise
      price of
              outstanding
              options,
      warrants
              and
      rights
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation
              plans
      (1)Equity compensation plans
      approved by security holders
            --
            --
            --Equity compensation plans not
      approved by security holders
            --
      (2)
            --
            --Total
            --
      (2)
            --
            5,000,000
    (1)         As
      of December 31, 2007, we had the following equity compensation plan in
      effect:
 
 On March
14, 2006, we adopted a stock incentive plan for officers, directors, employees,
and consultants entitled the “2006 Stock Option/Stock Issuance Plan”
(hereinafter the “Plan”). The maximum number of shares that may be issued under
the Plan is 5 million shares of our common stock options. The Plan has not
previously been approved by security holders. Under this Plan, we may issue
common stock options to purchase common stock to certain of our officers,
directors and employees and consultants and to our subsidiaries. The Plan is
administered either by the compensation committee or a committee appointed by
the board of directors that is comprised of a combination of two or more
officers and/or members of the board of directors. The committee has full and
complete authority, in its discretion, but subject to the express provisions of
the Plan to approve the eligible persons nominated by our management to be
granted awards of common stock (“Awards”) or stock options, to determine the
number of Awards or stock options to be granted to an eligible person; to
determine the time or times at which or stock options shall be granted; to
establish the terms and conditions upon which Awards or stock options may be
exercised; to remove or adjust any restrictions and conditions upon Awards or
stock options; to specify, at the time of grant, provisions relating to
exercisability of stock options and to accelerate or otherwise modify the
exercisability of any stock options; and to adopt such rules and regulations and
to make all other determinations deemed necessary or desirable for the
administration of the Plan. As of December 31, 2007, there are 5 million shares
of our common stock options remaining available for future issuance under the
Plan.
 
 46
 (2)        
      50,000 stock options were granted to our prior legal counsel with an
      exercise price equal to the fair market value of our common stock as of
      the effective date of our retainer agreement with such counsel. As of
      December 31, 2007, none of these stock options were exercised, and these
      stock options are no longer
outstanding.
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 Security
Ownership Prior To Change Of Control
 
 As
discussed in Item 9B above (“Other Information”), we acquired Hong Yuan and
Sheng Yu on April 4, 2008 (the “Acquisition”), and in connection with the
acquisition of these two companies, we issued 8,000,000 shares of our common
stock to the Xing An Owners. As a result, the Xing An Owners became our
controlling shareholders and Hong Yuan and Sheng Yu became our
subsidiaries.
 
 The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 3, 2008, for each of the following persons, prior to
closing of our acquisition of Hong Yuan and Sheng Yu:
 
 •
            each
      of our directors and named officers prior to the closing of the
      Acquisition;
 
 •
            all
      of the directors and executive officers as a group prior to the closing of
      the Acquisition; and
 
 •
            each
      person who is known by us to own beneficially five percent or more of our
      common stock prior to the closing of the
  Acquisition.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In general, a person is deemed to be a "beneficial owner"
of a security if that person has or shares the power to vote or direct the
voting of such security, or the power to dispose or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which the person has the right to acquire beneficial ownership
within 60 days.  Shares of common stock subject to options, warrants
or convertible securities exercisable or convertible within 60 days of April 3,
2008 are deemed outstanding for computing the percentage of the person or entity
holding such options, warrants or convertible securities but are not deemed
outstanding for computing the percentage of any other person. Unless otherwise
indicated in the table, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the shareholder’s name.
 
 
 Name and
      Address of Beneficial Owner(1)
            Number of Shares(2)
            %
      of Class of Stock OutstandingCommon
              Stock
            Preferred
      Stock (3)
            Common
              Stock
      (4)
            Preferred
      StockHongwen Li, Chairman of the Board
      of Directors
            1,092,038
            400,000
            15.75%
            100%Hongjun
      Li, President and Director
            422,971
            -
            6.10%
            -Yvonne
      Zhang, Interim Chief Financial Officer
            -
            -
            -
            -Huan
      Liu, Secretary
            -
            -
            -
            -All
      Directors and Executive Officers as a
              Group (4)
      persons
            1,515,009
            400,000
            21.85%
            100%
  (1)
            Unless
      otherwise indicated, the address of the following stockholders is 20337
      Rimview Place, Walnut, California,
91789.
 
 (2)
            Security
      ownership information for beneficial owners is taken from statements filed
      with the Securities and Exchange Commission pursuant to information made
      known by the Company. There are no shares issuable to any beneficial
      owner, director or executive officer pursuant to stock options that are/or
      will become exercisable within 60 days of April 3,
  2008.
 
 47
 (3)
            Each
      share of preferred stock is convertible into 1 share of common stock (as
      adjusted in proportion to our January 2008 reverse stock split) and vote
      on an as converted basis with the shares of common stock on all matters
      presented to shareholders. The shareholdings of Mr. Hongwen Li, on a
      fully converted basis, when added to those of Mr. Hongjun Li, amount
      to approximately 26.12% of the issued and outstanding shares of common
      stock of the Company on a fully-converted
basis.
 
 (4)
            Based
      on 6,932,582 shares of common stock and preferred stock outstanding on
      April 3, 2008.
 
 Security
Ownership After Change Of Control
 
 The
following table sets forth information regarding the beneficial ownership of our
common stock after April 4, 2008, for each of the following persons, after
giving effect to the Acquisition:
 
 •
            each
      of our directors and named officers after the closing of the
      Acquisition;
 
 •
            all
      directors and named executive officers as a group after the closing of the
      Acquisition; and
 
 •
            each
      person who is known by us to own beneficially five percent or more of our
      common stock after the closing of the
  Acquisition.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. The percentage
of class beneficially owned set forth below is based on 14,932,582 shares of
common stock outstanding after April 4, 2008.
 
 Name and Address of Beneficial
      Owner(1)
            Number of Shares(2)
            %
      of Class of Stock OutstandingCommon
              Stock
            Preferred
      Stock (3)
            Common
              Stock
      (4)
            Preferred
      StockHongwen Li, Chairman of the Board
      of Directors
            1,092,038
            400,000
            7.31%
            100%Hongjun
      Li, President and Director
            422,971
            -
            2.83%
            -Yvonne
      Zhang, Interim Chief Financial Officer
            -
            -
            -
            -Huan
      Liu, Secretary
            -
            -
            -
            -Heilongjiang
      Xing An Mining Development Group Co., Ltd. (5)
            8,000,000
            -
            53.57%
            -Mingshu
      Gong (5)
            8,000,000
            -
            53.57%
            -Yunjia
      Yue (5)
            8,000,000
            -
            53.57%
            -Yunpeng
      Yue (5)
            8,000,000
            -
            53.57%
            -Guoqing
      Yue (5)
            8,000,000
            -
            53.57%
            -All
      Directors and Executive Officers as a
              Group (4)
      persons
            1,515,009
            400,000
            10.14%
            100%
 
 (1)
            Unless
      otherwise indicated, the address of the named beneficial owners is: 20337
      Rimview Place, Walnut, California,
91789.
 
 (2)
            Security
      ownership information for beneficial owners is taken from statements filed
      with the Securities and Exchange Commission pursuant to information made
      known by the Company. There are no shares issuable to any beneficial
      owner, director or executive officer pursuant to stock options that are/or
      will become exercisable within 60 days of April 4,
  2008.
 
 (3)
            Each
      share of preferred stock is convertible into 10 shares of common stock and
      vote on an as converted basis with the shares of common stock on all
      matters presented to shareholders. The shareholdings of Mr. Hongwen
      Li, on a fully converted basis, when added to those of Mr. Hongjun
      Li, amount to approximately 12.49% of the issued and outstanding shares of
      common stock of the Company on a fully-converted
  basis.
 
 (4)
            Based
      on 14,932,582 shares of Common Stock and Preferred Stock outstanding after
      April 4, 2008.
 
 (5)
            The
      address of these named beneficial owners is: No. 9 People Road, Jiagedaqi,
      Jiagedaqi District, Da Xing'an Mountain Region,
      Heilongjiang Province, PRC 165000. These named beneficial owners
      received shares of our common stock in connection with the Acquisition,
      which shares are held in escrow pursuant to an escrow agreement dated as
      of April 4, 2008, as security for these named beneficial owners’
      indemnification obligations in connection with the Acquisition. Mingshu
      Guo, Yunjia Yue, Yunpeng Yue and Guoqing Yue are also all shareholders and
      directors of Heilongjiang Xing An Mining Development Group Co., Ltd.
      (“Xing An Mining”), and thus indirectly own the shares of our common stock
      issued to Xing An Mining. Therefore, the number of shares reported as
      beneficially owned by Mingshu Guo, Yunjia Yue, Yunpeng Yue and Guoqing Yue
      include the shares held by Xing An
Mining.
 
 ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
 
 Since the
beginning of our last fiscal year, we were not a party to any transaction in
which a related person has or will have a direct or indirect material interest
and in which the amount involved exceeds $120,000 or one percent of the average
of our total assets at year end for fiscal 2007 and 2006, nor is any such
transaction currently proposed as of the date of this Annual
Report.
  48
  ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES
 
 As
approved by our board of directors, we dismissed Jimmy C.H. Cheung & Co.
(“Cheung & Co.”) as our independent auditors effective October 19,
2007.  Cheung & Co. served as our independent auditors for the
fiscal years ended December 31, 2006 and December 31, 2005 and for the
quarterly review for 2006. On October 19, 2007, we engaged Goldman Parks
Kurland Mohidin, LLP (“GPKM LLP”) as our outside independent accounting firm for
the fiscal years ended December 31, 2007.
 
 The
following table sets forth fees billed to us by our auditors during the fiscal
years ended December 31, 2007 and December 31, 2006 for:
(i) services rendered for the audit of our annual financial statements and
the review of our quarterly financial statements, (ii) services by our
auditor that are reasonably related to the performance of the audit or review of
our financial statements and that are not reported as audit fees,
(iii) services rendered in connection with tax compliance, tax advice and
tax planning, and (iv) all other fees for services rendered.
  December
              31,
      2007
            
            
            December
              31,
      2006(i)       Audit
      Fees
            
            $
            160,000
            
            
            $
            36,900(ii)      Audit
      Related Fees
            
            
            0
            
            
            
            0(iii)     Tax
      Fees
            
            
            0
            
            
            
            0(iv)      All
      Other Fees
            
            
            0
            
            
            
            0Total
      fees
            
            $
            160,000
            
            
            $
            36,900
 
 Fees for
audit services include fees associated with the annual audit and the review of
documents filed with the Securities and Exchange Commission including quarterly
reports on Form 10-Q and the Annual Report on Form 10-K. Audit-related fees
principally included accounting consultation and information system control
reviews. Tax fees
included tax compliance, tax advice and tax planning work.
 
 PART
IV
  ITEM 15.   EXHIBITS
 
 Financial
Statements
 
 The
following consolidated financial statements of Songzai are included in Part II,
Item 8 of this Report:
 
 Report of
Goldman Park Kurland Mohidin, LLP, Registered Independent Public Accounting
Firm
  Report of
Jimmy C.H. Cheung & Co., Registered Independent Public Accounting
Firm
  Consolidated
Balance Sheets at December 31, 2007 and 2006
  Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years
Ended December 31, 2007 and 2006
  Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2007 and
2006
  Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
  Notes to
Consolidated Financial Statements
 
 Financial
Statement Schedules
  Schedules
are omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.
 
 49
  Exhibits
 
 EXHIBIT INDEX
  Exhibit
              Number
            
            Description
 2.1
            Plan
      of Exchange, dated September 23, 2004 by which Heritage Companies, Inc.
      shall acquire Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Reng Gong Si.
      (1)
 
 2.2
            Purchase
      and Sale Agreement By and Among Songzai Metal Products Co. Ltd and Songzai
      International Holding Group, Inc. (“Songzai”) covering the acquisition of
      certain assets formerly owned by Heihe Jinchang Coal Mine Co., Ltd.
      (2)
 
 2.3
            Stock
      Purchase Agreement dated as of December 31, 2007 by and among Songzai,
      Heilongjiang Xing An Group Hong Yuan Coal Mining Co., Ltd. (“Hong Yuan”),
      Heilongjiang Xing An Group Sheng Yu Ming Co., Ltd. (“Sheng Yu”), and the
      holders of 100% of the equity interests of Hong Yuan and Sheng Yu (the
      “Xing An Owners”). (3)
 
 3.1
            Articles
      of Incorporation dated June 7, 2001.
(4)
 
 3.2
            Certificate
      of Amendment to Articles of Incorporation dated October 23, 2003.
      (4)
 
 3.3
            Articles
      of Exchange among Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Reng Gong Si
      and Songzai International Holding Group, Inc. 
  (5)
 
 3.4
            Certificates
      of Amendments to Articles of Incorporation, dated October 23, 2003.
      (5)
 
 3.5
            Certificate
      of Amendment to Articles of Incorporation dated July 16, 2004.
      (4)
 
 3.6
            Certificate
      of Designation, Preference and Rights of Convertible Preferred Stock dated
      January 9, 2006. (4)
 
 3.7
            Certificate
      of Change Pursuant to NRS 78.209 as filed with the Secretary of State of
      Nevada on January 7, 2008. (6)
 
 3.8
            By-laws.
      (4)
  4.1
            Form
      of the Promissory Note issued to the Xing An Owners (7)10.1
            Escrow
      Agreement dated as of April 4, 2008, by and among the Songzai, the Xing An
      Owners and U.S. Bank (7)10.2
            Trust
      Agreement dated as of April 4, 2008, by and among Songzai, the Xing An
      Owners and Anping Cang (7)
 21.1
            List
      of subsidiaries (7)
 
 23.1
            Consent
      of Goldman & Park, LLP (7)
 
 23.2
            Consent
      of Jimmy C.H. Cheung & Co. (7)
 
 23.3
            Consent
      of John T. Boyd Company, independent geologists
  (7)
 
 50
 31.1
            Section
      302 Certification by the Corporation’s Chief Executive Officer
      (7)
 
 31.2
            Section
      302 Certification by the Corporation’s Chief Financial Officer
      (7)
 
 32.1
            Section
      906 Certification by the Corporation’s Chief Executive Officer
      (7)32.2
            Section
      906 Certification by the Corporation’s Chief Financial Officer
    (7)
 
 99.1
            Coal
      Mining Right Permit issued by the Heilongjiang Province National Land and
      Resources Officer, dated December 31, 2005.
(4)
 
 99.2
            Coal
      Mining Right Permit issued by the Heilongjiang Province Economy Committee,
      dated December 31, 2005. (4)
 
 99.3
            Safe
      Production Certificate issued by the Heilongjiang Coal Safety Inspection
      Bureau, dated February 16, 2006.
(4)
 
 99.4
            Audited
      consolidated financial statements of Hong Yuan and Sheng Yu for the years
      ended December 31, 2007 and 2006, and accompanying notes to consolidated
      financial statements. (7)
 
 99.5
            Pro
      forma financial information. (7)
 
 99.6
            Press
      release dated April 23 , 2008.
(7)
 
 99.7
            Employment
      agreement between Songzai and Yvonne Zhang dated as of July 20, 2007.
      (7)
   (1)
            Incorporated
      by reference from Registrant’s Current Report on Form 8-K filed on January
      2, 2004(2)
            Incorporated
      by reference from Registrant’s Current Report on Form 8-K filed on April
      8, 2004.(3)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      January 7, 2008.(4)
            Incorporated
      by reference from the Registrant’s Annual Report on Form 10-KSB filed on
      March 31, 2006.(5)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on
      May 14, 2004.(6)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      January 10, 2008.(7)
            Filed
      herewith.
 
 
 
  51
  SIGNATURES
  Pursuant
to the requirements of section 13 or 15 (d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
  SONGZAI
      INTERNATIONAL HOLDING
                GROUP,
      INC.
                (Registrant)Date:
      April 23 , 2008
              By:
              /s/ Hongjun
      LiHongjun
      LiPresident
  Date:
      April 23 , 2008
              By:
              /s/ Yvonne
      ZhangYvonne
      ZhangInterim
      Chief Financial Officer
   In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 
 Name
            
            Title
            
            Date/s/ Hongwen
    Li
            
            Chairman
      of the Board of Directors
            
            April
      23 , 2008Hongwen
      Li/s/
      Hongjun Li
            
            President
      and Director
            
            April
      23 , 2008Hongjun
      Li/s/ Yvonne Zhang
            
            Interim
      Chief Financial Officer
            
            April
      23 , 2008Yvonne
      Zhang
    52
 
   INDEX
TO CONSOLIDATED FINANCIAL INFORMATION
 
 Report
      of Goldman Parks Kurland Mohidin, dated March 7, 2008
                
                
                F-2Report
      of Jimmy C.H. Cheung & Co., dated February 1, 2007
                
                
                F-3Consolidated
      Balance Sheet as of December 31, 2007
                
                
                F-4Consolidated
      Statements of Operations and Other Comprehensive Income for the Years
      Ended December 31, 2007 and 2006
                
                
                F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006
                
                
                F-6Consolidated
      Statements of Stockholders’ Equity
                
                
                F-7Notes
      to the Consolidated Financial Statements
                
                
                F-8
     F-1
  Report
of Independent Registered Public Accounting Firm
  
 
 Board of
Directors and Stockholders of
 Songzai
International Holding Group, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Songzai International
Holding Group, Inc. and subsidiaries as of December 31, 2007 and the related
consolidated statements of income and other comprehensive income, stockholders'
equity, and cash flows for the year ended December 31, 2007.  These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Songzai
International Holding Group, Inc.
 and
Subsidiaries as of December 31, 2007 and the consolidated results of their
operations and their consolidated cash flows for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
 
 
 
 
 Goldman
Parks Kurland Mohidin
 Encino,
California
 March 7,
2008
  F-2
  Jimmy
      C.H. Cheung & CoCertified
      Public Accountants
                Registered
      with the Public Company(A
      member of Kreston International)
                Accounting
      Oversight Board
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   To the
Board of Directors of:
  Songzai
International Holding Group, Inc.
 
  We have
audited the accompanying consolidated balance sheets of Songzai International
Holding Group, Inc. and
subsidiaries as of December 31, 2006 and the related consolidated statements of
operations, stockholders' equity
and cash flows for the year ended December 31, 2006. These fnancial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these fnancial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the fnancial statements. An audit also includes assessing the
accounting principles used and signifcant estimates made by management, as well
as evaluating the
overall financial statement presentation. We believe that our audits of the
fnancial statements provide a reasonable
basis for our opinion.
  In our
opinion, the fnancial statements referred to above present fairly in all
material respects, the fnancial position of Songzai International Holding Group,
Inc. and subsidiaries as of December 31, 2006 and the results of its operations
and its cash flows for the year ended December 31, 2006, in conformity with
accounting principles
generally accepted in the United States of America.
  As
discussed in Note 16, the Company restated its consolidated fnancial
statements for the year ended December
31, 2006.
   
 JIMMY
C.M. CHEUNG & CO
 Certifed
Public Accountants
 
  Hong
Kong
  Date:
February 1, 2007 except for Note 16, to which the date is April 10,
2008.
 
 
 
 
   1607 Dominion Centre, 43 Queen's
      Road East, Wanchal, Hong
      Kong
                  Telephone   : (852)
      25295500    Fax:(852)
      28651067
                  Email            
      :jimmycheung@jimmycheungco.com
                  Website       :http://www.jimmycheungco.com
                Kreston
      International

                  A
      global association
                  of
      independent accountans
                  and
      business advisors
  F-3
 SONGZAI
      INTERNATIONAL HOLDING GROUP, INC.CONSOLIDATED
      BALANCE SHEETDECEMBER
      31, 2007ASSETSCURRENT
      ASSETSCash
      & cash equivalents
              
              $
              4,494,978Restricted
      cash
              
              
              62,062Advance
      to suppliers
              
              
              185,771Other
      receivables
              
              
              121,700Inventory
              
              
              366,514Prepaid
      expenses
              
              
              57,920Prepaid
      mining right - current
              
              
              164,505Total
      current assets
              
              
              5,453,450PREPAID
      MINING RIGHT
              
              
              1,380,017PROPERTY
      AND EQUIPMENT, net
              
              
              5,904,310CONSTRUCTION
      IN PROGRESS
              
              
              157,651TOTAL
      ASSETS
              
              $
              12,895,428LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              270,385Unearned
      revenue
              
              
              308,388Other
      payables
              
              
              514,919Tax
      payable
              
              
              190,726Advance
      from shareholder
              
              
              636,465Total
      current liabilities
              
              
              1,920,883DEFERRED
      TAX LIABILITY
              
              
              128,922Total
      liabilities
              
              
              2,049,805CONTINGENCIES
      AND COMMITMENTSSTOCKHOLDERS'
      EQUITYSeries
      A Preferred Stock ($0.001 par value, 8,000,000 sharesauthorized,
      400,000 shares issued and outstanding)
              
              $
              400Common
      stock ($0.001 par value, 1,000,000,000 shares authorized,69,323,748
      shares issued and outstanding)
              
              
              6,932Paid
      in capital
              
              
              4,665,349Statutory
      reserve
              
              
              1,794,559Accumulated
      other comprehensive income
              
              
              943,935Retained
      earnings
              
              
              3,434,448Total
      stockholders' equity
              
              
              10,845,623TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              12,895,428
 F-4
 SONGZAI
      INTERNATIONAL HOLDING GROUP, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOMEYEARS
      ENDED DECEMBER 31, 2007 AND 20062007
              
              
              2006RESTATEDNet
      sales
              
              $
              12,351,166
              
              
              $
              3,835,427Cost
      of goods sold
              
              
              (5,586,468
              )
              
              
              (2,402,459
              )Gross
      profit
              
              
              6,764,698
              
              
              
              1,432,968Operating
      expensesSelling
      expenses
              
              
              -
              
              
              
              13,311General
      and administrative expenses
              
              
              1,808,966
              
              
              
              697,338Total
      operating expenses
              
              
              1,808,966
              
              
              
              710,649Income
      from operations
              
              
              4,955,732
              
              
              
              722,319Non-operating
      income (expenses)Interest
      income
              
              
              1,730
              
              
              
              211Interest
      expense
              
              
              (27,017
              )
              
              
              (7,540
              )Other
      income
              
              
              1,330
              
              
              
              -Other
      expenses
              
              
              (25,121
              )
              
              
              463Financial
      expense
              
              
              (345
              )
              
              
              -Total
      non-operating expenses
              
              
              (49,423
              )
              
              
              (6,866
              )Income
      before income tax
              
              
              4,906,309
              
              
              
              715,453Income
      tax expense
              
              
              (818,438
              )
              
              
              (10,197
              )Net
      income
              
              
              4,087,871
              
              
              
              705,256Other
      comprehensive itemForeign
      currency translation
              
              
              649,641
              
              
              
              306,221Comprehensive
      Income
              
              $
              4,737,512
              
              
              $
              1,011,477Basic
      weighted average shares outstanding
              
              
              6,932,375
              
              
              
              6,926,841Diluted
      weighted average shares outstanding
              
              
              7,332,375
              
              
              
              7,326,841Basic
      net earnings per share
              
              $
              0.59
              
              
              $
              0.10Diluted
      net earnings per share
              
              $
              0.56
              
              
              $
              0.10
 F-5
 SONGZAI
      INTERNATIONAL HOLDING GROUP, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31, 2007 AND 20062007
                
                
                2006RESTATEDCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                4,087,871
                
                
                $
                705,256Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                
                
                892,448
                
                
                
                593,806Imputed
      interest expense
                
                
                27,017
                
                
                
                1,564Increase
      in deferred tax liability
                
                
                102,052
                
                
                
                10,197Issuance
      of common stock for services
                
                
                -
                
                
                
                48,000(Increase)
      decrease in current assets:Accounts
      receivable
                
                
                380,269
                
                
                
                (370,388
                )Advance
      to suppliers
                
                
                (169,606
                )
                
                
                -Other
      receivables
                
                
                (50,545
                )
                
                
                (833,465
                )Prepaid
      expenses
                
                
                1,289,710
                
                
                
                -Inventory
                
                
                (342,213
                )
                
                
                (9,063
                )Prepaid
      mining rights
                
                
                (1,314,786
                )
                
                
                -Increase
      (decrease) in current liabilities:Accounts
      payable
                
                
                (111,004
                )
                
                
                179,692Unearned
      revenue
                
                
                (126,666
                )
                
                
                -Accrued
      liabilities and other payables
                
                
                (39,008
                )
                
                
                250,439Tax
      payable
                
                
                96,090
                
                
                
                45,433Net
      cash provided by operating activities
                
                
                4,721,629
                
                
                
                621,471CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
                
                
                (59,522
                )
                
                
                -Acquisition
      of property & equipment
                
                
                (809,505
                )
                
                
                (930,025
                )Construction
      in progress
                
                
                (151,200
                )
                
                
                -Proceeds
      from disposal of discontinued operation
                
                
                -
                
                
                
                241,000Net
      cash used in investing activities
                
                (1,020,227
                )
                
                
                (689,025
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Due
      to shareholder
                
                
                526,080
                
                
                
                104,235(repayment)
      / proceeds on note payable
                
                
                (47,077
                )
                
                
                5,976Net
      cash provided by financing activities
                
                
                479,003
                
                
                
                110,211EFFECT
      OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
                
                
                184,354
                
                
                
                5,004NET
      INCREASE IN CASH & CASH EQUIVALENTS
                
                
                4,180,403
                
                
                
                42,657CASH
      & CASH EQUIVALENTS, BEGINNING OF YEAR
                
                
                130,221
                
                
                
                82,561CASH
      & CASH EQUIVALENTS, END OF YEAR
                
                $
                4,494,978
                
                
                $
                130,222Supplemental
      Cash flow data:
                
                $
                691,430
                
                
                $
                -Income
      tax paid
                
                $
                -
                
                
                $
                5,976Interest paid
 F-6
 SONGZAI
      INTERNATIONAL HOLDING GROUP, INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS'
      EQUITYSeries
      A
                
                
                
                
                
                
                
                
                Additional
                
                
                
                
                
                
                
                
                Accumulated
      otherPreferred
      Stock
                
                
                Common
      Stock
                
                
                paid-in
                
                
                Retained
                
                
                Statutory
                
                
                ComprehensiveShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capital
                
                
                earnings
                
                
                reserve
                
                
                gain
      (loss)
                
                
                TotalBalance
      at December 31, 2005
                
                400,000
                
                
                $
                400
                
                
                
                69,123,748
                
                
                $
                69,124
                
                
                $
                4,526,366
                
                
                $
                190,365
                
                
                $
                245,515
                
                
                $
                (11,927
                )
                
                
                5,019,843Issuances
      of common stock for services
                
                -
                
                
                
                -
                
                
                
                200,000
                
                
                
                200
                
                
                
                47,800
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                48,000Net
      income for the year
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                705,256
                
                
                
                -
                
                
                
                -
                
                
                
                705,256Foreign
      currency translation gain
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                306,221
                
                
                
                306,221Imputed
      interest on advances from a stockholder
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,564
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,564Transfer
      from retained earnings to statutory reserve
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (173,025
                )
                
                
                173,025
                
                
                
                -
                
                
                
                -Balance
      at December 31, 2006 (Restated)
                
                400,000
                
                
                
                400
                
                
                
                69,323,748
                
                
                
                69,324
                
                
                
                4,575,730
                
                
                
                722,596
                
                
                
                418,540
                
                
                
                294,294
                
                
                
                6,080,884Net
      income for the year
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,087,871
                
                
                
                -
                
                
                
                -
                
                
                
                4,087,871Foreign
      currency translation gain
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                649,641
                
                
                
                649,641Increased
      in paid in capital
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                210
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                210Imputed
      interest on advances from a stockholder
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27,017
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27,017Transfer
      from retained earnings to statutory reserve
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,376,019
                )
                
                
                1,376,019
                
                
                
                -
                
                
                
                -Balance
      at December 31, 2007
                
                400,000
                
                
                $
                400
                
                
                
                69,323,748
                
                
                $
                69,324
                
                
                $
                4,602,957
                
                
                $
                3,434,448
                
                
                $
                1,794,559
                
                
                $
                943,935
                
                
                $
                10,845,623
   
 F-7
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Songzai
International Holding Group, Inc. (“Songzai” or the “Company”) was incorporated
in Nevada on June 7, 2001 under the name of Heritage Companies, Inc.
(“Heritage”). On November 5, 2003, the Articles of Incorporation were amended to
change the name of the Company to Songzai International Holding Group,
Inc.
  On
September 23, 2004, the Company acquired a 75% interest in Heilongjiang Tong
Gong Kuang Ye You Xian Gong Si (“Tong Gong”), an operational coal mine located
near Heihe City in the PRC. To effect the payment of the purchase price, the
Company authorized a class of 8,000,000 convertible preferred shares under
Nevada law, and issued 400,000 shares of “blank check” preferred stock that is
convertible into 4,000,000 shares of common stock to exchange for a 75% interest
in Tong Gong’s registered capital of $4,009,662 (RMB 33,200,000).  In
addition to the 75% interest in Tong Gong, Harbin Green Ring Biological
Degradation Products Developing Co., Ltd. (“Harbin Green”) transferred a 25% net
profits interest in Tong Gong to the Company. Harbin Green is controlled by
Mr. Hong Wen Li, Chairman and Chief Executive officer of the
Company.
  Subsequently,
Harbin Green assigned all of its interest in the registered capital of Tong Gong
to the Company. Therefore, the Company is now the beneficial owner of 100%
interest in the registered capital of Tong Gong.
  During
October 2004, the Company discontinued the operations of Yong Heng, those were
recorded as discontinued operations in 2005.
  On
December 28, 2005, pursuant to a Purchase and Sale Agreement, the Company sold
100% interest in its subsidiary - Yong Heng to a third party for
$241,000.
 
 The
Company is engaged in coal production by exploration, assembling, assessing,
permitting and developing coal properties in the People’s Republic of China (the
“PRC”). After obtaining permits from the National Land and Resources Office and
Heilongjiang Province Economy Committee, the Company extracts coal from its mine
property, and sells most of the coal on a per ton basis for cash on delivery,
primarily to power plants, cement factories, wholesalers and individuals for
home heating.
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Songzai and its 100% owned subsidiary Tong Gong. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
 
 Use
of Estimates
 
 In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the dates of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting year. Significant
estimates, required by management, include the recoverability of long-lived
assets and the valuation of inventories. Actual results could differ from those
estimates.
  F-8
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Cash
and Cash Equivalents
 
 For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.  At December 31, 2007, the Company had restricted cash of
$62,062 in the bank as pledge for safety production of coal mine that is
required by Heilongjiang Safety Production Oversee Board.
 
 Accounts
Receivable
  The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable.  Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.  At December 31, 2007, the
Company’s accounts receivable was $0.
 
 Inventories
 
 Inventories
consists of coal extracted from the ground that is available for delivery to
customers, as well as extracted coal which has been removed from the ground but
not yet processed through a wash plant. Inventories of coals are valued at the
lower of average cost or market, cost being determined on a first in, first out
method and include labor costs and all expenditures directly related to the
removal of coal.
 
 Prepaid
Mining Right
 
 Prepaid
mining right is the amount paid to acquire the right to mine the coal
reserves.  Prepaid mining right is amortized over the life of the
reserves that are proven and probable.
  
 Asset
Retirement Cost and Obligation
 
 The
Company uses Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations. This Statement generally requires
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. Amortization of the related asset is recorded on a
straight line basis over the useful lives of the 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.
  F-9
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  Environmental
Costs
 
 The PRC
has adopted extensive environmental laws and regulations that affect the
operations of the coal mining industry. The outcome of environmental liabilities
under proposed or future environmental legislation cannot be reasonably
estimated at present, and could be material. Under existing legislation,
however, the management believes that there are no probable liabilities that
will have a material adverse effect on the financial position of the
Company.
  Property
and Equipment
  Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.  When
property and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations.
  Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives. The estimated useful lives are as
follows:
  Plant and
      Machinery
                10-15
  YearsMotor
      Vehicles
                5  YearsBuilding and Mining
      Structure
                10 Years
 Building
and mining structure includes the main and auxiliary mine shafts and underground
tunnels. Depreciation is provided to write off the cost of the mining structure
using the units of production method based on the estimated production volume
for which the structure was designed.
  Based on
updated geological report and new estimated production volume, the estimated
useful life of buildings and mining structure was changed during the year from
30 years in 2004 to 10 years commencing 2005.
 
 Impairment
of Long-Lived Assets
  Long-lived
assets, which include property and equipment and intangible assets, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
  Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the assets. Fair value is
generally determined using the asset’s expected future discounted cash flows or
market value, if readily determinable.  Based on its review, the
Company believes that, as of December 31, 2007, there were no significant
impairments of its long-lived assets.
  F-10
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Income
Taxes
 
 The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.  Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each period end
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable
income.  Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
 
 Tong Gong
is a Sino-foreign joint venture enterprise formed in the PRC that is subject to
PRC income tax computed according to the relevant laws and regulations in the
PRC. According to the PRC government local tax bureau, the Company is entitled
to full income tax relief for the first two years commencing on January 2005 and
a reduction in income tax rate of 18%, from 33% to 15% for the subsequent three
years from 2007 to 2009, and subject to income tax rate of 30% for the years
thereafter.  Net income for the years ended December 31, 2007 and 2006
would have been lower by approximately $835,000 and $345,000, respectively, if
Tonggong was not exempt from income taxes in 2006 and enjoyed a reduced rate of
18% in 2007.
 
 Songzai
parent has a net operating loss of approximately $1,426,000 at December 31,
2007.  A 100% valuation allowance has been established due to the
uncertainty of its realization.
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007.  As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48.  As a result of the implementation of Interpretation 48,
the Company recognized no material adjustments to liabilities or stockholders’
equity.  When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would
be ultimately sustained.  The benefit of a tax position is recognized
in the financial statements in
 the
period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if
any.  Tax positions taken are not offset or aggregated with other
positions.  Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheets
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination.
  F-11
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Interest associated with
unrecognized tax benefits are classified as interest expense and penalties are
classified in selling, general and administrative expenses in the statements of
income.
The adoption of FIN 48 did not have a material impact on the Company’s financial
statements.
  Revenue
Recognition
 
 The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104.  Coal sales revenues include sales to
customers of coal produced at Company operations and coal purchased from other
coal mining companies. Sales revenue is recognized when a formal arrangement
exists, which is generally represented by a contract between the Company and the
buyer; the price is fixed or determinable; title has passed to the buyer, which
generally is at the time of delivery; no other significant obligations of the
Company exist and collectibility is reasonably assured.  Payments
received before all of the relevant criteria for revenue recognition are
recorded as unearned revenue.
 
 Sales
revenue represents the invoiced value of coal, net of value-added tax
(“VAT”).  All of the Company’s coal that is sold in the PRC is subject
to Chinese value-added tax of 13% of the gross sales price.  This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their finished product.  The Company
recorded VAT payable and VAT receivable net of payments in the financial
statements.  The VAT tax return is filed offsetting the payables
against the receivables.
 
 VAT
payable on sales and VAT on purchases was $1,605,651 and $134,494 for the year
ended December 31, 2007, and $531,197 and $88,325 for the year ended December
31, 2006, respectively.  Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the
government.
 
 Cost
of Goods Sold
  Cost of
goods sold consists primarily of direct material, direct labor, depreciation of
mining preparation plant such as underground tunnel and major mine well and
relatedexpenses,
which are directly attributable to the production of coals.  Write-down of
inventory to lower of cost or market is also recorded in cost of goods
sold.
 
 Resource
Compensation Fees
 
 In
accordance with the relevant regulations, the Company is required to pay mineral
resource compensation fees to the Local Land Resource Bureau at RMB 3 per ton
for the total production during the year.  The Company expenses such
costs when incurred.
 F-12
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to credit risk consist
primarily of other receivables. The Company does not require collateral or other
security to support these receivables. The Company conducts periodic reviews of
its clients' financial condition and customer payment practices to minimize
collection risk on other receivables.
 
 The
operations of the Company are located in the PRC.  Accordingly, the
Company's business, financial condition, and results of operations may be
influenced by the political, economic, and legal environments in the PRC, as
well as by the general state of the PRC economy.
 
 Statement
of Cash Flows
 
 In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations are calculated based upon the local
currencies.  As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
 
 Basic
and diluted earnings per share (EPS)
  Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similar to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share are based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.  The following table presents a reconciliation of basic
and diluted earnings per share:
 
 2007
              
              2006Net
      income for basic and diluted shares outstanding
              $
              4,087,871
              $
              705,256Weighted
      average shares outstanding - basic
              
              6,932,375
              
              6,926,841Effect
      of dilutive securities:Series
      A preferred stock
              
              400,000
              
              400,000Unexercised
      warrants
              
              -
              
              -Weighted
      average shares outstanding - diluted
              
              7,332,375
              
              17,326,840Earnings
      per share - basic
              $
              0.06
              $
              0.01Earnings
      per share – diluted
              $
              0.06
              $
              0.01
 F-13
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Fair
Value of Financial Instruments
 
 SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments.  The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
 
 Fair
value of financial instruments is made at a specific point in time, based on
relevant information about financial markets and specific financial instruments.
As these estimates are subjective in nature, involving uncertainties and matters
of significant judgment, they cannot be determined with precision. Changes in
assumptions can significantly affect estimated fair values.
  The
carrying value of cash and cash equivalents, accounts payable and accrued
liabilities approximate their fair value because of the short-term nature of
these instruments. The Company places its cash and cash equivalents with what it
believes to be high credit quality financial institutions. The Company has a
diversified customer base, most of which are in the PRC. The Company controls
credit risk related to accounts receivable through credit approvals, credit
limit and monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk,
establishes an allowance, if required, for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowance is limited.
  All of
the Company’s operation is in the PRC, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the USD and the RMB.
  Foreign
Currency Translation and Comprehensive Income (Loss)
 
 Tonggong’s
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period.
 
 Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
 
 On July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar.  Historically, the
Chinese government has benchmarked the RMB exchange ratio against the U.S.
dollar, thereby mitigating the associated foreign currency exchange rate
fluctuation risk.  The Company does not believe that its foreign
currency exchange rate fluctuation risk is significant, especially if the
Chinese government continues to benchmark the RMB against the U.S.
dollar.
  F-14
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
 
 The
Company uses SFAS No. 130 “Reporting Comprehensive Income”. Comprehensive income
is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive income for the years
ended December 31, 2007and 2006 included net income and foreign currency
translation adjustments.
 
 Segment
Reporting
 
 SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires use of the “management approach” model for segment
reporting.  The management approachmodel
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance.  Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company.
 
 SFAS 131
has no effect on the Company’s financial statements as substantially all of its
operations are conducted in one industry segment - coal mining.
 
 New
Accounting Pronouncements
 
 Fair Value
Measurements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements required under the accounting pronouncements, but
does not change existing guidance as to whether or not an instrument is carried
at fair value. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for fiscal year, including financial statements for an
interim period within the fiscal year. The Company is currently evaluating the
impact, if any, that SFAS No. 157 will have on its financial
statements.
  Fair Value Option for
Financial Assets and Financial Liabilities
 
 In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.”  The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.The
statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  The Company believes that the
adoption of SFAS 159 will not have a significant impact on its financial
statements.
  F-15
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Business
Combinations
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
  •
              
              Acquisition
      costs will be generally expensed as
incurred;
  •
              
              Noncontrolling
      interests (formerly known as “minority interests” – see SFAS 160
      discussion below) will be valued at fair value at the acquisition
      date;
  •
              
              Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;
 
 •
              
              In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;
  •
              
              Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and
  •
              
              Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.
   SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.
 F-16
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  
 Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No.
51
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and cash
flows.
 
 3.
INVENTORY
 
 Inventories
at December 31, 2007 consisted of coals and materials that need for coal
extraction.
  4.
PROPERTY AND EQUIPMENT, NET
 
 Property
and equipment consisted of the following at December 31, 2007:
  Building
      and mining structure
              $
              6,576,959Production
      equipment
              
              1,208,245Vehicle
              
              122.7647,907,968Less:
      Accumulated depreciation
              
              (2,003,658
              )$
              5,904,310
 
 Depreciation
expense for the years ended December 31, 2007 and 2006 was $824,517 and
$568,750, respectively.
   F-17
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  5.
OTHER RECIEVABLES
 
 Other
receivables mainly consists of deposits for certain mining certificates issued
by the specific PRC Authorities, prepayment for working supplies and advance to
employees for traveling and other business related expenses.
 
 6.
PREPAID MINING RIGHT
 
 Prepaid
mining right represents the amount the Company paid for its coal reserves and is
amortized over the life of the reserves that are proven and probable, currently
10 years. The price was RMB 3.09 per ton during years 2006 through 2007, and
will vary each year depending on the decision of the local Mining Bureau’s from
which the Company acquired the rights. The Company is generally required to pay
the full amount of mining right within five years unless specific good cause
exists for extension.
 
 The
Company’s prepaid mining right consisted of the following at December 31,
2007:
 
 Prepaid
      mining right
              
              $
              1,645,053Less:
      Amortized portion
              
              
              (100,531
              )Prepaid
      mining right, net
              
              $
              1,544,522
 
 The total
coal reserves the Company may extract under the mining right is 6,149,700
tons.  At December 31, 2007, the Company is committed to pay for 2,266,205
tons of coal at RMB 3.09 ($0.42) per ton for the total amount of $951,806. 
The contract has been accounted for similar to a royalty agreement as neither
the payment terms nor the price per ton is fixed.
 
 7.
RELATED PARTY TRANSACTION
 
 The
Company owed a stockholder $636,465 for short-term advances at December 31,
2007. Imputed interest expense is charged at 6% per annum on the amount due.
Total imputed interest included as additional paid-in capital amounted to
$27,017 and $1,564 for the years ended December 31, 2007 and 2006
respectively.
 
 8.
OTHER PAYABLE
 
 Other
payable mainly consisted of welfare payable for welfare, employee education and
labor union outlays.
 
 9.
TAX PAYABLE
 
 Tax
payable consisted of the following at December 31, 2007:
 
 Income
      tax payable
              
              $
              26,021Value
      added tax payable
              
              
              151,826Resource
      tax payable
              
              
              12,879
  F-18
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  $
              190,726
 
 10.
DEFFERED TAX LIABILITY
 
 Deferred
tax liability consists of tax deductible reserve for safety and maintenance
expenses to be incurred in the future. The reserve is calculated based
on  management’s best estimates within the unit price range provided
by Ministry of Finance of PRC, currently RMB 8.7 per ton for safety expense and
RMB 6 per ton for maintenance for the quantity of coal produced. For financial
reporting purposes, this reserve has been recorded as an appropriation of
retained earnings as under US generally accepted accounting principles, 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 transaction.
 
 11.
INCOME TAXES
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the year ended December 31, 2007 and 2006:
 
 2007
              
              
              2006US
      statutory rates
              
              34
              %
              
              
              34
              %Tax
      rate difference
              
              (1
              %)
              
              
              (1
              %)Effect
      of tax holiday
              
              (20
              %)
              
              (32­­
              %)Valuation
      allowance
              
              4
              %
              
              
              -Tax
      per financial statements
              
              17
              %
              
              
              1
              %
 
 It is the
management’s intention to reinvest all the income attributable to the Company
earned by its operations outside the US. Accordingly, no US corporate income
taxes are provided for these financial statements.
  The
Company is subject to income taxes by entity basis on income arising in or
derived from the tax jurisdiction in which each entity is
domiciled.
  Songzai
was incorporated in the United States and has incurred net operating loss for
income tax purposes for 2007 and 2006.  Songzai has net operating loss
carry forwards for income taxes amounting to approximately $1,426,000 at
December 31, 2007which may be available to reduce future years’ taxable income.
These carry forwards, will expire, if not utilized, commencing in 2024.
Management believes that the realization of the benefits from these losses
appears uncertain due to the Company’s limited operating history and continuing
losses. Accordingly, a full deferred taxasset
valuation allowance has been provided.
  F-19
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  12. MAJOR
CUSTOMERS AND
VENDORS
  Four
major customers accounted for 43.6% and six customers accounted for 87.7% of the
Company’s net revenue for years 2007 and 2006, respectively.  For year
2007, each customer accounted for about 13%, 11%, 10% and 9.6% of the
sales.  For year 2006, each customer accounted for about 24%, 20%,
13%, 11%, 10% and 9.7% of the sales.  At December 31, 2007, the total
receivable balance due from these three customers was $0.
 
 There
were no major vendors for the Company for the years 2007 and 2006.
 
 13.
STATUTORY RESERVES
 
 Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
 
 Surplus reserve
fund
 
 The
Company is now only 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.  In 2007, the company voluntarily appropriated 15% of the net
income to this reserve.  At December 31, 2007, the Company had
$976,287 in this reserve
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
 
 Common welfare
fund
 
 Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income to this fund.  The Company did not make any
contribution to this fund for the year ended December 31, 2007.
 
 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, amended ruling No. 168 (2005)
on April 8, 2005 by Ministry of Finance of PRC regarding “Accrual and
Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine
Maintenance and Improvement”, the Company is required to accrue safety and
maintenance expense monthly. The amount of accrual is determined by management’s
best estimates within the unit price range provided by Ministry of Finance of
PRC, currently RMB 6 per for safety expense and RMB 8.7 per ton for maintenance
for the quantity of coal actual produced by the Company.  For
financial reporting purposes, this reserve has been recorded as an appropriation
of retained earnings as defined under US generally accepted accounting
principles, a liability for safety and maintenance expenses does not exist at
the balance sheet date. At December 31, 2007, the Company recorded $818,272 as
reserve for safety and maintenance.
  F-20
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  The
following table reconciles the statutory reserves at December 31,
2007:
 
 Statutory
      surplus reserve
              
              $
              976,287Safety
      and Maintenance reserve
              
              
              818,272Total
      statutory reserves
              
              $
              1,794,559
 
 
 14.
SHAREHOLDERS’ EQUITY
 
 (A) Issue
of preferred shares
  On
September 23, 2004, the Company issued 400,000 shares of “blank check” preferred
stock that is convertible into 40,000,000 (post a one for one hundred reverse
split) shares of common stock to exchange for a 75% interest in Tong Gong’s
registered capital of $4,009,662 (RMB33,200,000). On January 9, 2006, the
Company filed a Certificate of Designation pursuant to which the Board of
Directors designated 400,000 shares of preferred stock as Series A Preferred
Stock.
  On
December 19, 2006, the Company filed an amendment to the Certificate of
Designation pursuant to which the conversion rate of the Series A Preferred
Stock was amended that each share of Series A Preferred Stock is convertible
into 10 fully paid and non-assessable shares of common stock.
  (B) Stock
issuances
  During
April 2006, the Company issued 20,000 shares of its restricted common stock to a
service provider having a fair value of $48,000. The value of the common stock
issued was determined based on the closing market price of $0.24 per share on
April 12, 2006. The Company recognized marketing and promotion expenses of
$48,000 as of December 31, 2006.
 
 15.
CONTINGENCIES AND COMMITMENTS
 
 The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’ s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
  F-21
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
 
 The
Company is required to pay the full amount of total reserves (mining right)
within five years from the date the reserves is approved by Heilongjiang
Province National Land Resource Office unless.  The Company’s
operation may be suspended if they are not able to pay off total mining right
within five years.
 
 16.
RESTATEMENT- CORRECTION OF AN ERROR
 
 Subsequent
to the issuance of our consolidated financial statements for the fiscal year
ended December 31, 2006, our management determined that:
  Under
certain local Government regulations, the Company is required to maintain a
reserve at a specified rate per ton of coal extracted for the safety and
maintenance of the mining operations. The Company expenses actual costs relating
to safety and maintenance  as incurred. For PRC tax purposes, the
Company gets a deduction in the year the safety and maintenance expense mandated
by the local government regulation is  recorded. The Company had
recorded a liability for maintenance and Safety expense in 2005 and prior years
and 2006 of $69,944 and $67,981, respectively. During the fourth quarter of
2007, the Company determined that the liability recorded does not meet the
definition of a liability in accordance with SFAS Concepts No. 6 as there is no
present obligation to transfer assets or provide services as a result of past
transactions or events.
  As a
result, the consolidated financial statements for the fiscal year ended December
31, 2006 has been restated from the amounts previously reported.
  A summary
of the significant effects of the subsequent adjustments on the results of
operations and financial position for the year ended December 31, 2006 are as
follows:
  As
                Previously
                stated
              
              
              As
      RestatedFor
      the  year ended December 31, 2006Cost
      of Goods Sold
              
              $
              2,470,440
              
              
              $
              2,402,459Gross
      Profit
              
              
              1,364,987
              
              
              
              1,432,968
 Provision
      for income tax
                
                
                
                
                
                10,197Current:
                
                
                -
                
                
                
                -Deferred:
                
                
                -
                
                
                
                10,197Net
      income
                
                $
                647,472
                
                
                $
                705,256At
      December  31, 2006Account
      and other payables
                
                $
                1,438,687
                
                
                $
                1,300,762Deferred
      tax liabilities
                
                
                -
                
                
                
                20,689Total
      liabilities
                
                
                1,674,575
                
                
                
                1,557,339Statutory
      Reserve
                
                
                280,615
                
                
                
                418,540Maintenance
      & SafetyReserve
                
                
                -
                
                
                
                137,925Retained
      Earnings-beginning of year
                
                
                200,857
                
                
                
                190,365Retained
      Earnings- end of year
                
                
                743,285
                
                
                
                722,596Total
      stockholders’ equity
                
                $
                5,963,648
                
                
                $
                6,080,884
 F-22
 SONGZAI
INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
  Reclassification
of cash proceeds of $241,000 from disposal of discontinued operation from cash
flows from operating activities to cash flows from financing
activities
 
 17.
SUBSEQUENT EVENT – REVERSE ACQUSITION
 
 On or
about December 31, 2007 (the "Effective Date"), the Company entered into a Stock
Purchase Agreement with Heilongjiang Xing’an Group Hongyuan Coal Mine Co., Ltd.
(Hongyuan) and Heilongjiang Xing’an Group Shengyu Mining Co., Ltd. (Shengyu) and
their shareholders.
 
 Pursuant
to the terms of the Agreement, the Company acquired 90% of the registered
capital, representing 90% of the outstanding equity interests, of each of
Hongyuan and Shengyu from the selling shareholders for an aggregate purchase
price of thirty million dollars (the "Cash Consideration") and 80,000,000 shares
(pre-reverse stock split effective on January 07, 2008) of the Company's common
stock ("Stock Consideration"). The remaining 10% equity interest will be in
trust by the selling shareholders of Hongyuan and Shengyu for the benefit of
Songzai.  The acquisition transaction will not be deemed closed until
all the deliverables are made.  The transaction is completed and
closed on April 4, 2007.
 
 As a
result of the share exchange agreement, Hongyuan and Shengyu’s shareholders will
own 53% of the combined company.  For accounting purposes, the
transaction will be accounted for as a reverse acquisition of the Company by
Hongyuan and Shengyu.  The following unaudited pro forma consolidated
results of continuing operations for the Company and Hongyuan and Shengyu for
the years ended December 31, 2007 and 2006 presents the Company and Hongyuan and
Shengyu’s operations as if the acquisitions occurred on January 1, 2007 and
2006, respectively.  The pro forma results are not necessarily
indicative of the actual results that would have occurred had the acquisitions
been completed as of the beginning of the periods presented, nor are they
necessarily indicative of future consolidated results.
  For
      the years endedDecember
      31, 2007
                December
      31, 2006(Unaudited)(In
      thousands)Total
      Revenue
                $
                46,931
                $
                25,152Net
      Income
                $
                17,550
                $
                7,937
  F-23