UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K /A
 (Amendment
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, 2008
 
 OR
 
 o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the transition period fromto
 
 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.)17890
      Castleton Street, Suite 112
              City
      of Industry, California
            
            91748(Address
      of principal executive offices)
            
            (Zip
      Code)
 
 Registrant’s
telephone number: (626)
581-8878
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o   No
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o   No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the 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 x   No
o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o   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
              oNon-accelerated
      filer
              o
              
              Smaller
      reporting company
              x
 
 
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes o   No
x
 
 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:  $56,385,547 computed by reference to $10.80 as of June 30,
2008 which is less than $75 millions..
 
 Number of
shares of common stock outstanding as of March 23, 2009: 14,932,582
 
 
 TABLE OF CONTENTS
 TO
ANNUAL REPORT ON FORM 10-K
 FOR
YEAR ENDED DECEMBER 31, 2008
 PageExplanatory Note
                          3PART
      IItem 1.
                          Business
                          4Item 1A.
                          Risk Factors
                          19Item 1B.
                          Unresolved Staff Comments
                          27Item 2.
                          Properties
                          27Item 3.
                          Legal Proceedings
                          28Item
      4.
                          Submission of Matters to a Vote of Security Holders
                          28PART
      IIItem 5.
                          Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                          28Item 6.
                          Selected Financial Data
                          29Item 7.
                          Management's Discussion and Analysis of Financial Condition
      and Results of Operation
                          29Item 7A.
                          Quantitative and Qualitative Disclosures About Market
      Risk
                          37Item 8.
                          Financial Statements and Supplementary Data
                          37Item 9.
                          Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
                          37Item 9A(T).
                          Controls and Procedures
                          37Item 9B.
                          Other Information
                          39PART
      IIIItem 10.
                          Directors, Executive Officers and Corporate Governance
                          39Item 11.
                          Executive Compensation
                          41Item 12.
                          Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                          45Item 13.
                          Certain Relationships and Related Transactions, and Director
      Independence
                          46Item 14.
                          Principal Accounting Fees and Services
                          46PART
      IVItem 15.
                          Exhibits, Financial Statement Schedules
                          47Signatures
                          50
  2
 Table of Contents
  EXPL AN ATORY NOTE
 
 Songzai
International Holding Group Inc. (the “Company,” “we,” “us” or “our”) is filing
this Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for
the year ended December 31, 2008, originally filed with the Securities and
Exchange Commission (the “SEC”) on March 30, 2009 (the “Original Form 10-K”), in
response to comments received from the SEC. In addition, we are concurrently
filing Forms 10-Q/A as of and for the periods ended each of March 31, 2009, June
30, 2009 and September 30, 2009.
 
 The
comments from the SEC related to, among other things, (i) the proper disclosure
reconciling the coal reserves as estimated under the People’s Republic of China
mining rights appraisal process with the reserves as estimated pursuant to SEC
Industry Guide 7, (ii) the accounting for our reverse acquisition of Heilongjiang Xing An Group Hong Yuan Coal Mining Co.,
Ltd. and Heilongjiang Xing An Group Sheng Yu Ming Co., Ltd. in April,
2008, and (iii) the restatement of our consolidated financial statements
to reflect the changes made in response to the SEC’s comments.  See
Note 20 to our consolidated financial statements contained in Item 8 of
Part II of this report for more information regarding the restatement and
details of the impact of the restatement on our consolidated financial
statements as of and for the year ended December 31, 2008.
 
 In
response to the SEC’s comments, we also have revised the data and information in
“Business” located in Item 1 of Part I of this report; “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” located in
Item 7 of Part II of this report; “Controls and Procedures” located in
Item 9A(T) of Part II of this report; and “Certain Relationships and Related
Transactions, and Director Independence” located in Item 13 of Part III of this
report.  We have also revised Item 15 of Part III of this
report to contain the currently-dated certifications from our principal
executive officer and chief accounting officer, as required by Sections 302
and 906 of the Sarbanes-Oxley Act of 2002.
 
 Because
this Form 10-K/A sets forth the Original Form 10-K in its entirety, it includes
both items that have been changed and items that are unchanged from the Original
Form 10-K. Other than the revision of the disclosures as discussed above, this
Form 10-K/A speaks as of the original filing date of the Original Form 10-K and
has not been updated to reflect other events occurring subsequent to the
original filing date. This includes forward-looking statements and all other
sections of this Form 10-K/A that were not revised, which should be read in
their historical context.
 
 
 CAUTION
REGARDING FORWARD-LOOKING INFORMATION
 
 ThisAmendment No. 1 on
Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31,
2008 (“Annual
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
Annual Report, including the matters set forth under the captions “Risk Factors”
and in the Company’s other filings with the Securities and Exchange Commission
(“SEC”). 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 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. Readers are urged
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report. We file reports with the 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. 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.
 3
 Table of Contents
 
 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 engaged in coal production by
exploring, assembling, assessing, permitting, developing and mining coal
properties in the People’s Republic of China (“PRC” or “China”). After obtaining
permits from the Heilongjiang Province National Land and Resources
Administration Bureau and the Heilongjiang Economic and Trade Commission, we
mine to extract coal minerals, and then sell most of the coal on a per metric
ton (“ton”) basis in cash on delivery. Through the end of March 2008, our
business consisted of the operations of Tong Gong coal mine through our
subsidiary, Heilongjiang Tong Gong Mining Co., Ltd. ("Tong Gong"),  in
northern PRC. The mine is located approximately 175 kilometers southwest of
the city of Heihe in the 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 “Xing An” or the “Xing An
Companies”). The Xing An Companies operate two coal mines, the Hong Yuan and
Sheng Yu mines, located in the city of Mohe in Heilongjiang Province. We
completed our acquisition of the Xing An Companies on April 4, 2008, after which
our business now consists of the operations of Tong Gong coal mine as well
as the two Xing An coal mines.
 
 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
Yong Heng 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 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 Tong Gong, a PRC
limited liability company and the operator of 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 were
convertible into 4,000,000 shares of common stock. Effective January 7, 2008,
however, the conversion ratio for the preferred stock changed to a 1-for-1 as a
result of the 10-to-1 reverse stock split of our issued and outstanding shares
of common stock which was effective on that date. We acquired the 75% equity
interest in Tong Gong from Mr. Hongwen Li, our current President and Chief
Executive Officer. 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.
 
 On
December 31, 2007, we entered into a stock purchase agreement with 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 an aggregate purchase price
determined by multiplying the number of shares of Songzai outstanding just prior
to the transaction (400,000 Series A preferred shares and 6,932,582 common
shares) by the average stock price of Songzai stock two days before and two days
after the Agreement date.
 4
 Table of Contents
 
 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 with
the Secretary of State of Nevada pursuant to Nevada Revised Statutes Section
78.209. 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.
 
 On April
4, 2008, we completed the acquisition of the Xing An Companies and, pursuant to
the terms of the stock purchase agreement, the Xing
An shareholders received 8 million shares of Songzai common stock and $30
million, which is treated as a dividend pursuant to the accounting treatment
applied to the transaction. 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 have been placed in escrow as security for certain indemnification
obligations of the Xing An Shareholders in connection with this transaction.
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 have been placed in trust for our benefit. In connection
with the completion of our 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
enterprises and listing Songzai as owner of 90% of their respective registered
capitals. Our acquisition of 90%, rather than 100%, of the Xing An Companies was
dictated by PRC regulations applicable at the time of the transaction, which
limit foreign ownership of mining-related companies to a maximum of
90%.
 
 Hong Yuan
was originally organized as a limited liability company under the laws of the
PRC on August 18, 2003, and was issued a Certificate of Approval for
Establishment of Enterprises with Foreign Investment (No. 2300002414) on March
24, 2008 by the Heilongjiang provincial government. Hong Yuan’s registered
address is Xilinji Town, Mohe County, Daxing’an Mountain District,
Heilongjiang Province.
 
 Sheng Yu
was originally organized as a limited liability company under the laws of the
PRC on July 28, 2003, and was issued a Certificate of Approval for Establishment
of Enterprises with Foreign Investment (No. 2300002415) on March 24, 2008 by the
Heilongjiang provincial government. Sheng Yu’s registered address is Cross Area
between Zhenxing Road and Zhonghua Road, Xilinji Town, Mohe County,
Daxing’an Mountain District, Heilongjiang Province.
 
 Current
Corporate Structure
 
 Our
current organizational structure is as follows (the percentages depict the
current equity interests):
 
 
  *In accordance with
applicable PRC regulations limiting foreign ownership of mining-related
companies, the remaining 10% are placed in trust for the benefit of the
Company.
  5
 Table of Contents
 
 The
Coal Mines
 
 Tong
Gong Coal Mine
 
 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 Mr. Hongwen Li and rehabilitated the coal mine for production,
renaming it Tong Gong coal mine in the process.
 
 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.
There are two coal seams in the mine area. 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.
 
 Tong Gong coal mine, including the land on which the
mine is located and on which most of our mining facilities are located as well
as the underlying coal and other minerals, is owned by the PRC. Therefore, the
exact amount of coal that we can extract from the mine is based on mining rights
issued by the Heilongjiang Department of Land and Resources. Each mining
right is issued pursuant to a reserves appraisal report submitted by government
authorized mining engineers, and the mining right is issued upon approval of
such appraisal report by the Heilongjiang Department of Land and Resources. The
amount of coal underlying the mining rights represents the amount that we have
paid for and may legally extract, assuming adequate economically viable
reserves, under applicable PRC law and regulations .
 
 We
currently have in-place resources for the Tong Gong coal mine as
follows:
 6
 Table of Contents
 
 Grant
      date
                                        of
      the mining rights
                                      In
      Place Resources
                                        to which
      Mining
                                        Rights
      Relate
                                        (in
      metric tons) (1)
                                      Due
      date for payment
                                        of
      the mining rights12/30/2004
                                      4,649,700
                                      
                                      12/30/20099/30/2007
                                      1,500,000
                                      
                                      9/30/2017Total
                                      6,149,700
 _________________________
 (1)  The
Company’s mining rights are based on appraisals of in place resources conducted
by the appropriate PRC authorities and are expressed as a maximum number of
metric tons of coal in each mine which the Company is entitled to extract under
the related mining rights. Rights to legally extract coal does not
guarantee reserves or the amount that may be economically
extracted.
 
 Our
expected mining recovery is about 65-70% of the in-place resources, and our
process / screening recoveries are about 95-97% of the run-of-mine output (the
amount resulting from the mining recovery amount). Thus, we have the legal
rights to extract coal based on 6,149,700 metric tons (“tons”) of in-place
resources from Tong Gong coal mine, provided that the coal underlying the mining
rights is fully paid for by a certain period of time. Rights to legally extract
coal does not guarantee reserves or the amount that may be economically
extracted. For
mining rights granted prior to September 1, 2006, we are generally required to
make full payment within five years unless specific good cause exists for
extension. Effective September 1, 2006, under the authority of the
Heilongjiang Geology and Mineral Exploration Office, the due date is ten years
from the grant date for mining rights granted on or after September 1,
2006. The price is determined on a per ton basis, and is subject to change
based on the prevailing market price as determined by the Heilongjiang
Department of Land and Resources. As of December 31, 2008, we have paid for
5,383,495 tons out of the 6,149,700 tons to which we have mining
rights.
 
 The
amount of coal underlying our mining rights is determined based on PRC
standards, which differ from those of Guide 7 of the Securities Act Industry
Guide (“SEC Industry Guide 7”). As such, coal that is deemed extractable in
China, where we operate, may not be deemed proven or probable reserves under SEC
Industry Guide 7. Because our coal is mined and sold entirely in China, we
believe it is helpful
to understanding our business for usto provide the measurements of coal
reserves used by the Company in its operations and evaluations.  The
amount of coal underlying our mining rights in Tong Gong are based on PRC
guidelines and presents a different valuation of our mining reserves from Tong
Gong mine’s proven and
probable reserves, as
such terms are defined in SEC Industry Guide 7.
Specifically:
 
 Proven (Measured) Reserves
are reserves for which (a) quantity is computed from dimensions revealed in
outcrops, trenches, workings, or drill holes; grade and/or quality are computed
from the results of detailed sampling and (b) the sites for inspection,
sampling, and measurement are spaced so closely and the geologic character is so
well defined that size, shape, depth and mineral content of reserves are
well-established.
 
 Probable (Indicated) Reserves
are reserves for which quantity and grade and/or quality are computed from
information similar to that used for proven (measured) reserves, but the sites
for inspection, sampling, and measurement are farther apart or are otherwise
less adequately spaced. The degree of assurance, although lower than that for
proven reserves, is high enough to assume continuity between points of
observation.
 
 We
commissioned John T. Boyd Company, an independent mining and geological
consulting firm (“JTB”) to assess Tong Gong coal mine in accordance with SEC
Industry Guide 7. Based on the JTB report dated March 31, 2006, Tong Gong coal
mine had proven product (salable) reserves of 1.36 million tons and
probable product (salable) reserves of 0.17 million tons as of December 31,
2005. Based on such reserves, the JTB report also estimates the mine service
life at 10 years. Tong Gong coal mine’s proven and probable product
(salable) reserves as reported by JTB presented here comply with SEC Industry
Guide 7.  However,
they are based upon and do not reflect reserves as described in the PRC
appraisal on which our mining rights are based and which establishes the amount
of coal we are entitled to extract pursuant to those rights.At December
31, 2008, the estimated product reserves for Tong Gong under Industry Guide 7
was approximately 1.15 million tons, of which, 0.23 million tons was probable
product reserves and 0.92 million tons was proven product
reserves.  We estimated these proven product reserves by subtracting
salable production during the periods subsequent to our earlier estimates of
proven product reserves.   Following is a reconciliation table
that reconciles the total estimates of proven and probable reserves under
Industry Guide 7 from the date of the previous John Boyd appraisal to the
applicable estimates as of December 31, 2008.
 
 Proven  reserves
                                        (in
      million tons)
                                      Probable
      reserves
                                        (in
      million tons)
                                      Total  reserves
                                        (in
      million tons)Reserves
      at December 31, 2005
                                      1.36
                                      0.17
                                      1.53Produced
      in 2006
                                      (0.18)
                                      -
                                      (0.18)Reserves
      at December 31, 2006
                                      1.18
                                      0.17
                                      1.35Produced
      in 2007
                                      (0.35)
                                      -
                                      (0.35)Increased
      reserves in 2007
                                      0.46
                                      0.06
                                      0.52Reserves
      at December 31, 2007
                                      1.29
                                      0.23
                                      1.52Produced
      in 2008
                                      (0.37)
                                      -
                                      (0.37)Reserves
      at December 31, 2008
                                      0.92
                                      0.23
                                      1.15
 
 7
 Table of Contents
 
 In
deriving their estimate reserve amounts, JTB used assumed recoveries for mining
and processing/screening utilized in their estimates for Tong Gong coal mine as
follows: mining recovery - 55% areal recovery; vertical recovery - 100% of coal
column; coal processing recovery - 100% of coal in the run-of-mine output; and
parting / OSD removal - 80% removal of the parting / OSD material in the
run-of-mine output. These factors are different from those used in the PRC by
firms providing appraisals for reserves on which mining rights, including ours,
are based.
 
 Hong
Yuan and Sheng Yu Coal Mines
 
 Hong Yuan
and Sheng Yu coal mines (collectively “Xing An coal 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 Heilongjiang Province driven by
the region’s rapid economic growth, and the substantial costs involved in
transporting coal to this region from major coal-producing provinces such as
Shaanxi Province, Shanxi Province and the Inner Mongolia Autonomous
Region.
 
 Xing An
coal mines are located in the Da Qing’an Ling Mountain Range in Northeastern
China, just outside of the city of Mohe which is less than two miles from the
Russian border:
 
 
 As with
the Tong Gong coal mine, neither we nor our subsidiaries own the Hong Yuan
and Sheng Yu coal mines. Our mining rights for Hong Yuan and Sheng Yu describe
in-place resources, as follows:
 
 Grant
      date
                                        of
      the mining rights
                                      In
      Place Resources
                                          to which
      Mining
                                          Rights
      Relate
                                        (in
      metric tons) (1)
                                      Due
      date for payment
                                        of
      the mining rights4/1/2005
                                      816,300
                                      
                                      12/30/201010/15/2005
                                      13,520,700
                                      
                                      9/30/20103/1/2007
                                      5,444,800
                                      
                                      3/1/2017Total
                                      19,781,800
 _________________________
 (1)  The
Company’s mining rights are based on appraisals of in place resources conducted
by the appropriate PRC authorities and are expressed as a maximum number of
metric tons of coal in each mine which the Company is entitled to extract under
the related mining rights. Rights to legally extract coal does not
guarantee reserves or the amount that may be economically
extracted.
  8
 Table of Contents
 
 Our
expected mining recovery is about 65-70% of the in-place resources, and our
process / screening recoveries is about 95-97% of the run-of-mine output. Thus,
we may extract coal based on 19,781,800 tons of  in-place resources
from Xing An coal mines, provided that the coal underlying the mining rights is
fully paid for by a certain period of time. As of December 31, 2008, we have
paid for all mining rights at the Xing An coal mines based on PRC reserve
guidelines.
 
 As with
Tong Gong coal mine, we also commissioned JTB to assess both Xing An coal mines
in accordance with SEC Industry Guide 7. Based on the JTB report dated April 15,
2008, as of June 30, 2007, Hong Yuan coal mine had proven product (salable)
reserves of 2.53 million tons and probable product (salable) reserves of 2.81
million tons, and Sheng Yu had proven product (salable) reserves of 0.81 million
tons and probable product (salable) reserves of 2.73 million tons. We present
these figures to comply with SEC Industry Guide 7, but note again that the
amount of coal we can extract from these mines are based on the mining rights
described above.  At December 31, 2008, the estimated product reserves
for Hong Yuan and Sheng Yu under Industry Guide 7 was approximately 7.83 million
tons, of which, 5.54 million tons was probable product reserves and 2.29 million
tons was proven product reserves.  We estimated these proven product
reserves by subtracting salable production from proven product reserves during
the periods subsequent to our earlier estimates of proven product
reserves.   Following is a reconciliation table that reconciles
the total estimates of proven and probable reserves under Industry Guide 7 from
the date of the previous John Boyd appraisal to the applicable estimates as of
December 31, 2008.
 
 Proven  reserves
                                        (in
      million tons)
                                      Probable
      reserves
                                        (in
      million tons)
                                      Total  reserves
                                        (in
      million tons)Reserves
      at June 30, 2007
                                      3.34
                                      5.54
                                      8.88Produced
      from July 1 to
                                        December
      31, 2007
                                      (0.31)
                                      -
                                      (0.31)Reserves
      at December 31, 2007
                                      3.03
                                      5.54
                                      8.57Produced
      in 2008
                                      (0.74)
                                      -
                                      (0.74)Reserves
      at December 31, 2008
                                      2.29
                                      5.54
                                      7.83
 
 The JTB
report employed assumed recoveries for mining and processing/screening in
developing estimates for Hong Yuan coal mine as follows: mining recovery - 60%
areal recovery; vertical recovery - 100% of first 2.5 meters of coal column, 65%
recovery of coal column greater than 2.5 meters thickness; coal processing
recovery - 90% of coal in the run-of-mine output for seams 4, 5 and 6, 80% of
coal in the run-of-mine output for No. 3 seam; and parting / OSD removal - 97%
removal of the parting / OSD material in the run-of-mine
output.
 
 The JTB
report employed assumed recoveries for mining and processing/screening in
developing estimates for Sheng Yu coal mine as follows: mining recovery - 60%
areal recovery; vertical recovery - 100% of coal column; coal processing
recovery - 90% of coal in the run-of-mine output for seams 4, 5 and 6, 80% of
coal in the run-of-mine output for No. 3 seam; and parting / OSD removal - 97%
removal of the parting / OSD material in the run-of-mine
output.
 
 Our
Mining Operations
 
 In
addition to our mining rights, each of which caps the amount of coal we legally
can extract from a specific mine, we operate the coal mines pursuant to the
following permits:
 
 Permit
                                      
                                      Issuing
      Authority
                                      
                                      Purpose
      of PermitResource
      mining permit
                                      
                                      Heilongjiang Province National Land
      and Resources Administration Bureau
                                      
                                      Specifies
      the coordinates of the mining area, the mine’s designed annual production
      capacity, and production lifeCoal
      production right permit
                                      
                                      Heilongjiang Province
      Economic and Trade Commission
                                      
                                      Official
      coal production permit; specifies the coordinate of the mining area, the
      mine’s designed annual production capacity, production
  life
 
 According
to our resource mining permit for Tong Gong, the coal mine’s design capacity is
estimated at 180,000 tons per annum based on mine operating conditions.
Additionally, the resource mining permit estimates the mine’s resources at 6.14
million tons, formulated according to PRC standard for resource estimate that
includes the coal resources in the specified mining area, which differs from the
formulation based on current drilled hole under SEC Industry Guide 7. Our
resource mining permits for Hong Yuan and Sheng Yu estimate those mines’ design
capacity at 450,000 tons and 150,000 tons, respectively, and an in-place
estimate of their reserves at 10,775,000 tons and 9,006,000 tons,
respectively.
 
 In
January, 2008, our application to increase Tong Gong’s annual production amount
was approved, and our coal production right permit presently authorizes us to
mine 180,000 tons of coal per year, up from 150,000 tons, in a 1.1193 square
kilometer area, which comprises the entire area of Tong Gong coal mine The
effective period of our coal production right permit for Tong Gong is from March
25, 2007 through June 30, 2016. Subject to certain geographic limitations, we
are authorized to extract 450,000 tons annually from Hong Yuan, and 150,000 tons
annually from Sheng Yu, according to their respective coal production right
permits, both of which are effective from July 27, 2007 to November 22, 2017.
The coal production right permits can be extended as necessary; however, any
material change in or revocation of these permits by the Heilongjiang Province
Economic and Trade Commission could materially and adversely affect our
operations and financial condition.
 9
 Table of Contents
 
 Mining
Tong Gong Coal Mine
 
 Coal
extracted from 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.
 
 The
“longwall” coal mining method employed at 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.
 
 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.
 
 Tong
Gong’s annual production volumes from 2005 to 2008, and the weighted average
selling price per ton for each year, are as follows:
 Year
                                          Annual
      Production
                                            ( Tons )
                                          Weighted
      Average
                                            Price
      Per Ton
                                            (RMB)2005
                                          129,448
                                          RMB
      1762006
                                          176,844*
                                          RMB
      1742007
                                          351,946*
                                          RMB
      1982008
                                          372,229*
                                          RMB
      231
 
 Mining Xing
An Coal Mines
 
 Current
mining operations at Xing An coal mines take advantage of the region’s weather
conditions. For approximately 100 days from October to April, the frigid weather
causes permafrost at these mines, thereby enabling coal to be extracted by
dynamite mining. Additionally, the permafrost eliminates the need for any shaft
support. Thus, mining operations are ongoing 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.
 10
 Table of Contents
 
 Xing An
coal mines together produced approximately 743,280 tons of coal during
fiscal 2008. The annual production volumes from 2005 to 2008, and the weighted
average selling price per ton, are as follows:
 
 Year
                                            Annual
      Production
                                              ( Tons )
                                            Weighted
      Average
                                              Price
      Per Ton
                                              (RMB)2005
                                            299,760
                                            RMB
      2002006
                                            694,502*
                                            RMB
      1962007
                                            712,690*
                                            RMB
      2282008
                                            743,280*
                                            RMB
      238
 
 * while
our production volumes in 2006, 2007, and 2008 exceeded the amount specified on
our coal production permits, such practice is common in Heilongjiang Province,
and was accepted by the relevant authorities because the mining rights for the
extracted coal and taxes from sales of such coal were paid.
 
 Brokered
Coal
 
 In
addition to mining coal, we also broker coal from small independent mines
operating in the areas surrounding the mines that we operate. Because operators
of these small mines often lack the means to transport coal from the mines, they
have no market for their coal other than selling to us at competitive prices.
The brokered coal enables our subsidiaries to fulfill their respective sales
obligations. Tong Gong currently brokers approximately 236,000 tons of coal
annually at approximately 30% mark up of the costs of the coal that it
mines. Xing An, on the other hand, brokers approximately 403,000 tons of
coal annually at approximately the same costs as the coal that the company
mines.
 
 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.” 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.
 
 The
following information comes from the JTB reports that we commissioned and is
prepared in accordance with SEC Industry Guide 7. As
indicated above, however, this information is not based upon and does not
reflect the reserves as described in the PRC appraisal on which our mining
rights are based and which establishthe amount of coal that we can
legally extract pursuant to the mining rights issued to our
subsidiaries.
 
 Tong
Gong’s Coal
 
 As
reported in the JTB report dated March 31, 2006, the coal from Tong Gong
coal mine has the following characteristics:
 
 Recoverable
                                              Reserves
                                              (million
                                              tons )(1)
                                            Amount
                                              Assigned
      to
                                              Existing
                                              Facilities(2)
                                            Type
      of Coal
                                            Btu
      per
                                              Pound
                                            Sulfur
                                              Content
                                              (%)
                                            Ash
                                              Content
                                              (%)
                                            Moisture
                                              (%)Proven
                                              (Measured)(3)
                                            1.36
                                            1.36
                                            Steam
      coal
                                            10,080
                                            0.5-0.6
                                            14-18
                                            5-6Probable
                                              (Indicated)(3)
                                            0.17
                                            0.17
                                            Steam
      coal
                                            10.080
                                            0.5-0.6
                                            14-18
                                            5-6Total
                                            1.53
                                            1.53
 
 11
 Table of Contents
  (1)
                                            Amount
      is as of December 31, 2005, based on the JTB report dated March 31,
      2006.
 
 (2)
                                            Existing
      infrastructure and equipment allows these reserves to be mined at current
      production levels.
 
 (3)
                                            A
      drill hole spacing of 500 meters is used for proven reserves, and a drill
      hole spacing of 1,000 meters is used for probable
  reserves.
 
 Xing
An’s Coal
 
 Based on
the JTB report dated April 15, 2008, the coal from Hong Yuan coal mine has
the following characteristics:
 
 Recoverable
                                              Reserves
                                              (million
                                              tons ) (1)
                                            Amount
                                              Assigned
      to
                                              Existing
                                              Facilities
      (2)
                                            Amount
      not
                                              Assigned
      to
                                              Existing
                                              Facilities
                                            Type
      of
                                              Coal
                                            Btu
      per
                                              Pound
                                            Sulfur
                                              Content
                                              (%)
                                            Ash
                                              Content
                                              (%)
                                            Moisture
                                              (%)Proven
                                              (Measured)(3)
                                            2.53
                                            1.84
                                            0.69
                                            Steam
      coal
                                            6,600-9,000
                                            0.5-0.7
                                            19-35
                                            10Probable
                                              (Indicated)(3)
                                            2.81
                                            1.70
                                            1.11
                                            Steam
      coal
                                            6,600-9,000
                                            0.5-0.7
                                            19-35
                                            10Total
                                            5.34
                                            3.54
                                            1.80
 
 Based on
the JTB report dated April 15, 2008, the coal from Sheng Yu coal mine has
the following characteristics:
 
 Recoverable
                                              Reserves
                                              (million
                                              tons ) (1)
                                            Amount
                                              Assigned
      to
                                              Existing
                                              Facilities
      (2)
                                            Amount
      not
                                              Assigned
      to
                                              Existing
                                              Facilities
                                            Type
      of
                                              Coal
                                            Btu
      per
                                              Pound
                                            Sulfur
                                              Content
                                              (%)
                                            Ash
                                              Content
                                              (%)
                                            Moisture
                                              (%)Proven
                                              (Measured)
      (3)
                                            0.81
                                            0.59
                                            0.22
                                            Steam
      coal
                                            6,600-9,000
                                            0.6-0.8
                                            19-35
                                            10Probable
                                              (Indicated)(3)
                                            2.73
                                            0.90
                                            1.83
                                            Steam
      coal
                                            6,600-9,000
                                            0.6-0.8
                                            19-35
                                            10Total
                                            3.54
                                            1.49
                                            2.05
 
 (1)
                                            Amount
      is as of June 30, 2007, based on the JTB report dated April 15,
      2008.
 
 (2)
                                            Existing
      infrastructure and equipment allow these reserves to be mined at current
      production levels.
 
 (3)
                                            A
      drill hole spacing of 500 meters is used for proven reserves, and a drill
      hole spacing of 1,000 meters is used for probable
  reserves.
 
 Our
Customers
 
 Because
of their differing properties, Tong Gong’s coal and Xing An’s coal are sold to
different types of customers. Tong Gong’s coal is primarily sold to power
plants, cement factories, wholesalers and individuals for home heating. Xing
An’s coal, on the other hand, is primarily sold to electric power plants,
metallurgical mills and fuel trading companies.
 
 For the
year ended December 31, 2008, six customers collectively accounted for
approximately 83% of our consolidated revenue:
 
 ·
                                            Heilongjiang
      QiQiHaEr Huadian Power Plants Co., Ltd., which purchases coal
      extracted from Xing An coal mines, , accounted for 28% of our total sales
      in 2008;
 
 ·
                                            Heilongjiang
      TieRan Coal Industrial Company, which purchases coal extracted from Xing
      An coal mines, accounted for 12% of our total sales in
    2008;
 
 ·
                                            Zhongliang
      (Zhaodong) Biochemical Energy Resources Co., Ltd., which purchases coal
      extracted from Xing An coal mines, accounted for 11% of our total sales in
      2008;
 
 ·
                                            Nenjiang
      County Hong Yu Trading Co., which purchases coal extracted from Tong Gong
      coal mine, accounted for 11% of our total sales in
    2008;
 12
 Table of Contents
 
 ·
                                              Heilongjiang
      QiQiHaEr Huadian Power Plants Co., Ltd. , which purchases coal
      extracted from Tong Gong coal mine,  accounted for 11% of our
      total sales in 2008; and
 
 ·
                                              Baicheng
      City Heating Co., which purchases coal extracted from Tong Gong coal
      mine, accounted for 10% of our total sales in
  2008.
 
 We sell
our coal on a per ton basis directly to our customers. Coal is generally sold to
major customers by purchase order signed prior to the beginning of each mining
season. These purchase orders generally specify the quantities and timing
of purchases planned over a time period generally no longer than one year. The
balance of the sales comes from purchase orders issued by the same customers
that have additional requirements for coal during the year, or from smaller
customers. 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.
While the price of coal did not change significantly between 2005 and 2006,
there was a significant increase in 2007 and 2008 driven by market demands.
Under such conditions, most customers in 2008 paid in advance of delivery, and
we require the remaining customers to pay against delivery of coal. As
a result, we did not carry any accounts receivable at December 31, 2008. Our
sales personnel conduct routine customer visits and customer satisfaction
surveys. We have established long-term business relationships with our major
customers, and our management believes that these relationships are
stable.
 
 Once our
coal is extracted, it is typically picked up immediately by, or loaded
immediately for delivery to, customers so we do not currently maintain an
inventory of extracted coal. Coal extracted from Tong Gong coal mine is
trucked approximately 500 meters to the nearest rail siding and sold f.o.b.
railcar. Coal extracted from Xing An coal mines is trucked approximately 60
kilometers to a stockyard adjacent to the nearest rail siding and sold f.o.b.
railcar.
 
 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.
 
 We 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 raw coal from Tong Gong
in 2008 is RMB 231 per ton, which is RMB 33 higher than the average price of RMB
198 in 2007. The average price for raw coal from Xing An in 2008 is RMB 238 per
ton, which is RMB 10 higher than the average price of RMB 228 in
2007.
 
 Product
Delivery
 
 All of
our major customers are located in Northeastern China, primarily in the
provinces of Heilongjiang and Jilin. Coal is transported to these customers
principally by railways. In 2008, about 1,804,000 tons of our raw coal were
delivered to our customers by railways; in 2007, about 1,060,000 tons of our raw
coal were delivered to our customers by railways.
 
 Sources
and Availability of Raw Materials and the Principal Suppliers
 
 We
purchase certain materials in connection with our coal mining operations,
including: (i) tires for mining equipment and vehicles; (ii) lift
cylinders; and (iii) iron boards. Because these materials are readily
available, we do not purchase them exclusively from any one supplier for our
Tong Gong operation. Xing An, however, does source tires and lift cylinders
principally from Mohe County Yongsheng Metal Products Shop, and iron boards
principally from Mohe Shuangli Steel Store. The price of these materials are set
at market rates or determined through negotiations. We believe we have
established stable cooperative relationships with the suppliers that we
deal with to ensure a reliable supply of the materials required for
our mining operations.
 
 Research
and Development
 
 We had no
research and development expenses in 2008 and in 2007. 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.
 13
 Table of Contents
 
 Competition
 
 In the
area where we operate Tong Gong coal mine, there are two other coal mines which
directly compete with us:  No. 151 coal mine and Fu Hong coal mine. No. 151
coal mine has an annual production capacity of 400,000 tons and 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 from Tong Gong. In the area where we operate Xing An
coal mines, on the other hand, competition is comprised of small mining
operations that often lack transportation capabilities to deliver their coal to
the nearest train depot.
 
 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.
 
 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.
 14
 Table of Contents
 
 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.
 
 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
 
 There are
various taxes and fees that are imposed upon coal producers
in Heilongjiang Province, as well as statutory reserves which coal
producers required to set aside. Such taxes, fees and statutory reserves as
applicable to Tong Gong at December 31, 2008 are as follows:
 
 Item
                                                  
                                                  Base
                                                  
                                                  RateCorporate
      income tax
                                                  
                                                  Taxable
      income
                                                  
                                                  12.5%VAT
                                                  
                                                  Revenue
      from domestic sales
                                                  
                                                  13.0%City
      construction tax
                                                  
                                                  Amount
      of VAT and business tax
                                                  
                                                  Exempted
      by National GovernmentEducation
      surcharge
                                                  
                                                  Amount
      of VAT and business tax
                                                  
                                                  Exempted
      by National GovernmentAnti-flood
      fee
                                                  
                                                  Proceeds
      from the sale of coal
                                                  
                                                  Exempted
      by National GovernmentResource
      tax
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB2.3
      per tonCompensation
      for the depletion of coal resources
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB3
      per tonMine
      maintenance fund
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB8.7
      per tonSafety
      fund
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB6
      per ton
 
 Such
taxes, fees and statutory reserves as applicable to Xing An at December 31, 2008
are as follows:
 
 Item
                                                  
                                                  Base
                                                  
                                                  RateCorporate
      income tax
                                                  
                                                  Taxable
      income
                                                  
                                                  25.0%VAT
                                                  
                                                  Revenue
      from 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%Anti-flood
      fee
                                                  
                                                  Proceeds
      from the sale of coal
                                                  
                                                  0.1%Resource
      tax
                                                  
                                                  Aggregate
      volume of raw coal or coal
                                                    products
      sold
                                                  
                                                  RMB2.3
      per tonCompensation
      for the depletion of coal resources
                                                  
                                                  Proceeds
      from the sale of coal
                                                  
                                                  1%Mine
      maintenance fund
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB8.7
      per tonSafety
      fund
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB3
      per tonEnvironment
      fund, voluntary fund (Asset retirement obligation)
                                                  
                                                  Volume
      of raw coal produced
                                                  
                                                  RMB1
      per ton
 
 15
 Table of Contents
 
 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.
 
 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.
 16
 Table of Contents
 
 New
construction, expansion or reconstruction projects and other installations that
directly or indirectly discharge pollutants to the environment shall be subject
to relevant state regulations governing environmental protection for such
projects. Entities undertaking such projects must submit a pollutant discharge
declaration statement detailing the amount, type, location and method of
treatment to the competent authorities for examination. The authorities will
allow the construction project operator to release a certain amount of
pollutants into the environment and will issue a pollutant discharge license for
that amount of discharge subject to the payment of discharge fees. The release
of pollutants is subject to monitoring by the competent environmental
protection authorities. If an entity discharges more than the amount permitted
by the pollutant discharge license, the local environmental protection bureau
can fine the entity up to several times the discharge fees payable by the
offending entity for its allowable discharge, require the offending entity to
close its operations, or take other measures to remedy the problem.
 
 In the
environmental impact statement of a construction project, the project operator
shall make an assessment regarding the pollution and environmental hazards the
project is likely to produce and its impact on the ecosystem, and measures for
their prevention and control. The operator shall submit the statement according
to the specified procedure to the competent environmental protection authority
for examination and approval. The building of sewage outlets within any water
conservancy projects, such as canals, irrigation channels and reservoirs, shall
be subject to the consent of the competent authority in charge of water
conservancy projects.
 
 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.
 17
 Table of Contents
 
 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:
 
 (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.
 18
 Table of Contents
 
 (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
December 31, 2008, we had approximately 130 full-time employees, including
management, as follows: 85 with our operations at Tong Gong and
45 with our operations at Xing An. 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.
 
 In
addition, during each mining season, there are up to 210 miners working at Tong
Gong coal mine and up to 374 miners working at Xing An coal mines, none of
whom are employees.  Our subsidiaries contract with various general
contractors who provide the miners and who are fully responsible for the miners’
wages, including all state-mandated insurance.
 
 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 per ton in 2005, RMB 174 per ton in
2006, RMB 192 per ton in 2007 and RMB 231 per ton in 2008. 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, RMB 225 per ton in 2007 and RMB
238 per ton in 2008. 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.
 19
 Table of Contents
 
 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.
 20
 Table of Contents
 
 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 mining rights that are economically feasible.
 
 The
amount of coal underlying our mining rights declines as we produce
coal.  We may not be able to mine all of the coal underlying our
mining rights as profitably as we do at our current operations.  Our
profitability depends substantially on our ability to mine coal that has the
geological characteristics that enable it 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
expanding our existing mining rights or acquisitions of new mining
rights.
 21
 Table of Contents
 
 New
mining rights may not be available when required or, if available, the
underlying coal may not be capable of being mined at costs comparable to those
characteristics of our existing mining rights.  We may in the future
acquire mining rights from third parties.  We may not be able to
accurately assess the geological characteristics to any mining rights 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 the mining rights underlying these mines, as well mining rights
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 mining rights.
 
 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 mining rights could have an adverse effect on the results of
operation and our financial condition.
 
 The
acquisition of mining rights and 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.
 
 All of
our 2008 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.
 
 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 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 Hong Yuan and Sheng Yu
coal mines are sub-contracted from general contractors who borne the costs of
such insurance.
 22
 Table of Contents
 
 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.
 
 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 both in the regions in which we operate as well
as in other parts of China through acquisitions of businesses and
assets.  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 mining rights 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.
  23
 Table of Contents
 
 A
prolonged downturn in global economic conditions may materially adversely affect
our business.
 
 Our
business and results of operations are affected by international, national and
regional economic conditions. Financial markets in the United States, Europe and
Asia have been experiencing extreme disruption in recent months, including,
among other things, extreme volatility in security prices, severely diminished
liquidity and credit availability, ratings downgrades of certain investments and
declining values of others. The global economy has entered a recession. We are
unable to predict the likely duration and severity of the current disruptions in
financial markets, credit availability, and adverse economic conditions
throughout the world. These economic developments affect businesses such as ours
and those of our customers in a number of ways that could result in unfavorable
consequences to us. Current economic conditions or a deepening economic downturn
in the PRC and elsewhere may cause our current or potential customers to delay
or reduce purchases which could, in turn, result in reductions in our sales
volumes or prices, materially and adversely affecting our results of operations
and cash flows. Volatility and disruption of global financial markets could
limit our customers' ability to obtain adequate financing to maintain operations
and proceed with planned or new capital spending initiatives, leading to a
reduction in sales volume that could materially and adversely affect our results
of operations and cash flow. In addition, a decline in our customers' ability to
pay as a result of the economic downturn may lead to increased difficulties in
the collection of our accounts receivable, higher levels of reserves for
doubtful accounts and write-offs of accounts receivable, and higher operating
costs as a percentage of revenues.
 
 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 (“Heilongjiang
SAIC”), which is charged with verification of our payment, 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. We have been advised by our PRC counsel, however, that Heilongjiang
SAIC makes such verification only at the time of its annual examination of the
Xing An Companies’ business licenses, sometime between April and May, and never
before such time. Thus, so long as our payment is made in full before the
examination, the acquisition should not be voided. We cannot, however, prevent
Heilongjiang SAIC from verifying our payment at an earlier time. 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.
 
 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.
  24
 Table of Contents
 
 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.
 
 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.
  25
 Table of Contents
 
 Most
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 most of our directors or officers.
 
 Most 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.
 
 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.
 
 The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
 
 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. If the trading price of our common
stock falls below $5.00 per share, the open-market trading of our common
stock is subject to 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.
  26
 Table of Contents
 
 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.
 
 Item 1B.
                                                                  UNRESOLVED
      STAFF COMMENTS
 
 Not
applicable.
 
 ITEM 2.
                                                                DESCRIPTION
      OF PROPERTY
 
 Our
Offices
 
 Our
principal executive office in the United States is in City of Industry,
California, which headquarters some of our officers and administrative staff and
oversees our operations in the PRC. Our lease agreement for this office is from
September 1, 2008 to August 31, 2011, for annual rent of $57,516, and
we have the option to renew this lease.
 
 Our
principal executive office in the PRC is located in the provincial capital of
Harbin and is approximately 7,000 square feet. We have no written agreement or
formal arrangement pertaining to the use of this office, as it is owned by Mr.
Hongwen Li, our President and Chief Executive Officer, who is making the office
available to us rent-free. This office houses our administrative and clerical
staff. If necessary, we believe that we would be able to find replacement office
space without unreasonable expense or delay.
 
 In
addition, we also maintain an office in Jiadedaqi city, the closest major city
to Mohe where Xing An coal mines are located. This office is approximately
87,700 square feet and also serves as residence for some of our employees. Our
Hong Yuan subsidiary entered into a lease agreement for this office in July
2005, which expires in July 2015, with annual rent at RMB 150,000 (approximately
$20,550).
 
 Tong
Gong Coal Mine
 
 The land
on which Tong Gong coal mine is located and on which our mining
facilities are located is owned by the PRC. However, we own 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. We have no written agreement or
formal arrangement pertaining to the use of the land for the building, but
we believe that use of the land is authorized by our coal production right
permit, as confirmed by the Heihe Municipal Administration of Land and
Resources.
  27
 Table of Contents
 
 Xing
An Coal Mines
 
 Much like
Tong Gong coal mine, the land on which Hong Yuan and Sheng Yu coal
mines are located and on which our mining facilities are located is
owned by the PRC. We own a building at the Hong Yuan mine site,
approximately 5,000 square feet in size, which houses both our operations office
and dormitory for some of our engineers and salespeople. Xing An’s mining
operations are controlled from this office. We have no written agreement or
formal arrangement pertaining to the use of the land for the building, but we
believe that use of the land is authorized by our coal production right
permit, as confirmed by the Mohe Municipal Administration of Land and
Resources.
 
 ITEM 3.
                                                                LEGAL
      PROCEEDINGS
 
 As of
December 31, 2008, 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 2008.
 
 PART
II
 
 ITEM 5.
                                                                  MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES
 
 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.
  Common
Stock
 
 Quarter
      Ended
                                                                
                                                                High
      Bid
                                                                
                                                                
                                                                Low
      BidDecember
      31, 2008
                                                                
                                                                $
                                                                6.00
                                                                
                                                                
                                                                $
                                                                3.00September
      30, 2008
                                                                
                                                                $
                                                                10.60
                                                                
                                                                
                                                                $
                                                                5.38June
      30, 2008
                                                                
                                                                $
                                                                12.80
                                                                
                                                                
                                                                $
                                                                5.95March
      31, 2008*
                                                                
                                                                $
                                                                6.83
                                                                
                                                                
                                                                $
                                                                5.50December
      31, 2007
                                                                
                                                                $
                                                                0.53
                                                                
                                                                
                                                                $
                                                                0.47September
      30, 2007
                                                                
                                                                $
                                                                0.70
                                                                
                                                                
                                                                $
                                                                0.55June
      30, 2007
                                                                
                                                                $
                                                                0.05
                                                                
                                                                
                                                                $
                                                                0.05March
      31, 2007
                                                                
                                                                $
                                                                0.07
                                                                
                                                                
                                                                $
                                                                0.07
 __________
 *
Increase in stock price commencing in the first quarter of our 2008 fiscal year
reflects 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 23, 2009, we had approximately 14,932,582 shares of common stock
issued and outstanding and 400,000 shares of preferred stock issued and
outstanding.
 
 Holders
 
 As of
March 23, 2009, we had approximately 884 record holders of our common stock (not
including beneficial owners who hold shares at broker/dealers in "street name").
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.
 28
 Table of Contents
 
 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
 
 Sales of
securities within the past three years which were not registered under the
Securities Act of 1933, as amended (the “Securities Act”) were previously
disclosed in our current reports on Form 8-K filed on January 7, 2008 and June
10, 2008, and in our quarterly reports on Form 10-Q for the quarters ended March
31, 2008 and June 30, 2008.
 
 ITEM 6.
                                                                  SELECTED
      FINANCIAL DATA
 
 Not
applicable.
 
 ITEM
      7.
                                                                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 Note
Regarding Forward-Looking Statements
 
 The following discussion and
analysis of our results of operations and financial condition for the fiscal
years ended December 31, 2008 and 2007 should be read in conjunction with 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.
 
 OVERVIEW
 
 We are a
company engaged in coal production and sales by exploring, assembling,
assessing, permitting, developing and mining coal properties in the People’s
Republic of China (“PRC”). After obtaining permits from the Heilongjiang
Province National Land and Resources Administration Bureau and the Heilongjiang
Economic and Trade Commission, we extract coal from properties to which we have
the right to mine capped amounts of coal, and then sell most of the coal on a
per metric ton (“ton”) basis in cash on delivery, primarily to power plants,
cement factories, wholesalers and individuals for home heating. We do not own
the coal mines, but have mining rights to extract a capped amount of coal from a
mine as determined by government authorized mining engineers and approved by the
Heilongjiang Department of Land and Resources. 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 the city of Heihe in
the Heilongjiang Province.
 
 Pursuant
to a stock purchase agreement that we entered into on December 31, 2007, on
April 4, 2008, we added two coal mines to our operations when we completed the
acquisition of two mining companies under common ownership in the PRC, Hong Yuan
and Sheng Yu.  In connection with that transaction, the Xing An
shareholders received 8 million shares of Songzai common stock and $30
million, which is treated as a dividend pursuant to the accounting treatment
applied to the transaction. The purchase price was determined by multiplying the
number of shares of Songzai outstanding just prior to the transaction (400,000
Series A preferred shares and 6,932,582 common shares) by the average stock
price of Songzai stock two days before and two days after the Agreement date.
After the closing of this acquisition transaction, the Xing An Shareholders now
collectively own 53% of the combined company. Accordingly, for accounting
purposes, the transaction is accounted for as a reverse acquisition of the
Company by Xing An and
therefore the historical financial information reflected in the financial
statements contained in this Form 10-K/A is that of Xing An. Xing An
operates two coal mines, the Hong Yuan and Sheng Yu mines, located in Mohe City
in Heilongjiang Province.
 
 On
October 15, 2008, we paid $18 million of the dividend to the Xing An
Shareholders in accordance with the terms of the Stock Purchase Agreement. We
anticipate paying the remaining $12 million of the dividend to the Xing An
Shareholders by April 2009.
 29
 Table of Contents
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements, we believe that
the following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis.
 
 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.
 
 Method
of Accounting
 
 We
maintain our general ledger and journals with the accrual method of accounting
for financial reporting purposes. The financial statements and notes are
representations of management. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States of America and
have been consistently applied in the presentation of financial statements,
which are compiled on the accrual basis of accounting.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Songzai and its subsidiaries, Tong Gong, and Xing An. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
 
 Use
of Estimates
 
 In
preparing financial statements in conformity with United States Generally
Accepted Accounting Principles (US GAAP), 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, allowance for doubtful accounts, and the
reserve for obsolete and slow-moving 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
consist 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. Coal inventories 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 Rights
 
 Prepaid
mining rights represent that portion of the mining rights for which the Company
has previously paid for its mining rights.  Prepaid mining rights are
expensed based on actual production volume during the
period.
 
 Goodwill
 
 Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”),
goodwill is not amortized but is tested for impairment annually, or when
circumstances indicate a possible impairment may exist. Impairment testing is
performed at a reporting unit level. An impairment loss generally would be
recognized when the carrying amount of the reporting unit exceeds the fair value
of the reporting unit, with the fair value of the reporting unit determined
using a discounted cash flow (DCF) analysis. A number of significant assumptions
and estimates are involved in the application of the DCF analysis to forecast
operating cash flows, including the discount rate, the internal rate of return,
and projections of realizations and costs to produce. Management considers
historical experience and all available information at the time the fair values
of its reporting units are estimated.
 
 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
that the Company’s legal obligations associated with the retirement of
long-lived assets are recognized at fair value at the time the obligations are
incurred. Obligations are incurred at the time development of a mine commences
for underground mines or construction begins for support facilities, refuse
areas and slurry ponds. The obligation’s fair value is determined using
discounted cash flow techniques and is accreted over time to its expected
settlement value. Upon initial recognition of a liability, a corresponding
amount is capitalized as part of the carrying amount of the related long-lived
asset. Amortization of the related asset is calculated on a unit-of-production
method by amortizing the total estimated cost over the salable reserves
determined under SEC Industry Guide 7, multiplied by the production during
the period. Xing An has voluntarily applied to Daxinganling District Environment
Protection Bureau for the asset retirement obligation and is obligated to
account for land subsidence, restoration, rehabilitation and environmental
protection at a rate of RMB 1 per ton based on total reserves at the end of the
useful lives of the mines. Tong Gong 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. The Company reviews its asset retirement obligation
at least annually and makes necessary adjustments for permit changes as granted
by state authorities and for revisions of estimates of the amount and timing of
costs. For ongoing operations, adjustments to the liability result in an
adjustment to the corresponding asset.
 30
 Table of Contents
 
 Property,
Plant, and Equipment
 
 Property
and equipment are stated at cost, less accumulated depreciation. 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
the actual tons of coals produced 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 10 to 15 years. 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. 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.
 
 The
estimated useful lives for each category of the fixed assets are as
follows:
 
 Plant
      and Machinery
                                                                      10-15
      YearsMotor
      Vehicles
                                                                      5
      YearsBuilding
      and Mining Structure
                                                                      10
      Years
 
 Mining
structure includes the main and auxiliary mine shafts, underground tunnels, and
other integrant mining infrastructure. Depreciation for the mine shafts is
provided to write off the cost of the mining structure using the units of
production method based on the salable reserves determined under SEC Industry
Guide 7.
 
 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 brokered coal sales, where
coal is purchased from other coal mining companies and sold at a higher rate to
third parties. 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 collectability is reasonably assured.  Payments
received before all of the relevant criteria for revenue recognition are
recorded as unearned revenue.
 
 In
brokered coal sales, the customers either pick up the coal directly from the
other mining premises or the coal is shipped directly from the other coal mining
premises. Purchases and shipments of the coal from other mining companies are
arranged at the same time. Revenue of brokered coal is recognized at the time of
delivery.
 
 Cost
of Goods Sold
 
 Cost of
goods sold consists primarily of amortization of the mining rights, direct
material, direct labor, depreciation of mining preparation plants such as the
underground tunnel and the 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.
 
 Foreign
Currency Translation and Comprehensive Income (Loss)
 
 The
functional currency of Tong Gong and Xing An 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 the exchange rate for the conversion of RMB to USD after the balance sheet
date.
 31
 Table of Contents
 
 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.
 
 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 approach model 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.
 
 Recent
Accounting Pronouncements
 
 Employer’s
Disclosures about Postretirement Benefit Plan Assets
 
 In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 applies to an employer that is subject to the disclosure
requirements of SFAS No. 132 (revised 2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (“SFAS 132R”) and amends
SFAS 132R to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by FSP FAS 132(R)-1 shall be
provided for fiscal years ending after December 15, 2009. Earlier
application is permitted. The Company does not expect the adoption of FSP
FAS 132(R)-1 to have a material impact on its financial
statements.
 
 Accounting
for Defensive Intangible Assets
 
 In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to all
acquired intangible assets in situations in which the acquirer does not intend
to actively use the asset but intends to hold the asset to prevent its
competitors from obtaining access to the asset (a defensive intangible asset).
Defensive intangible assets could include assets that the acquirer will never
actively use, as well as assets that will be used by the acquirer during a
transition period when the intention of the acquirer is to discontinue the use
of those assets. EITF 08-7 concluded that a defensive intangible asset
should be accounted for as a separate unit of accounting and should be amortized
over the period that the defensive intangible asset directly or indirectly
contributes to the future cash flows of the entity. EITF 08-7 is effective
prospectively for intangible assets acquired on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier application is not permitted.
 
 Accounting
for Financial Guarantee Insurance Contracts
 
 In May
2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 163,
“Accounting for Financial Guarantee Insurance Contracts, an interpretation of
FASB Statement No. 60.”  The scope of this Statement is limited to
financial guarantee insurance (and reinsurance) contracts, as described in this
Statement, issued by enterprises included within the scope of Statement 60.
Accordingly, this Statement does not apply to financial guarantee contracts
issued by enterprises excluded from the scope of Statement 60 or to some
insurance contracts that seem similar to financial guarantee insurance contracts
issued by insurance enterprises (such as mortgage guaranty insurance or credit
insurance on trade receivables). This Statement also does not apply to financial
guarantee insurance contracts that are derivative instruments included within
the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” This Statement will not have an impact on the Company’s
financial statements.
 
 The
Hierarchy of Generally Accepted Accounting Principles
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy).  This Statement will not have an impact on the Company’s
financial statements.
 32
 Table of Contents
 
 Determination
of the Useful Life of Intangible Assets
 
 In
April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible
asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”), and requires additional disclosures. The objective of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (R), “Business Combinations” (“SFAS
141(R)”), and other accounting principles generally accepted in the United
States of America. FSP FAS 142-3 applies to all intangible assets, whether
acquired in a business combination or otherwise and shall be effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The guidance for
determining the useful life of intangible assets shall be applied prospectively
to intangible assets acquired after the effective date. The disclosure
requirements apply prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. Early adoption is prohibited. The Company
does not expect the adoption of FSP FAS 142-3 to have a material impact on its
financial statements.
 
 Disclosures
about Derivative Instruments and Hedging Activities
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.”  This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its financial
statements.
 
 Fair
Value Measurements
 
 On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.  The three levels are defined as follow:
 
 ·
                                                                          Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
                                                                          Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
                                                                          Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
 
 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.
The Company expects SFAS 160 will have an impact on accounting for business
combinations once adopted but the effect is dependent upon future acquisitions
at that time.
 
 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:
 33
 Table of Contents
 
 ·
                                                                            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
the Company is a calendar year-end company and will continue to record and
disclose business combinations following existing GAAP until January 1,
2009. The Company expects SFAS 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent upon future
acquisitions at that time.
 
 Accounting
for Nonrefundable Advance Payments for Goods or Services Received for use in
Future Research and Development Activities
 
 In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of FSP EITF
07-3 to have a material impact on its financial statements.
 
 RESULTS
OF OPERATIONS
 
 On April
4, 2008, the Company completed the acquisition of 90% of Xing An for an
aggregate purchase price determined by multiplying the number of shares of
Songzai outstanding just prior to the transaction (400,000 Series A preferred
shares and 6,932,582 common shares) by the average stock price of Songzai stock
two days before and two days after the Agreement date. Pursuant to the purchase
agreement the Xing An shareholders received $30 million, which is treated as a
dividend under the accounting treatment of the transaction, and 80,000,000
shares (pre-10-to-1 reverse stock split effected on January 7, 2008) of
Songzai's common stock. The beneficial interests to the remaining 10% of Xing An
were placed in trust by the Xing An shareholders for the benefit of
the Company. As a result of the acquisition, the Xing An Shareholders
now collectively own 53% of the combined company.  For accounting
purposes, the acquisition of Xing An by Songzai is accounted for as a reverse
acquisition of Songzai by Xing An.
 
 The
operating results of Xing An for the year ended December 31, 2008 and Songzai
for the nine months ended December 31, 2008 are included in the accompanying
consolidated statements of operations from the acquisition date.  For
convenience of reporting the acquisition for accounting purposes, April 1, 2008
has been designated as the acquisition date
 
 Comparison
of the Years Ended December 31, 2008 and 2007
 
 The
following table sets forth the results of our operations for the years indicated
as a percentage of net sales:
 
 2008
      (Restated)
                                                                            
                                                                            
                                                                            2007
      (Restated)$
                                                                            
                                                                            
                                                                            %
      of Sales
                                                                            
                                                                            
                                                                            $
                                                                            
                                                                            
                                                                            %
      of SalesSales
                                                                            
                                                                            
                                                                            57,130,098
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            %
                                                                            
                                                                            
                                                                            34,580,611
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            %Cost
      of Sales
                                                                            
                                                                            
                                                                            25,676,126
                                                                            
                                                                            
                                                                            
                                                                            45
                                                                            %
                                                                            
                                                                            
                                                                            14,012,207
                                                                            
                                                                            
                                                                            
                                                                            41
                                                                            %Gross
      Profit
                                                                            
                                                                            
                                                                            31,453,972
                                                                            
                                                                            
                                                                            
                                                                            55
                                                                            %
                                                                            
                                                                            
                                                                            20,568,404
                                                                            
                                                                            
                                                                            
                                                                            59
                                                                            %Operating
      Expenses
                                                                            
                                                                            
                                                                            2,794,398
                                                                            
                                                                            
                                                                            
                                                                            5
                                                                            %
                                                                            
                                                                            
                                                                            1,469,424
                                                                            
                                                                            
                                                                            
                                                                            4
                                                                            %Income
      from Operations
                                                                            
                                                                            
                                                                            28,659,574
                                                                            
                                                                            
                                                                            
                                                                            50
                                                                            %
                                                                            
                                                                            
                                                                            19,098,980
                                                                            
                                                                            
                                                                            
                                                                            55
                                                                            %Other
      Income (Expenses), net
                                                                            
                                                                            
                                                                            (245,387
                                                                            )
                                                                            
                                                                            
                                                                            (0.43)
                                                                            %
                                                                            
                                                                            
                                                                            (132,596)
                                                                            
                                                                            
                                                                            
                                                                            (0.38)
                                                                            %Income
      tax
                                                                            
                                                                            
                                                                            6,690,206
                                                                            
                                                                            
                                                                            
                                                                            12
                                                                            %
                                                                            
                                                                            
                                                                            6,260,444
                                                                            
                                                                            
                                                                            
                                                                            18
                                                                            %Net
      Income
                                                                            
                                                                            
                                                                            21,723,981
                                                                            
                                                                            
                                                                            
                                                                            38
                                                                            %
                                                                            
                                                                            
                                                                            12,705,940
                                                                            
                                                                            
                                                                            
                                                                            37
                                                                            %
  34
 Table of Contents
 
 Coal
mining production, brokerage and sales at our three mines,
in tons, for the periods indicated:
 
 Tong
      Gong Coal MineSalable
      Production (tons)
                                                                              Brokerage
      (tons)
                                                                              Sales
      (tons)2008
                                                                              2007
                                                                              2008
                                                                              2007
                                                                              2008
                                                                              2007First
      Quarter
                                                                              137,536
                                                                              41,310
                                                                              -
                                                                              -
                                                                              137,536
                                                                              41,310Second
      Quarter
                                                                              168,245
                                                                              142,705
                                                                              -
                                                                              -
                                                                              168,245
                                                                              145,569Third
      Quarter
                                                                              66,448
                                                                              167,931
                                                                              -
                                                                              -
                                                                              153,517
                                                                              165,067Fourth
      Quarter
                                                                              -
                                                                              -
                                                                              236,526
                                                                              122,111
                                                                              149,457
                                                                              123,066Total
                                                                              372,229
                                                                              351,946
                                                                              236,526
                                                                              122,111
                                                                              608,755
                                                                              475,012
 
 Xing
      An Coal Mines (Hong Yuan and Sheng Yu)Salable
      Production (tons)
                                                                              Brokerage
      (tons)
                                                                              Sales
      (tons)2008
                                                                              2007
                                                                              2008
                                                                              2007
                                                                              2008
                                                                              2007First
      Quarter
                                                                              539,737
                                                                              398,430
                                                                              -
                                                                              -
                                                                              472,019
                                                                              210,363Second
      Quarter
                                                                              120,000
                                                                              -
                                                                              -
                                                                              -
                                                                              225,590
                                                                              295,745Third
      Quarter
                                                                              -
                                                                              -
                                                                              246,000
                                                                              -
                                                                              255,909
                                                                              210,975Fourth
      Quarter
                                                                              83,543
                                                                              314,260
                                                                              157,700
                                                                              500,000
                                                                              241,944
                                                                              449,502Total
                                                                              743,280
                                                                              712,690
                                                                              403,700
                                                                              500,000
                                                                              1,195,462
                                                                              1,166,585
 
 Sales. Our revenues are
derived primarily from the sales of coal. During 2008, we had sales of $57.13
million as compared to sales of $34.58 million for 2007, an increase of
approximately 65%.  The increase in sales is primarily due to increase
in both our selling price and sales volume resulting from the combined
operations of Xing An and Tong Gong following our reverse merger with Xing An in
April of 2008. The average selling price per ton for 2008 was approximately
$33.77, compared to the average selling price of approximately $29.64 for 2007,
an increase of 14%.  Our total sales volume was 1,666,681 tons for the
year of 2008 (taking into account both twelve-month sales volume of Xing An
and nine-months sales volume of Tong Gong from the reverse acquisition
date), as compared to 1,166,585 tons of sales for the year of 2007 (taking into
account of only Xing An’s sales volume), an increase of approximately
43%.
 
 Cost
of Sales.Our
cost of sales currently consists of cost of brokerage sales, coal production
cost and all depreciation, depletion and amortization attributable to our mining
operations. Cost of sales for 2008 increased by $11.66 million or approximately
83%, from $14.01 million for 2007 to $25.68 million for 2008. The major reason
for the increase was due to proportional increase in production cost as sales
increased. Our total production during the year of 2008 was 977,973 tons (taking
into account both twelve-month production volume of Xing An and nine-month
production volume of Tong Gong from the reverse acquisition date), as
compared to 712,690 tons of production for the same period in 2007 (taking
into account of only Xing An’s production volume). Cost of sales as a percentage
of sales was approximately 45% and 41% for  2008 and 2007,
respectively.   This increase in 2008 was mainly due to the
higher production cost of approximately $14 per ton and brokerage cost of
approximately $18 per ton for Tong Gong that were taken into account for 2008
(for the nine months from the reverse acquisition date), as well as an increase
in Xing An’s production and brokerage costs, from $11.12 per ton in 2007 to
$12.97 per ton in 2008, as a result of overall price increase in China since the
third quarter of 2008.
 
 In
addition to mining coal, we also broker coal from small independent mines
operating in the areas surrounding the mines that we operate, which often have
little or no market for their coal as they lack the means to transport coal from
the mine sites. This is especially true for the small mines around Xing An coal
mines, as reflected in the lower price of Xing An’s brokered coal. In 2008, the
cost of brokered coal for Tong Gong was approximately $4 per ton higher than the
cost of production, while the cost of brokered coal for Xing An was about same
as the cost of production. In 2008, we brokered 640,226 tons of coal (including
403,700 tons by Xing An and 236,526 tons by Tong Gong for the nine months from
the reverse acquisition date), as compared to approximately 500,000 tons of
brokered coal in 2007 (taking into account of only Xing An’s brokered
volume).
  35
 Table of Contents
 
 Gross
Profit.Gross
profit was $31.45 million for 2008 as compared to $20.57 million for 2007,
representing an increase of $10.88million.  Our gross profit as a
percentage of sales was approximately 55% and 59% in 2008 and 2007,
respectively.
 The
decrease in gross profit margin in 2008 mainly resulted from the inclusion of
Tong Gong’s cost of sales for 2008 (for the nine months from the reverse
acquisition date), which was not a factor for in
2007.
 
 Operating
Expenses.Operating
expenses totaled $2.79 million for 2008 as compared to $1.47 million
for 2007, an increase of $1.32 million or approximately
90%.  This increase is primarily attributable to the combined expenses
for Xing An and Tong Gong being taken into account for 2008 (while only Xing
An’s expenses were taken into account for the same period in 2007), as well as
compensation expense of approximately $470,000 for employee stock options
vested during the second quarter of 2008, and expenses related to the reverse
acquisition Xing An (including due diligence, audit and legal
fees).
 
 Net
Income. Our net
income for 2008 was $21.72 million as compared to net income of $12.71 million
for 2007, an increase of $9.01 million.  This increase in net income
is attributable to increase in sales volume and sales price resulting
from the combined operations of Xing An and Tong Gong following Xing An’s
acquisition in April of 2008.  Net income as a percentage of sales
increased from 37% in 2007 to 38% in 2008, which management attributes primarily
to an increase in production and sales with increased selling price, a lower
income tax rate of 25% for Xing An effective for fiscal 2008, down from 33% for
fiscal 2007, and an income tax holiday of 50% rate deduction for Tong
Gong.
 
 LIQUIDITY AND CAPITAL
RESOURCES
 
 Cash
Flows
 
 As of
December 31, 2008, we had cash and cash equivalents of $16,744,741. Our working
capital deficit was approximately $2.98 million. The ratio of current assets to
current liabilities was 0.86:1 at December 31, 2008. The negative working
capital was mainly due to the dividend payable of $30 million to Xing An
Shareholders for the acquisition of Xing An, of which $18 million was repaid to
the Xing An Shareholders on October 15, 2008.
 
 The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended December 31, 2008 and
2007:
 
 Years
      Ended December 312008
                                                                                  (Restated)
                                                                                
                                                                                
                                                                                2007
                                                                                  (Restated)Cash
      provided by (used in):Operating
      Activities
                                                                                
                                                                                $
                                                                                28,405,392
                                                                                
                                                                                
                                                                                $
                                                                                17,261,377Investing
      Activities
                                                                                
                                                                                $
                                                                                (5,113,940)
                                                                                
                                                                                
                                                                                $
                                                                                (12,432,199)
                                                                                )Financing
      Activities
                                                                                
                                                                                $
                                                                                (16,960,028
                                                                                )
                                                                                
                                                                                $
                                                                                (1,305,108
                                                                                )
 
 Net cash
flow provided by operating activities was approximately $28.40 million in 2008
while net cash flow provided by operating activities was approximately $17.26
million in 2007.  The increase in cash inflow from operating
activities resulted from an increase in net income and no accounts receivable
outstanding as cash was received in advance for most of the
sales.
 
 Net cash
flow used in investing activities was approximately $5.11 million in 2008,
compared to $12.43 million of net cash used in investing activities in 2007.
This increase in cash flow from investing activities was mainly due to the $7.2
million of cash acquired from Songzai as a result of the reverse
acquisition though we paid approximately $12 million for acquiring mining rights
during the year ended December 31, 2008, while in 2007, we spent about $6.19
million for improving and constructing mine infrastructures and acquiring new
mining equipments and $6.24 million for the mining rights.
 
 Net cash
flow used in financing activities was approximately $16.96 million in 2008 as
compared to net cash used in financing activities of approximately $1.31 million
in 2007. The increase in cash outflow from financing activities in the year 2008
was primarily due to dividend payment of $18 million to Xing An
Shareholders.
 
 Based on
our current expectations, we believe that our cash and cash equivalents, and
cash generated from operations will satisfy our working capital needs, and other
liquidity requirements associated with our existing operation through the
remainder of this year. We would like to expand our existing mining operations
and acquire additional coal mining rights, 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 plans for
expansion.
 
 We do not
believe that inflation has had a negative impact on our results of
operation.
  36
 Table of Contents
 
 Contractual
Obligations
 
 We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
 
 The
following tables summarize our contractual obligations as of December 31, 2008,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
 
 Payments
      Due by PeriodTotal
                                                                                  
                                                                                  
                                                                                  Less
      than 1
                                                                                    year
                                                                                  
                                                                                  
                                                                                  1-3
      Years
                                                                                  
                                                                                  
                                                                                  3-5
      Years
                                                                                  
                                                                                  
                                                                                  5
      Years +Contractual
      Obligations:Bank
      Indebtedness
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Dividend
      payable
                                                                                  
                                                                                  $
                                                                                  12,000,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  12,000,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Capital
      Lease Obligations
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Operating
      Leases
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Mining
      Rights
                                                                                  
                                                                                  $
                                                                                  893,664
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  893,664Total
      Contractual Obligations:
                                                                                  
                                                                                  $
                                                                                  12,893,664
                                                                                  
                                                                                  
                                                                                  $
                                                                                  12,000,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  893,664
 
 Off-balance
Sheet Arrangements
 
 We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
 
 ITEM
      7A.
                                                                                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Not
applicable.
 
 ITEM 8.
                                                                                  FINANCIAL
      STATEMENTS
 
 The
Consolidated Financial Statements are included in this Annual Report beginning
on Page F-1.
 
 ITEM 9.
                                                                                  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURES
 
 None.
 
 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, 2008. Based on that evaluation, our management
concluded that as of December 31, 2008, our disclosure controls and procedures
were effective. However,
after reviewing the weaknesses in internal control of financial reporting
described below and the changes to the financial statements made in this Form
10-K/A, our management has now concluded that the disclosure controls and
procedures were not effective at that time.
  37
 Table of Contents
 
 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.
 
 Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on
that evaluation, our management concluded that as of December 31, 2008, 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,
2008, management determined that our internal control over financial reporting
was subject to the following material weaknesses, which management believes have
existed since our acquisition of Tong Gong in September 2004:
 
 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 an 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.
 
 These
material weaknesses were also identified in the Company’s 2007 annual report.
Since that time, the Company has taken steps to address these material
weaknesses as follows:
 
 1.
                                                                                  In
      June 2008, we appointed Ms. Yvonne Zhang, whom our management believes has
      the requisite financial reporting experience, skills and knowledge to
      complement our existing personnel, as our full-time Chief Financial
      Officer for a term of one year at an annual compensation of $100,000 as
      well as options to purchase shares of our common
  stock;
 
 2.
                                                                                  Since
      her appointment, Ms. Zhang has been regularly training our accounting
      staff both in the United States and in the PRC on the application of
      generally accepted accounting
principles;
 
 3.
                                                                                  In
      January 2009, we engaged an outside consultant to assist with
      evaluating and improving the Company’s internal control, accounting system
      and working process (including internal audit and material transaction
      review and verification process) to strengthen the timeliness and
      efficiency of the Company’s internal controls, for a term of one year for
      approximately $70,000; and
 
 4.
                                                                                  In
      March 2009, we appointed three independent directors to our board of
      directors, including one who is appropriately credentialed as a financial
      expert, for aggregate compensations of $45,000 and these directors will be
      tasked to establish certain internal audit functions within the
      Company.
 38
 Table of Contents
 
 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, 2008 that have materially
affected, or are reasonably likely to materially affect, our international
control over financial reporting.
 
 ITEM 9B.
                                                                                    OTHER
      INFORMATION
 
 None.
 
 PART
II
 
 ITEM 10.
                                                                                    DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
following table includes the names, positions held, and dates of appointment of
our current executive officers and directors:
 
 Name
                                                                                    
                                                                                    Position
                                                                                    
                                                                                    Date
      of AppointmentGuoqing
      Yue
                                                                                    
                                                                                    
                                                                                    Chairman
      of the Board of Directors
                                                                                    
                                                                                    
                                                                                    August
      15, 2008Hongwen
      Li
                                                                                    
                                                                                    
                                                                                    President*,
      Chief Executive Officer* and Director
                                                                                    
                                                                                    
                                                                                    December
      15, 2003, August 15, 2008*Yvonne
      Zhang
                                                                                    
                                                                                    
                                                                                    Chief
      Financial Officer
                                                                                    
                                                                                    
                                                                                    June
      9, 2008Huan
      Liu
                                                                                    
                                                                                    
                                                                                    Secretary
                                                                                    
                                                                                    
                                                                                    July
      12, 2007Elan
      Yaish
                                                                                    
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    
                                                                                    February
      27, 2009Yanlin
      Qu
                                                                                    
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    
                                                                                    February
      27, 2009Shengchun
      Liu
                                                                                    
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    
                                                                                    February
      27, 2009
 
 Business
Experience Descriptions
 
 Guoqing
Yue, Chairman of the Board of Directors
 
 Mr. Yue
has extensive work experience in, and knowledge of, Heilongjiang Province, where
our mining operations are based. From 1976 to 1989, Mr. Yue was a government
official with the Second Light Industry Bureau in Daxinganling, a prefecture of
Heilongjiang Province. From 1989 to 1994, Mr. Yue worked at a local engineering
company and a paper mill in the region before joining Qinghuangdao Xinshiji
Industrial Co., Ltd., a commodities trading company doing business between
Heilongjiang and Qinhuangdao, a municipality and the chief port of Hebei
Province. In 1999, Mr. Yue left the trading company and founded Qinhuangdao
Pengda Real Estate Development Co., Ltd., developing properties primarily in
Qinhuandao and Hebei’s Xiong County. In 2001, Mr. Yue led a group of private
investors to acquire Heilongjiang Beiyao Development Co., Ltd., which later
became Heilongjiang Xing An Mining Development Group Co., Ltd. (“Xing An
Mining”).
 
 Hongwen
Li, President, Chief Executive Officer and Director
 
 Mr.
Hongwen Li had served as chairman of our board of directors since the share
exchange transaction with Yong Heng was completed in December 2003 until his
replacement from that position by Mr. Yue in August 2008. Mr. Li founded
Fellow Workers Group in June, 1993, a holding company in the PRC 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. Within several
years, Mr. Li’s company grew from a small corporation with several
employees to a holding company with more than 300 employees.
 39
 Table of Contents
 
 Yvonne
Zhang, Chief Financial Officer
 
 Ms.
Yvonne Zhang was initially appointed as our interim chief financial officer
on August 18, 2007, and became our full-time chief financial officer on June 9,
2008. In that position, she has worked solely for the preparation of our
financial statements included in our quarterly and annual reports and
advising the Company on US GAAP and internal control.  Ms. Zhang
has over eight years experience in auditing, tax return preparation and
accounting services. Ms. Zhang is also the owner of V Trust Accounting and
Tax Services, a CPA firm she founded in June 2007 that provides tax return
preparation, accounting and auditing services.  Prior to V Trust, Ms.
Zhang was the auditor-in-charge at a Los Angeles based CPA firm from June 2006
to June 2007 that primarily audits public companies.  From January
2001 to May 2006, Ms. Zhang was a supervisor at another Los Angeles based CPA
firm.  Ms. Zhang is a licensed CPA and received her bachelor degree in
accountancy from California State University at Northridge in
1999.
 
 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. Mr. Liu has been the Company’s corporate
secretary from July 2007 to the present.
 
 Elan
Yaish, Director and Chairman of Audit Committee
 
 Mr. Yaish
is the President of ERS Associates, Ltd., and has been providing business and
financial advisory services to publicly traded and privately held companies
since January 2006. From August 2002 to November 2005, Mr. Yaish was the Chief
Financial Officer, Vice President of Finance and Assistant Secretary of
Manchester Technologies, Inc. From February 2000 to July 2002, Mr. Yaish was the
Assistant Vice President of Finance at Comverse Technology, Inc. From June 1996
to February 2000, Mr. Yaish was the Vice President of Finance and Controller of
Trans-Resources, Inc. Mr. Yaish was a senior accountant at Deloitte & Touche
LLP fromSeptember
1992 to May 1996. Mr. Yaish graduated from The Yeshiva University, Sy Syms
School of Business, with a B.S. in accounting in 1992. Mr. Yaish is a licensed
CPA inNew York and
a member of the AICPA and NYSSCPA.
 
 Yanlin
Qu, Director, Chairman of Nominating Committee and Member of Audit and
Compensation Committees
 
 Mr. Qu is
the Deputy Director General of the Coalfield Geological Bureau of Heilongjiang
Province, a position that he has held since November 1999. Mr. Qu is a 1977
graduate of Heilongjiang School of Mining with a master’s degree in mining
sciences.
 
 Shengchun
Liu, Director, Chairman of Compensation Committee and Member of Audit and
Nominating Committees
 
 Mr. Liu
is the President of both the Heilongjiang Province Railway Association and the
Harbin Railway Commission Science & Technology Association, positions he has
held since December 2002. From June 1977 to December 2002, Mr. Liu was the
Director of the Heilongjiang Province Economic Commission. Mr. Liu is a graduate
of Jilin University with a B.S. degree in automotive sciences.
 
 Family
Relationships
 
 There are
no family relationships between or among any of our current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and
directors and the officers and directors of our direct and indirect
subsidiaries.
 
 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.
 40
 Table of Contents
  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,
2008, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent shareholders were complied with, except
for Ms. Yvonne Zhang and Mr. Guoqing Yue.
 
 Code
of Ethics
 
 On
February 24, 2009, we adopted a code of ethics that applies to our officers,
directors and employees, including our chief executive officer, senior executive
officers, principal accounting officer, and other senior financial officers. A
copy of our code of ethics will be provided to any person without charge, upon
written request sent to us at our offices located at 17890 Castleton Street,
Suite 112, City of Industry, California 91748.
 
 Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors
 
 On
February 24, 2009, we adopted a nominating committee charter. Under such
charter, while there have been no material changes to the procedures by which
our shareholders may recommend nominees to the board of directors, the board of
directors may take into consideration as one of the factors in its evaluation of
shareholder-recommended nominees, the size and duration of the share holdings of
the recommending shareholder or shareholder group in relation to the total
outstanding shares of the Company. The board of directors may also consider the
extent to which the recommending shareholder intends to continue holding its
interest in the Company, including, in the case of nominees recommended for
election at an annual meeting of shareholders, whether the recommending
shareholder intends to continue holding its interest at least through the time
of such annual meeting.
 
 Audit
Committee
 
 Although
we are not a “listed company” under SEC rules and are therefore not required to
have an audit committee, we have an audit committee comprised of independent
directors. Our audit committee is comprised of three independent directors: Mr.
Elan Yaish, Mr. Yanlin Qu and Mr. Shengchun Liu. Our board of directors has
determined, based on information furnished by Mr. Yaish and other available
information, that Mr. Yaish meets the requirements of an “audit committee
financial expert” as such term is defined in the rules promulgated under the
Securities Act and the Exchange Act. On February 27, 2009, Mr. Yaish was
appointed to serve as chairman of the audit committee, and to serve as our audit
committee financial expert.
 
 ITEM 11.
                                                                                        EXECUTIVE
      COMPENSATION
 
 Summary
of Compensation
 
 The
following summary compensation table indicates the cash and non-cash
compensation earned for years ended December 31, 2008 and 2007 by our Chief
Executive Officer and each of our other two highest paid executives, whose total
compensation exceeded $100,000 (if any) for the years ended December 31,
2008 and 2007.
 
 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
                                                                                          ($)Hongwen
      Li,
                                                                                        
                                                                                        
                                                                                        2008
                                                                                        
                                                                                        41,666
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        41,666President
      and CEO (1)
                                                                                        
                                                                                        
                                                                                        2007
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        N/A
                                                                                        
                                                                                        
                                                                                        N/AHongjun
      Li,
                                                                                        
                                                                                        
                                                                                        2008
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-former
      President (2)
                                                                                        
                                                                                        
                                                                                        2007
                                                                                        
                                                                                        9,167
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        -0-
                                                                                        
                                                                                        
                                                                                        9,167
 (1)  On August
15, 2008, we entered into an employment agreement with Mr. Hongwen Li pursuant
to which he is entitled to an initial annual compensation of $100,000 as our
Chief Executive Officer.
 
 (2) On
August 15, 2008, Mr. Hongjun Li resigned as our President and from our board of
directors.
 41
 Table of Contents
 
 Employment
Agreements, Termination of Employment and Change-in-Control Arrangements with
our Executive Officers
 
 Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
 
 Employment
Agreement with Hongwen Li
 
 On August
15, 2008, we entered into an employment agreement with Mr. Hongwen Li for an
initial term of one year, which automatically renews for successive one-year
periods unless one party notifies the other party in writing not to renew at
least 60 days before the end of the then effective term. Under the employment
agreement, we agreed to compensate Mr. Li an annual salary of $100,000 for his
services as President and Chief Executive Officer, which may be adjusted at the
discretion of the Board. During the term of the employment agreement, we agree
to include Mr. Li as an insured if we obtain an officers and directors insurance
policy. In addition, we agreed to reimburse Mr. Li for reasonable expenses
incurred in connection with the performance of his duties under the employment
agreement.
 
 We may
terminate the employment agreement for cause if Mr. Li (i) is convicted of (or
pleads nolo contendere to) any felony; (ii) commits acts of fraud,
misappropriation or embezzlement at the expense of Songzai; (iii) engages in
willful misconduct, gross negligence or gross or habitual or material neglect in
the performance of his duties; or (iv) causes a material breach of any of the
covenants, terms or provisions of the employment agreement that remains uncured
for a period of 30 days after written notice from us to him.
 
 On the
other hand, Mr. Li may terminate the employment agreement for good reason if (i)
we cause a material breach of any of the provisions of this Agreement that
remains uncured within thirty (30) days following his written notice of such
breach; (ii) we adversely alter his title, position, status, duties or authority
with Songzai; (iii) we reduce his compensation; (iv) the Board requests him to
engage in any unlawful activity; or (v) a change in control of Songzai
occurs.
 
 The
employment agreement may also be terminated by either Mr. Li or us without cause
or without good reason, immediately upon written notice to the other party.
Additionally, the employment agreement terminates upon Mr. Li’s death or
inability to carry out his duties for 90 consecutive days or 120 days in any
360-day period. Upon termination of the employment agreement, we are obligated
to Mr. Li for all accrued but unpaid salary and accrued but unreimbursed
expenses.
 
 The
employment also contains restrictive covenants preventing the unauthorized use
and/or disclosure by Mr. Li of confidential information during or at any time
after termination.
 
 Employment
Agreement with Yvonne Zhang
 
 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.
 
 On June
9, 2008, we agreed to employ Ms. Zhang as our full-time Chief Financial Officer,
and amended the terms of her employment agreement. Specifically, we agreed to
continue the employment of Ms. Zhang for a term commencing on June 9, 2008 and
ending on June 8, 2009, during which Ms. Zhang is to receive a base annual
salary of $100,000. We also agreed to grant Ms. Zhang options under our 2006
Stock Option/Stock Issuance Plan (the “2006 Plan”) to purchase up to 55,000
shares of our common stock, at an exercise price of $9.35 per share for a period
of 5 years. Ms. Zhang is also eligible for an annual bonus, if any, which will
be determined and paid in accordance with policies set from time to time by our
board of directors. The employment relationship may be terminated by Ms. Zhang
or us prior to the expiration of the Term, with or without cause, upon which we
agreed to pay Ms. Zhang any accrued but unpaid base salary and any accrued but
unreimbursed expenses.
 
 On March
10, 2009, we granted Ms. Zhang options to purchase up to 55,000 shares of common
stock under our 2009 Stock Incentive Plan pursuant to a non-statutory stock
option agreement. We granted these options to replace the options previously
granted to Ms. Zhang under the 2006 Plan, which expired under their
terms.
 
 Outstanding
Equity Awards at Fiscal Year-End
 
 With the
exception of Ms. Yvonne Zhang, our Chief Financial Officer, there were no
unexercised options, unvested stock awards or equity incentive plan awards for
any of the above-named executive officers outstanding as of December 31, 2008.
Pursuant to the terms of her employment agreement, Ms. Zhang was granted options
to purchase up to 55,000 shares of common stock under our 2006 Plan, which
options were outstanding as of December 31, 2008.
 42
 Table of Contents
 
 Compensation
of Directors
 
 The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the year ended December 31,
2008.
 
 DIRECTOR
      COMPENSATION TABLEName
                                                                                            
                                                                                            Year
                                                                                            
                                                                                            Fees
                                                                                              Earned
                                                                                              or
                                                                                              Paid
      in
                                                                                              Cash
                                                                                              ($)
                                                                                            
                                                                                            Stock
                                                                                              Awards
                                                                                              ($)
                                                                                            
                                                                                            Option
                                                                                              Awards
                                                                                              ($)
                                                                                            
                                                                                            Non-Equity
                                                                                              Incentive
      Plan
                                                                                              Compensation
                                                                                              ($)
                                                                                            
                                                                                            Nonqualified
                                                                                              Deferred
                                                                                              Compensation
                                                                                              Earnings
                                                                                              ($)
                                                                                            
                                                                                            All
      Other
                                                                                              Compensation
                                                                                              ($)
                                                                                            
                                                                                            Total
                                                                                              ($)Guoqing
      Yue (1)
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            62,500
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            62,500Hongwen
      Li
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-Hongjun
      Li (2)
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            
                                                                                            -0-
                                                                                            
                                                                                            -0-Elan
      Yaish (3)
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/AYanlin
      Qu (4)
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/AShengchun
      Liu (5)
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            
                                                                                            N/A
                                                                                            
                                                                                            N/A
 
 (1)
                                                                                            Mr.
      Guoqing Yue was appointed to our board of directors effective August 15,
      2008, and is entitled to receive annual compensation of $150,000 for his
      services rendered as a director.
 (2)
                                                                                            Mr
      Hongjun Li resigned from our board of directors effective August 15,
      2008.
 (3)
                                                                                            Mr.
      Elan Yaish was appointed to our board of directors effective February 27,
      2009, and is entitled to receive annual compensation of $30,000 for his
      services rendered as a director and chairman of the audit committee, as
      well as an option to purchase up to 20,000 shares of our common stock
      under the Company 2009 Stock Incentive
Plan.
 (4)
                                                                                            Mr.
      Yanlin Qu was appointed to our board of directors effective February 27,
      2009, and is entitled to receive annual compensation of RMB 50,000 for his
      services rendered as a director, as well as chairman of the nominating
      committee and member of the audit and compensation
    committees.
 (5)
                                                                                            Mr.
      Shengchun Liu was appointed to our board of directors effective February
      27, 2009, and is entitled to receive annual compensation of RMB 50,000 for
      his services rendered as a director, as well as chairman of the
      compensation committee and member of the audit and nominating
      committees.
 
 There
were no stock or option awards issued to any directors and outstanding as of
December 31, 2008.
 
 Director
Agreements
 
 In
connection with the appointments of Mr. Guoqing Yue, Mr. Elan Yaish, Mr. Yanlin
Qu and Mr. Shengchun Liu to our board of directors, we entered into agreements
with each of them as follows:
 
 Under the
agreement with Mr. Yue, Mr. Yue is entitled to receive annual compensation of
$150,000 for his actual attendance and participation at all meetings of the
board of directors, as well as expenses incurred in connection therewith. Mr.
Yue’s annual compensation will be paid in cash. During his term as a director,
Mr. Yue is included as an insured in our officers and directors insurance policy
(“D&O Insurance”). In addition, we agreed to reimburse Mr. Yue for
reasonable expenses incurred in connection with the performance of duties as a
director and Chairman of the Board. The employment also contains restrictive
covenants preventing the unauthorized use and/or disclosure by Mr. Yue of
confidential information during or at any time after his term as a
director.
 
 Under the
agreement with Mr. Yaish, in addition to duties as a director, he will serve as
chairman of the audit committee as well as the audit committee financial expert,
for annual compensation of $30,000. Mr. Yaish has also received options to
purchase shares of the Company’s common stock pursuant to a non-statutory stock
option agreement entered into between the Company and Mr. Yaish.  Mr. Yaish
is included as an insured under our D&O Insurance policy, and the Company
agreed to indemnify Mr. Yaish against any expense, liability, or loss paid or
incurred in connection with any event relating to his directorship to which we
also entered into an indemnification agreement with Mr. Yaish. During his
directorship, Mr. Yaish agrees not to disclose confidential information without
our consent and not to be engaged by our direct competitors for services to
those that he provides to us.
 
 Under the
agreements with Mr. Qu and Mr. Liu, in addition to their duties as directors,
they will each serve on the compensation committee and nominating committee, for
annual compensation of 50,000 Renminbi. Additionally, Mr. Liu will
serve as chairman of the compensation committee and Mr. Qu as chairman of the
nominating committee. During their directorships, both Mr. Qu and Mr. Liu agree
not to disclose confidential information without our consent and not to be
engaged by our direct competitors for services to those that each of them
provides to us.
 43
 Table of Contents
 
 Indemnification
of Officers and Directors
 
 The
statutes, charter provisions, by-laws, contracts or other arrangements under
which any of our controlling person, director or officer 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;
 
 (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 there from, 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)           The
Company has directors and officers insurance that insures our officers,
directors or controlling persons against liabilities that may arise against them
those capacities.
 
 (5)           The
Company is contractually obligated to indemnify one of its directors in
connection with such director’s duties serving as our director pursuant to an
indemnification agreement.
 
 These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.
 
 Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. No pending material
litigation or proceeding involving our directors, executive officers, employees
or other agents as to which indemnification is being sought exists, and we are
not aware of any pending or threatened material litigation that may result in
claims for indemnification by any of our directors or executive
officers.
 44
 Table of Contents
 
 Insofar
as indemnification for liabilities under the Securities Act may be permitted to
directors, officers, or persons controlling the Company pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
 
 ITEM 12.
                                                                                                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 Securities
Authorized for Issuance under Equity Compensation Plan
 
 As of
December 31, 2008, we had one equity compensation plan in effect. The
Company’s 2006 Stock Option/Stock Issuance Plan was adopted on March 14, 2006,
and under its terms, the approval by our shareholders was required within 12
months of its adoption date. As the plan was not approved by our shareholders
within that time, no further issuance under the plan is permitted in accordance
with its terms.
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth certain information regarding our common stock
beneficially owned on March 23, 2009, for (i) each stockholder known to be the
beneficial owner of 5% or more of our outstanding common stock, (ii) each
executive officer and director, and (iii) all executive officers and directors
as a group. 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 March 23,
2009 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. Percentages are
determined based on 14,932,582 common shares issued and outstanding as of March
23, 2009. To the best of our knowledge, subject to community and martial
property laws, all persons named have sole voting and investment power with
respect to such shares, except as otherwise noted.
 
 Number of Shares(2)
                                                                                                
                                                                                                
                                                                                                %
      of Class of Stock
                                                                                                  OutstandingName and Address of Beneficial
      Owner(1)
                                                                                                
                                                                                                Common
                                                                                                  Stock
                                                                                                
                                                                                                
                                                                                                Preferred
                                                                                                  Stock
      (3)
                                                                                                
                                                                                                
                                                                                                Common
                                                                                                  Stock
      (4)
                                                                                                
                                                                                                
                                                                                                Preferred
                                                                                                  StockGuoqing
      Yue, Chairman of the Board of Directors (5)
                                                                                                
                                                                                                
                                                                                                8,000,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                53.57
                                                                                                %
                                                                                                
                                                                                                
                                                                                                -Hongwen
      Li, President and Director
                                                                                                
                                                                                                
                                                                                                1,092,038
                                                                                                
                                                                                                
                                                                                                
                                                                                                400,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                7.31
                                                                                                %
                                                                                                
                                                                                                
                                                                                                100
                                                                                                %Yvonne
      Zhang, Chief Financial Officer (6)
                                                                                                
                                                                                                
                                                                                                55,000-
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                *
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Huan
      Liu, Secretary
                                                                                                
                                                                                                
                                                                                                42,983
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                *
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Elan
      Yaish, Director (7)
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Yanlin
      Qu, Director (8)
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Shengchun
      Liu, Director (9)
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -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
                                                                                                %
                                                                                                
                                                                                                
                                                                                                -All
      Directors and Executive Officers as a Group (7)
      persons
                                                                                                
                                                                                                
                                                                                                9,190,021
                                                                                                
                                                                                                
                                                                                                
                                                                                                400,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                61.54
                                                                                                %
                                                                                                
                                                                                                
                                                                                                100
                                                                                                %
 
 * Less
than 1%
 
 (1)
                                                                                                Unless
      otherwise indicated, the address of the named beneficial owners is: 17890
      Castleton Street, Suite 112, City of Industry,
      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.
 
 (3)
                                                                                                Each
      share of preferred stock is convertible into 1 share of common stock and
      votes 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
      as of March 23, 2009.
 
 (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 of
      Xing An, 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 transaction. 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.
  45
 Table of Contents
 
 (6)
                                                                                                Represents
      shares underlying stock options that are exercisable within 60 days of
      March 23, 2009
 
 (7)
                                                                                                Elan
      Yaish’s address is: 515 Cedarwood Dr., Cedarhurst,
      NY 11516
 
 (8)
                                                                                                Yanlin
      Qu’s address is: Suite #301, Unit 1, #6, A Shen He St., Nan Gang District,
      Harbin City, Heilongjiang Province,
China
 
 (9)
                                                                                                Shengchun
      Liu’s address is: #7 Xuan Qing St., Nan Gang District, Harbin City,
      Heilongjiang Province, China
 
 ITEM 13.
                                                                                                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
 
 Advance
from shareholder
 
 At
December 31, 2008, we owed our Chief Executive Officer $1,175,242 for
short-term advances made to us to facilitate our operations.  Imputed
interest expense is charged at 6% per annum on the amount due at balance sheet
date. Total imputed interest included as additional paid-in capital amounted to
$50,177 for the year ended December 31, 2008. The manner of settlement is in
cash, and we anticipate repayment of the advances sometimes in
2009.
 
 Payments
to shareholders
 
 As
discussed elsewhere in this Annual Report, we completed the acquisition of Xing
An in April 2008 and issued 8 million shares of Songzai common stock and paid
$30,000,000 (which is treated as a dividend) to the Xing An shareholders,
including Mr. Guoqing Yue, our Chairman of the Board. On October 15, 2008,
we paid $18 million of the dividend to the Xing An shareholders in accordance
with the terms of the Stock Purchase Agreement. We anticipate paying the
remaining $12 million of the dividend to the Xing An Shareholders by April
2009.
 
 Director
Independence
 
 Based
upon information submitted by Mr. Elan Yaish, Mr. Yanlin Qu and Mr. Shengchun
Liu, our board of directors has determined that each of them is “independent”
under the listing standards of NYSE Alternext US LLC (formerly the American
Stock Exchange).
 
 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, 2008 and December 31, 2007 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,
                                                                                                  2008
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                  2007(i)       Audit
      Fees
                                                                                                
                                                                                                $
                                                                                                110,000
                                                                                                
                                                                                                
                                                                                                $
                                                                                                160,000(ii)      Audit
      Related Fees(iii)     Tax
      Fees
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -(iv)     All
      Other FeesTotal
      fees
                                                                                                
                                                                                                $
                                                                                                110,000
                                                                                                
                                                                                                
                                                                                                $
                                                                                                160,000
 
 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.
 46
 Table of Contents
 
 PART
IV
 
 ITEM
      15.
                                                                                                  EXHIBITS
 
 (1)           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
 
 ·
                                                                                                  Consolidated
      Balance Sheets at December 31, 2008 and
2007
 
 ·
                                                                                                  Consolidated
      Statements of Income and Other Comprehensive Income for the Years
      Ended December 31, 2008 and 2007
 
 ·
                                                                                                  Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2008
      and 2007
 
 ·
                                                                                                  Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
 
 ·
                                                                                                  Notes
      to Consolidated Financial
Statements
 
 (2)           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.
 
 (3)           Exhibits
 
 Exhibit
                                                                                                    Number
                                                                                                  
                                                                                                  Description2.1
                                                                                                  
                                                                                                  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 Shareholders”). (3)3.1
                                                                                                  
                                                                                                  Articles
      of Incorporation dated June 7, 2001. (4)3.2
                                                                                                  
                                                                                                  Certificate
      of Amendment to Articles of Incorporation dated October 23, 2003.
      (13)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)
 47
 Table of Contents
  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
                                                                                                    
                                                                                                    Songzai’s
      Amended and Restated By-laws (12)4.1
                                                                                                    
                                                                                                    Form
      of the Promissory Note issued to the Xing An Shareholders
    (7)4.2
                                                                                                    
                                                                                                    Form
      of non-statutory stock option agreement with Yvonne Zhang
    (11)4.3
                                                                                                    
                                                                                                    Form
      of non-statutory stock option agreement with Elan Yaish
    (11)10.1
                                                                                                    
                                                                                                    Escrow
      Agreement dated as of April 4, 2008, by and among the Songzai, the Xing An
      Shareholders and U.S. Bank (7)10.2
                                                                                                    
                                                                                                    Trust
      Agreement dated as of April 4, 2008, by and among Songzai, the Xing An
      Shareholders and Anping Cang (7)14
                                                                                                    
                                                                                                    Code
      of Ethics (10)21
                                                                                                    
                                                                                                    List
      of subsidiaries (7)23
                                                                                                    
                                                                                                    Consent
      of John T. Boyd Company, independent geologists (12)31.1
                                                                                                    
                                                                                                    Section
      302 Certification by the Corporation’s Chief Executive Officer
      (12)31.2
                                                                                                    
                                                                                                    Section
      302 Certification by the Corporation’s Chief Financial Officer
      (12)32.1
                                                                                                    
                                                                                                    Section
      906 Certification by the Corporation's Chief Executive Officer
      (12)32.2
                                                                                                    
                                                                                                    Section
      906 Certification by the Corporation's Chief Financial
      Officer(12)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 for the years ended December 31, 2008
      and 2007 (Restated), and accompanying notes to consolidated financial
      statements. (12)99.5
                                                                                                    
                                                                                                    Employment
      agreement between Songzai and Yvonne Zhang dated as of July 20, 2007.
      (7)99.6
                                                                                                    
                                                                                                    Form
      of amendment to employment agreement between Songzai and Yvonne
      Zhang (8)99.7
                                                                                                    
                                                                                                    Form
      of employment agreement between Songzai and Hongwen Li
  (9)99.8
                                                                                                    
                                                                                                    Form
      of director offer letter to Guoqing Yue (9)99.9
                                                                                                    
                                                                                                    Form
      of director offer letter to Elan Yaish (10)99.10
                                                                                                    
                                                                                                    Form
      of indemnification agreement with Elan Yaish (10)99.11
                                                                                                    
                                                                                                    Form
      of director offer letter to Yanlin Qu and Shengchun Liu
    (10)
 
 (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.
 48
 Table of Contents
  (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)
                                                                                                      Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K filed on
      April 10, 2008.(8)
                                                                                                      Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      June 10, 2008.(9)
                                                                                                      Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      August 19, 2008.(10)
                                                                                                      Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      March 5, 2009.(11)
                                                                                                      Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      March 13, 2009.(12)
                                                                                                      Filed
      herewith.(13)
                                                                                                      Incorporated
      by reference from the Registrant's Annual Report on Form 10-K filed on
      March 30, 2009.
 
 49
 Table of Contents
 
 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:
      November 25, 2009
                                                                                                          By:
                                                                                                          /s/ Hongwen
      LiHongwen
      LiChief
      Executive Officer
 
 Date:
      November 25, 2009
                                                                                                          By:
                                                                                                          /s/ Yvonne
      ZhangYvonne
      ZhangChief
      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.  Each person whose signature appears below constitutes and
appoints Hongwen Li and Yvonne Zhang as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K/A
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the U.S. Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
 
 Name
                                                                                                          
                                                                                                          Title
                                                                                                          
                                                                                                          Date/s/
      Guoqing Yue
                                                                                                          
                                                                                                          Chairman
      of the Board of Directors
                                                                                                          
                                                                                                          November
      25, 2009Guoqing
      Yue/s/ Hongwen
      Li
                                                                                                          
                                                                                                          Chief
      Executive Officer and Director
                                                                                                          
                                                                                                          November
      25, 2009Hongwen
      Li/s/
      Yvonne Zhang
                                                                                                          
                                                                                                          Chief
      Financial Officer
                                                                                                          
                                                                                                          November
      25, 2009Yvonne
      Zhang/s/  Elan
      Yaish
                                                                                                          
                                                                                                          Director
                                                                                                          
                                                                                                          November
      25, 2009Elan
      Yaish/s/
      Yanlin Qu
                                                                                                          
                                                                                                          Director
                                                                                                          
                                                                                                          November
      25, 2009Yanlin
      Qu/s/
      Shengchun Liu
                                                                                                          
                                                                                                          Director
                                                                                                          
                                                                                                          November
      25, 2009Shengchun
      Liu
 
 50
 Table of Contents
 
 EXHIBIT
INDEX
 Exhibit
      No.
                                                                                                                
                                                                                                                Description23
                                                                                                                
                                                                                                                Consent
      of John T. Boyd Company, independent geologists (12)31.1
                                                                                                                
                                                                                                                Section
      302 Certification by the Corporation’s Chief Executive Officer
      (12)31.2
                                                                                                                
                                                                                                                Section
      302 Certification by the Corporation’s Chief Financial Officer
      (12)32.1
                                                                                                                
                                                                                                                Section
      906 Certification by the Corporation's Chief Executive Officer
      (12)32.2
                                                                                                                
                                                                                                                Section
      906 Certification by the Corporation's Chief Financial
      Officer(12)
  51
 Table of Contents
 
 INDEX
TO CONSOLIDATED FINANCIAL INFORMATION
 
 Report of Independent Registered Public Accounting Firm
                                                                                                                F-2Consolidated Balance Sheets as of December 31, 2008 and
      2007
                                                                                                                F-3Consolidated Statements of Income and Other Comprehensive
      Income for the Years Ended December 31, 2008 and
    2007
                                                                                                                F-4Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2008 and 2007
                                                                                                                F-5Consolidated Statements of Stockholders’ Equity for the Years
      Ended December 31, 2008 and 2007
                                                                                                                F-6Notes to the Consolidated Financial Statements
                                                                                                                F-7
 Table of Contents
 
 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 sheets of Songzai International
Holding Group, Inc. and subsidiaries as of December 31, 2008 and 2007 and the
related consolidated statements of income and other comprehensive income,
stockholders' equity, and cash flows for the years ended December 31, 2008 and
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 audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Songzai
International Holding Group, Inc. and Subsidiaries as of December 31, 2008 and
2007 and the consolidated results of their operations and their consolidated
cash flows for the year ended December 31, 2008 and 2007, in conformity with
U.S. generally accepted accounting principles.
 
 As
discussed in Note 20 to the consolidated financial statements, certain errors in
the amortization of the mining rights and asset retirement obligation,
depreciation of property and equipment, deferred income taxes, goodwill and the
reclassification of prepaid mining rights in the financial statements as at and
for the years ended December 31, 2008 and 2007 were discovered by the
Company’s management.  Accordingly, the 2008 and 2007 financial
statements have been restated.
 
 
 /s/
Goldman Parks Kurland Mohidin LLP
 Goldman
Parks Kurland Mohidin LLP
 Encino,
California
 March 1,
2009, except for Note 20 for which the date is October 11, 2009.
 F-2
 Table of Contents
 
 SONGZAI INTERNATIONAL HOLDING GROUP, INC.
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008 AND 2007
 
 As
      of December 31, 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            As
      of December 31, 2007(Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            (Restated)ASSETSCURRENT
      ASSETSCash
      & cash equivalents
                                                                                                                            
                                                                                                                            $
                                                                                                                            16,744,741
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            9,327,227Restricted
      cash
                                                                                                                            
                                                                                                                            
                                                                                                                            212,901
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Accounts
      receivable
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,509,446Other
      receivables, deposits and prepayments
                                                                                                                            
                                                                                                                            
                                                                                                                            47,458
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Inventory
                                                                                                                            
                                                                                                                            
                                                                                                                            29,662
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            502,984Advance
      to shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            753,982Total
      current assets
                                                                                                                            
                                                                                                                            
                                                                                                                            17,034,762
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,093,639NONCURRENT
      ASSETSGoodwill
                                                                                                                            
                                                                                                                            
                                                                                                                            26,180,923
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Long
      term prepaid expense
                                                                                                                            
                                                                                                                            
                                                                                                                            27,311
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Prepaid
      mining rights, net
                                                                                                                            
                                                                                                                            
                                                                                                                            19,188,533
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6,823,807Property
      and equipment, net
                                                                                                                            
                                                                                                                            
                                                                                                                            13,711,998
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            7,671,122Construction
      in progress
                                                                                                                            
                                                                                                                            
                                                                                                                            97,313
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Deferred
      tax asset
                                                                                                                            
                                                                                                                            
                                                                                                                            47,751
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            269,464Asset
      retirement cost, net
                                                                                                                            
                                                                                                                            
                                                                                                                            2,630,113
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,703,786Total
      noncurrent assets
                                                                                                                            
                                                                                                                            
                                                                                                                            61,883,942
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            17,468,179TOTAL
      ASSETS
                                                                                                                            
                                                                                                                            $
                                                                                                                            78,918,704
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            31,561,818LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                                                                                            
                                                                                                                            $
                                                                                                                            270,325
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            -Unearned
      revenue
                                                                                                                            
                                                                                                                            
                                                                                                                            190,217
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Accrued
      liabilities and other payables
                                                                                                                            
                                                                                                                            
                                                                                                                            497,549
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            225,348Taxes
      payable
                                                                                                                            
                                                                                                                            
                                                                                                                            6,700,901
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            7,253,019Advance
      from shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            1,175,242
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Dividend
      payable to Xing An shareholders
                                                                                                                            
                                                                                                                            
                                                                                                                            12,000,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Total
      current liabilities
                                                                                                                            
                                                                                                                            
                                                                                                                            20,834,234
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            7,478,367NONCURRENT
      LIABILITIESAsset
      retirement obligation
                                                                                                                            
                                                                                                                            
                                                                                                                            3,974,356
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,577,759Total
      noncurrent liabilities
                                                                                                                            
                                                                                                                            
                                                                                                                            3,974,356
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,577,759Total
      liabilities
                                                                                                                            
                                                                                                                            
                                                                                                                            24,808,590
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            11,056,126CONTINGENCIES
      AND COMMITMENTSTOCKHOLDERS'
      EQUITYSeries
      A Preferred Stock ($0.001 par value,
                                                                                                                              8,000,000
      shares authorized, 400,000 shares
                                                                                                                              issued
      and outstanding)
                                                                                                                            
                                                                                                                            
                                                                                                                            400
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Common
      stock, $0.001 par value, 100,000,000
                                                                                                                              shares
      authorized, 14,932,582 and 8,000,000
                                                                                                                              shares
      issued and outstanding as of December
                                                                                                                              31,
      2008 and December 31, 2007, respectively
                                                                                                                            
                                                                                                                            
                                                                                                                            14,932
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000Additional
      paid in capital
                                                                                                                            
                                                                                                                            
                                                                                                                            38,726,197
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,321,062Statutory
      reserves
                                                                                                                            
                                                                                                                            
                                                                                                                            7,579,346
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,943,658Accumulated
      other comprehensive income
                                                                                                                            
                                                                                                                            
                                                                                                                            3,575,866
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,372,462Retained
      earnings
                                                                                                                            
                                                                                                                            
                                                                                                                            4,213,373
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,860,510Total
      stockholders' equity
                                                                                                                            
                                                                                                                            
                                                                                                                            54,110,114
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            20,505,692TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                                                            
                                                                                                                            $
                                                                                                                            78,918,704
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            31,561,818
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-3
 Table of Contents
 
 SONGZAI INTERNATIONAL HOLDING GROUP, INC.
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 YEARS
ENDED DECEMBER 31, 2008 AND 2007
 
 2008
      (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            2007(Restated)Net
      sales
                                                                                                                            
                                                                                                                            $
                                                                                                                            57,130,098
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            34,580,611Cost
      of goods sold
                                                                                                                            
                                                                                                                            
                                                                                                                            25,676,126
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,012,207Gross
      profit
                                                                                                                            
                                                                                                                            
                                                                                                                            31,453,972
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            20,568,404Operating
      expensesSelling
      expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            499,470
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            750,026General
      and administrative expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            2,294,928
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            719,398Total
      operating expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            2,794,398
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,469,424Income
      from operations
                                                                                                                            
                                                                                                                            
                                                                                                                            28,659,574
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            19,098,980Non-operating
      income (expenses)Interest
      income
                                                                                                                            
                                                                                                                            
                                                                                                                            15,542
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,118Interest
      expense
                                                                                                                            
                                                                                                                            
                                                                                                                            (203,498
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (134,511
                                                                                                                            )Other expenses, net
                                                                                                                            
                                                                                                                            
                                                                                                                            (57,431
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (203
                                                                                                                            )Total
      non-operating expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            (245,387
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (132,596
                                                                                                                            )Income
      before income tax
                                                                                                                            
                                                                                                                            
                                                                                                                            28,414,187
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            18,966,384Provision
      for income tax
                                                                                                                            
                                                                                                                            
                                                                                                                            6,690,206
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6,260,444Net
      income
                                                                                                                            
                                                                                                                            
                                                                                                                            21,723,981
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            12,705,940Other
      comprehensive incomeForeign
      currency translation gain
                                                                                                                            
                                                                                                                            
                                                                                                                            2,170,763
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,085,643Comprehensive
      Income
                                                                                                                            
                                                                                                                            $
                                                                                                                            23,894,744
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            13,791,583Basic
      weighted average shares outstanding
                                                                                                                            
                                                                                                                            
                                                                                                                            13,133,141
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000Diluted
      weighted average shares outstanding
                                                                                                                            
                                                                                                                            
                                                                                                                            13,429,416
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000Basic
      net earnings per share
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.65
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.59Diluted
      net earnings per share
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.62
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.59
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
 Table of Contents
 
 SONGZAI INTERNATIONAL HOLDING GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 YEARS ENDED DECEMBER 31, 2008 AND
2007
 
 2008
      (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            2007
      (Restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                                                                                            
                                                                                                                            $
                                                                                                                            21,723,981
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            12,705,940Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                                                                                                                            
                                                                                                                            
                                                                                                                            3,335,565
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,758,945Accretion
      of interest on asset retirement obligation
                                                                                                                            
                                                                                                                            
                                                                                                                            153,321
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            134,512Imputed
      interest expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            50,177
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Stock
      option compensation expense
                                                                                                                            
                                                                                                                            
                                                                                                                            471,979
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Changes
      in deferred tax
                                                                                                                            
                                                                                                                            
                                                                                                                            (456
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (9,001
                                                                                                                            )Increase
      in deferred tax liability
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -(Increase)
      decrease in current assets:Accounts
      receivable
                                                                                                                            
                                                                                                                            
                                                                                                                            3,686,105
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,021,986Advance
      to suppliers
                                                                                                                            
                                                                                                                            
                                                                                                                            52,059
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Other
      receivables, deposits and prepayments
                                                                                                                            
                                                                                                                            
                                                                                                                            79,503
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            79,320Inventory
                                                                                                                            
                                                                                                                            
                                                                                                                            537,532
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            (453,946
                                                                                                                            )Increase
      (decrease) in current liabilities:Accounts
      payable
                                                                                                                            
                                                                                                                            
                                                                                                                            (50,904
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (90,477
                                                                                                                            )Unearned
      revenue
                                                                                                                            
                                                                                                                            
                                                                                                                            (14,110
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (268,524
                                                                                                                            )Accrued
      liabilities and other payables
                                                                                                                            
                                                                                                                            
                                                                                                                            (251,156
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (365,433
                                                                                                                            )Taxes
      payable
                                                                                                                            
                                                                                                                            
                                                                                                                            (1,368,204
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            2,748,056Net
      cash provided by operating activities
                                                                                                                            
                                                                                                                            
                                                                                                                            28,405,392
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            17,261,378CASH
      FLOWS FROM INVESTING ACTIVITIES:Change
      in restricted cash
                                                                                                                            
                                                                                                                            
                                                                                                                            (346
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            -Acquisition
      of property and equipment
                                                                                                                            
                                                                                                                            
                                                                                                                            (109,094
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (6,190,079
                                                                                                                            )Construction
      in progress
                                                                                                                            
                                                                                                                            
                                                                                                                            (96,720
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            -Prepaid
      mining rights
                                                                                                                            
                                                                                                                            
                                                                                                                            (12,112,245
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (6,242,120
                                                                                                                            )Cash
      acquired at purchase of business
                                                                                                                            
                                                                                                                            
                                                                                                                            7,204,465
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Net
      cash used in investing activities
                                                                                                                            
                                                                                                                            
                                                                                                                            (5,113,940
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (12,432,199
                                                                                                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      to shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            854,611Repayment
      from shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            791,937
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Advance
      from shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            248,035
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Dividend
      payment to Xing An shareholders
                                                                                                                            
                                                                                                                            
                                                                                                                            (18,000,000
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (2,159,719
                                                                                                                            )Net
      cash used in financing activities
                                                                                                                            
                                                                                                                            
                                                                                                                            (16,960,028
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (1,305,108
                                                                                                                            )EFFECT
      OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
                                                                                                                            
                                                                                                                            
                                                                                                                            1,086,090
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            519,392NET
      INCREASE IN CASH & CASH EQUIVALENTS
                                                                                                                            
                                                                                                                            
                                                                                                                            7,417,514
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            4,043,463CASH
      & CASH EQUIVALENTS, BEGINNING OF YEAR
                                                                                                                            
                                                                                                                            
                                                                                                                            9,327,227
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            5,283,764CASH
      & CASH EQUIVALENTS, END OF YEAR
                                                                                                                            
                                                                                                                            $
                                                                                                                            16,744,741
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            9,327,227Supplemental
      Cash flow data:Income
      tax paid
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,502,216
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,546,181Interest
      paid
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-5
 Table of Contents
  SONGZAI INTERNATIONAL HOLDING GROUP, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 Series
      A Preferred stock
                                                                                                                            
                                                                                                                            
                                                                                                                            Common
      stockShares
                                                                                                                            
                                                                                                                            
                                                                                                                            Amount
                                                                                                                            
                                                                                                                            
                                                                                                                            Shares
                                                                                                                            
                                                                                                                            
                                                                                                                            Amount
                                                                                                                            
                                                                                                                            
                                                                                                                            Paid
      in
                                                                                                                              capital
                                                                                                                            
                                                                                                                            
                                                                                                                            Statutory
                                                                                                                              reserves
                                                                                                                            
                                                                                                                            
                                                                                                                            Other
                                                                                                                              comprehensive
                                                                                                                              income
                                                                                                                            
                                                                                                                            
                                                                                                                            Retained
                                                                                                                              earnings
                                                                                                                            
                                                                                                                            
                                                                                                                            TotalBalance
      at December 31, 2006
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            8,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,321,062
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,846,933
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            286,819
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,251,295
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            6,714,109Net
      income for the year
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            12,705,940
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            12,705,940Transfer
      to statutory  reserves
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,096,725
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -1,096,725
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Foreign
      currency translation gain
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,085,643
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,085,643Balance
      at December 31, 2007
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,321,062
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,943,658
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,372,462
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,860,510
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            20,505,692Recapitalization
      on reverse acquisition with Xing An coal mines
                                                                                                                            
                                                                                                                            
                                                                                                                            400,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            400
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6,932,582
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6,932
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            36,882,979
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,264,570
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            39,154,881Net
      income for the year
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            21,723,981
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            21,723,981Stock
      options issued to employee
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            471,979
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            471,979Imputed
      interest on advances from a stockholder
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            50,177
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            50,177Dividend
      payable to  Xing An shareholders
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -30,000,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -30,000,000Transfer
      to statutory  reserves
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,371,118
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -2,371,118
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Foreign
      currency translation gain
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,203,404
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,203,404Balance
      at December 31, 2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            400,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            400
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,932,582
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            14,932
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            38,726,197
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,579,346
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,575,866
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            4,213,373
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            54,110,114
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-6
 Table of Contents
 
 SONGZAI INTERNATIONAL HOLDING GROUP, INC.
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Songzai
International Holding Group, Inc. (“Songzai” or the “Company”) was incorporated
in Nevada on June 7, 2001. As
described in the third paragraph in this Note 1, in April 2008 the Company
completed a transaction with Xing An (as defined below) which is accounted for
as a reverse acquisition and the historical financial information contained
herein is of Xing An.The Company is engaged in coal production by
exploring, assembling, assessing, permitting, developing and mining coal
properties in the People’s Republic of China (the “PRC”). After obtaining
permits from the Heilongjiang Province National Land and
Resources Administration Bureau and Heilongjiang Economic and Trade Commission,
the Company extracts coal from properties it has the right to mine, 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.
 
 On
September 23, 2004, the Company acquired a 75% interest in Heilongjiang Tong
Gong Kuang Ye You Xian Gong Si (“Tong Gong”), which owns the mining rights to a
coal mine located near Heihe City in the Heilongjiang Province in exchange for
400,000 shares of its convertible preferred stock which, at the time of
issuance, were convertible into 40,000,000 shares of common stock. (The
conversion ratio was amended to 1:10 on December 19, 2006, such that the 400,000
shares of convertible preferred stock were convertible into 4,000,000 shares of
common stock) Effective January 7, 2008, however, the conversion ratio for the
preferred stock was changed to 1-for-1 as a result of the 10-to-1 reverse stock
split of issued and outstanding shares of common stock which was effective on
that date.  Additionally, Harbin Green Ring Biological Degradation Products
Developing Co., Ltd. (“Harbin Green”), which owns the remaining 25% of Tong
Gong, assigned and transferred his beneficial interests to the
Company.  As a result, the Company beneficially owns 100% of Tong
Gong.
 
 On
December 31, 2007, the Company entered into a Stock Purchase Agreement (the
“Agreement”) to acquire two PRC mining companies under common ownership:
Heilongjiang Xing An Group Hong Yuan Coal Mine Co., Ltd. (“Hong Yuan”) and
Heilongjiang Xing An Group Sheng Yu Mining Co., Ltd. (“Sheng Yu”, and with Hong
Yuan sometimes collectively as “Xing An”) for an aggregate purchase price
determined by multiplying the number of shares of Songzai outstanding just prior
to the transaction (400,000 Series A preferred shares and 6,932,582 common
shares) by the average stock price of Songzai stock two days before and two days
after the Agreement date.  This transaction was completed on April 4,
2008, and the Xing An shareholders received 8 million shares of Songzai common
stock and $30 million, which is treated as a dividend pursuant to the accounting
treatment applied to the transaction.  As a result of the
transaction  Xing An shareholders now collectively own 53% of the
combined company.  For accounting purposes, the transaction was
accounted for as a reverse acquisition of the Company by Xing An.
 
 Because
current PRC regulations restrict foreign ownership of any mining-related company
to a maximum of 90% of such company’s equity interest, the Company acquired 90%
of the registered capital, representing 90% of the outstanding equity interests,
of each of Hong Yuan and Sheng Yu from their owners (the “Xing An
Shareholders”). Concurrently with the acquisition, the Xing An Shareholders
placed the beneficial interests to the remaining 10% equity interests of Xing An
in trust for the benefit of the Company pursuant to a Trust Agreement. Under the
terms of the Trust Agreement, all rights attached to the 10% equity interests
are to be exercised by the trustee at the direction, and for the sole benefit,
of the Company. Transfer of the 10% equity interests to the Company shall occur
at such time as permitted under applicable PRC regulations. At such time that
the trust is deemed to violate applicable PRC regulations or can no longer
achieve its intended purpose, the trust shall terminate, and the 10% equity
interests shall revert back to the Xing An Shareholders.
 
 Hong Yuan
was incorporated in Heilongjiang Province on August 18, 2003, under the
name Daxinganling Mohe County Hong Yuan Coal Mine Co., Ltd. Sheng Yu was
incorporated in Heilongjiang Province on August 18, 2003, under the name
Daxinganling Mohe County Sheng Yu Mining Co., Ltd. Each company is engaged in
production of coal from an underground mine for sale to the utilities and
industrial markets.  Both mines are located in Mohe County, in
the northern most regions of China, and are geologically joined.  The
Selling Shareholders acquired Hong Yuan on August 19, 2005 and Sheng Yu
on May 8, 2005. From January 1, 2005 until these companies were acquired by
Xing An Shareholders, the mines that these companies have mining rights to were
not in operation.
 
 On
January 7, 2008, the Company amended its Articles of Incorporation to effect a
10-to-1 reverse stock split of its issued and outstanding shares of common stock
and a proportional decrease of its authorized number of shares of common stock
from 1,000,000,000 to 100,000,000 shares.
 
 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Songzai and its subsidiaries, Tong Gong and Xing An. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
  F-7
 Table of Contents
 
 Use
of Estimates
 
 In
preparing financial statements in conformity with United States Generally
Accepted Accounting Principles (US GAAP), 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, allowance for doubtful accounts, and the
reserve for obsolete and slow-moving inventories. Actual results could differ
from those estimates.
 
 Cash
and Cash Equivalents
 
 For
financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. At December 31, 2008 and December 31, 2007, the Company had
restricted cash of $212,901 and $0, respectively, in the bank pledged for coal
mine safety production that is required by the Heilongjiang Board for Overseeing
Safety Production.
 
 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
consist 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. Coal inventories 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 Rights
 
 Prepaid
mining rights represent that portion of the mining rights for which the Company
has previously paid.   Prepaid mining rights are expensed based on
actual production volume during the period. See additional discussion in Note 6,
“Prepaid Mining Rights.”
 
 Goodwill
 
 Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”),
goodwill is not amortized but is tested for impairment annually, or when
circumstances indicate a possible impairment may exist. Impairment testing is
performed at a reporting unit level. An impairment loss generally would be
recognized when the carrying amount of the reporting unit exceeds the fair value
of the reporting unit, with the fair value of the reporting unit determined
using a discounted cash flow (DCF) analysis. A number of significant assumptions
and estimates are involved in the application of the DCF analysis to forecast
operating cash flows, including the discount rate, the internal rate of return,
and projections of realizations and costs to produce. Management considers
historical experience and all available information at the time the fair values
of its reporting units are estimated.
 
 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
that the Company’s legal obligations associated with the retirement of
long-lived assets are recognized at fair value at the time the obligations are
incurred. Obligations are incurred at the time development of a mine commences
for underground mines or construction begins for support facilities, refuse
areas and slurry ponds. The obligation’s fair value is determined using
discounted cash flow techniques and is accreted over time to its expected
settlement value. Upon initial recognition of a liability, a corresponding
amount is capitalized as part of the carrying amount of the related long-lived
asset. Amortization of the related asset is calculated on a unit-of-production
method by amortizing the total estimated cost over the salable reserves
determined under Industry Guide 7, multiplied by the production during the
period. Xing An has voluntarily applied to Daxinganling District Environment
Protection Bureau for the asset retirement obligation and is obligated to
account for land subsidence, restoration, rehabilitation and environmental
protection at a rate of RMB 1 per ton based on total reserves at the end of the
useful lives of the mines. Tong Gong 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. See additional discussion in Note 11, “Asset
Retirement Cost and Obligations.”
  F-8
 Table of Contents
 
 The
Company reviews its asset retirement obligation at least annually and makes
necessary adjustments for permit changes as granted by state authorities and for
revisions of estimates of the amount and timing of costs. For ongoing
operations, adjustments to the liability result in an adjustment to the
corresponding asset.
 
 Environmental
Costs
 
 The PRC
has adopted extensive environmental laws and regulations that affect the
operations of the coal mining industry. The outcome of environmental liabilities
under proposed or future environmental legislation cannot be reasonably
estimated at present, and could be material. Under existing legislation,
however, Company management believes that there are no probable liabilities that
will have a material adverse effect on the financial position of the
Company.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost, less accumulated depreciation. 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
the actual tons of coals produced 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 10 to 15 years. 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. 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.
 
 The
estimated useful lives for each category of the fixed assets are as
follows:
 
 Plant
      and Machinery
                                                                                                                            10-15
      YearsMotor
      Vehicles
                                                                                                                            5
      YearsBuilding
      and Mining Structure
                                                                                                                            10
      Years
 
 Mining
structure includes the main and auxiliary mine shafts, underground tunnels, and
other integrant mining infrastructure. Depreciation for the mine shafts is
provided to write off the cost of the mining structure using the units of
production method based on salable reserves determined under Industry Guide
7.
 
 Based on
updated geological reports and new estimated production volume, the estimated
useful life of mining structures is 10 to 12 years.
 
 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, 2008 and
December 31, 2007, there were no impairments of its long-lived
assets.
 
 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.
 
 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. 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.
  F-9
 Table of Contents
 
 Revenue
Recognition
 
 The
Company's revenue recognition policies are in compliance with Securities and
Exchange Commission (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 collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are recorded as unearned revenue.
 
 When the
Company purchases coal from other mining companies, the customers pick up the
coal directly from those coal mines premises or the coal is shipped directly
from other coal mining companies. Purchases and shipments of the coal from other
mining companies are arranged at the same time.  Revenue of brokered
coal is recognized at the time of delivery.
 
 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 the 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. 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 amortization of the mining rights, direct
material, direct labor, depreciation of mining preparation plants such as the
underground tunnel and the 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, a company that is engaged in coal
production business is required to pay a fee to the
Heilongjiang Province National Land and Resources Administration
Bureau as the compensation for the depletion of coal resources. Tong Gong
is required to pay mineral resource compensation fees at a rate of RMB 3 per ton
for its total production during the year; Xing An is required to pay
resource compensation fees at 1% of its total sales.  The Company
expenses such costs when incurred.
 
 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 customers' 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.
 
 The
Company has cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Cash in state-owned banks are not covered by
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.
 
 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.  The cash flows
from operating, investing and financing activities exclude the effect of reverse
acquisition of Songzai.
  F-10
 Table of Contents
 
 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 all the potential common shares, warrants and stock options 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:
 
 For
      the Year
                                                                                                                              Ended
      December 31, 2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            For
      the Year
                                                                                                                              Ended
      December 31, 2007
                                                                                                                              (Restated)Net
      income
                                                                                                                            
                                                                                                                            $
                                                                                                                            21,723,981
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            12,705,940Weighted
      average shares  outstanding - basic
                                                                                                                            
                                                                                                                            
                                                                                                                            13,133,141
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000Effect
      of dilutive securities:Series
      “A” preferred stock
                                                                                                                            
                                                                                                                            
                                                                                                                            296,175
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Unexercised
      warrants
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Weighted
      average sharesoutstanding
      - diluted
                                                                                                                            
                                                                                                                            
                                                                                                                            13,429,316
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            8,000,000Earnings
      per share – basic
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.65
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.59Earnings
      per share – diluted
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.62
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.59
 
 Fair
Value of Financial Instruments
 
 SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires 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. All of the Company’s
customer bases are in the PRC. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits 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 operations are 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)
 
 The
functional currency of Tong Gong and Xing An 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 the exchange rate for the conversion of RMB to USD after the balance sheet
date.
  F-11
 Table of Contents
 
 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.
 
 The
fluctuation 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, 2008 and 2007 consisted of net income and foreign currency
translation adjustments.
 
 Stock-Based
Compensation
 
 The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The Company
recognizes in the statement of operations the grant-date fair value of stock
options and other equity-based compensation issued to employees and
non-employees.
 
 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.
 
 Reclassifications
 
 Certain
prior year amounts have been reclassified to conform to the manner of
presentation in the current year.
 
 New
Accounting Pronouncements
 
 Employer’s
Disclosures about Postretirement Benefit Plan Assets
 
 In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 applies to an employer that is subject to the disclosure
requirements of SFAS No. 132 (revised 2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (“SFAS 132R”) and amends
SFAS 132R to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by FSP FAS 132(R)-1 shall be
provided for fiscal years ending after December 15, 2009. Earlier
application is permitted. The Company does not expect the adoption of FSP
FAS 132(R)-1 to have a material impact on its financial
statements.
 
 Accounting
for Defensive Intangible Assets
 
 In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to all
acquired intangible assets in situations in which the acquirer does not intend
to actively use the asset but intends to hold the asset to prevent its
competitors from obtaining access to the asset (a defensive intangible
asset). Defensive intangible assets could include assets that the acquirer will
never actively use, as well as assets that will be used by the acquirer during a
transition period when the intention of the acquirer is to discontinue the use
of those assets. EITF 08-7 concluded that a defensive intangible asset
should be accounted for as a separate unit of accounting and should be amortized
over the period that the defensive intangible asset directly or indirectly
contributes to the future cash flows of the entity. EITF 08-7 is effective
prospectively for intangible assets acquired on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier application is not permitted.
  F-12
 Table of Contents
 
 Accounting
for Financial Guarantee Insurance Contracts
 
 In May
2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 163,
“Accounting for Financial Guarantee Insurance Contracts, an interpretation of
FASB Statement No. 60.”  The scope of this Statement is limited to
financial guarantee insurance (and reinsurance) contracts, as described in this
Statement, issued by enterprises included within the scope of Statement 60.
Accordingly, this Statement does not apply to financial guarantee contracts
issued by enterprises excluded from the scope of Statement 60 or to some
insurance contracts that seem similar to financial guarantee insurance contracts
issued by insurance enterprises (such as mortgage guaranty insurance or credit
insurance on trade receivables). This Statement also does not apply to financial
guarantee insurance contracts that are derivative instruments included within
the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” This Statement will not have an impact on the
Company’s financial statements.
 
 The
Hierarchy of Generally Accepted Accounting Principles
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy).  This Statement will not have an impact on the Company’s
financial statements.
 
 Determination
of the Useful Life of Intangible Assets
 
 In
April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
and requires additional disclosures. The objective of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (R), “Business Combinations” (“SFAS
141(R)”), and other accounting principles generally accepted in the United
States of America. FSP FAS 142-3 applies to all intangible assets, whether
acquired in a business combination or otherwise and shall be effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The guidance for
determining the useful life of intangible assets shall be applied prospectively
to intangible assets acquired after the effective date. The disclosure
requirements apply prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. Early adoption is prohibited. The Company
does not expect the adoption of FSP FAS 142-3 to have a material impact on its
financial statements.
 
 Disclosures
about Derivative Instruments and Hedging Activities
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.”  This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  Based on current conditions,
the Company does not expect the adoption of SFAS 161 to have a significant
impact on its financial statements.
 
 Fair
Value Measurements
 
 On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.  The three levels are defined as follow:
 
 ·
                                                                                                                            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
                                                                                                                            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
                                                                                                                            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
  F-13
 Table of Contents
 
 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. The Company expects SFAS 160 will have an impact on accounting for
business combinations once adopted but the effect is dependent upon future
acquisitions at that time.
 
 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
the Company is a calendar year-end company and will continue to record and
disclose business combinations following existing GAAP until January 1,
2009. The Company expects SFAS 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent upon future
acquisitions at that time.
 
 Accounting
for Nonrefundable Advance Payments for Goods or Services Received for use in
Future Research and Development Activities
 
 In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of FSP EITF
07-3 to have a material impact on its financial statements.
 
 3.
INVENTORY
 
 Inventory
at December 31, 2008 and December 31, 2007 consisted of coal and materials
needed for coal extraction.
  F-14
 Table of Contents
 
 4.
PROPERTY AND EQUIPMENT, NET
 
 Property
and equipment consisted of the following at December 31, 2008 and December 31,
2007:
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Building
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,043,457
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,925,671Mining
      structure
                                                                                                                            
                                                                                                                            
                                                                                                                            9,878,629
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,440,002Production
      equipment
                                                                                                                            
                                                                                                                            
                                                                                                                            4,194,548
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,492,049Office
      equipment
                                                                                                                            
                                                                                                                            
                                                                                                                            63,573
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Vehicles
                                                                                                                            
                                                                                                                            
                                                                                                                            146,391
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,39417,326,598
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            7,872,116Less:
      Accumulated depreciation
                                                                                                                            
                                                                                                                            
                                                                                                                            (3,614,600
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (200,994
                                                                                                                            )$
                                                                                                                            13,711,998
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,671,122
 
 Depreciation
expense for 2008 and 2007 was approximately $936,000 and $100,100,
respectively.
 
 5.
OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
 
 Other
receivables represented advances to employees for traveling and other business
related expenses. Deposits mainly represented deposits to the government for
certain mining certificates issued by the specific PRC Authorities. Prepayments
represented payments made for working supplies and utilities.
 
 6.
PREPAID MINING RIGHTS
 
 Prepaid
mining rights represent that portion of the mining rights for which the Company
has previously paid. The price was determined by the local mining bureau from
which the Company acquired its mining rights, based in part on market price set
by the Heilongjiang Department of Land and Resources and in part on negotiations
with the local mining bureau. The price is established at the time of payment,
regardless of when production of the underlying coal occurs. The price for Tong
Gong is RMB 8 per ton for 2008 and RMB 3.09 per ton for 2005 through 2007; the
price for Xing An is RMB 9 per ton for 2008, RMB 6 per ton for 2006 and 2007,
and RMB 4 per ton for 2005. For the mining rights granted prior to September 1,
2006, the Company is generally required to pay the full amount of its mining
rights within five years from the date such rights are granted unless specific
good cause exists for extension. Effective September 1, 2006, under the
authority of the Heilongjiang Geology and Mineral Exploration Office, the
Company has ten years to fully pay for the mining rights granted on or after
such date.
 
 If the
Company decides to cease mining at a particular property, and the Company
already extracted all the coal underlying the prepaid mining rights, the
government will take back that coal mine.  If the Company decides to
cease mining but has not extracted all the coal underlying the prepaid mining
rights, while the Company will not be entitled to a refund of the corresponding
prepaid mining rights from the government, the Company can sell any unused
prepaid mining rights to a third party.
 
 The
following table illustrates the grant date of the mining rights and
corresponding due date for the payment:
 
 Grant date of the mining rights
      (1)
                                                                                                                            In
      Place Resources
                                                                                                                              to which
      Mining
                                                                                                                              Rights
      Relate
                                                                                                                              (in
      metric tons) (2)
                                                                                                                            Due
      date for the
                                                                                                                              payment
      of mining rightsXing
      An
                                                                                                                            Tong
      Gong
                                                                                                                            Xing
      An
                                                                                                                            Tong
      Gong
                                                                                                                            Xing
      An
                                                                                                                            Tong
      Gong12/30/2004
                                                                                                                            
                                                                                                                            4,649,700
                                                                                                                            
                                                                                                                            12/30/20094/1/2005
                                                                                                                            
                                                                                                                            816,300
                                                                                                                            
                                                                                                                            12/30/201010/15/2005
                                                                                                                            
                                                                                                                            13,520,700
                                                                                                                            
                                                                                                                            9/30/20103/1/2007
                                                                                                                            
                                                                                                                            5,444,800
                                                                                                                            
                                                                                                                            3/1/20179/30/2007
                                                                                                                            
                                                                                                                            1,500,000
                                                                                                                            
                                                                                                                            9/30/2017Total
                                                                                                                            19,781,800
                                                                                                                            6,149,700
 
 (1)
 Grant date is the date that the reserves appraisal report by government
authorized mining engineers is filed with Heilongjiang Department of Land and
Resources and the Company is approved for the total tons of coal it is legally
allowed to extract based on the PRC reserves appraisal report.
  The
Company’s mining rights are based on appraisals of in place resources conducted
by the appropriate PRC authorities and are expressed as a maximum number of
metric tons of coal in each mine which the Company is entitled to extract under
the related mining rights.
  F-15
 Table of Contents
 
 The
Company’s prepaid mining rights consisted of the following at December 31, 2008
and December 31, 2007, respectively.
 
 December
      31, 2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            December
      31, 2007
                                                                                                                              (Restated)Xing
      An
                                                                                                                            
                                                                                                                            
                                                                                                                            Tong
      Gong
                                                                                                                            
                                                                                                                            
                                                                                                                            TotalPrepaid
      mining rights
                                                                                                                            
                                                                                                                            $
                                                                                                                            21,676,517
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,511,544
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            25,188,061
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            10,439,273Less:
      Amortized portion
                                                                                                                            
                                                                                                                            
                                                                                                                            (5,358,752
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (640,776
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (5,999,528
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (3,615,466
                                                                                                                            )Prepaid
      mining rights, net
                                                                                                                            
                                                                                                                            
                                                                                                                            16,317,765
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,870,768
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            19,188,533
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6,823,807
 
 The
Company amortizes the mining rights by using total cost of mining rights (the sum
of those for which the Company has paid and those for whichthe Company
is still committed to pay), divided by total salable reserves determined under
SEC Industry Guide 7, multiplied by production during the period.  The
cost of unpaid mining rights has been assumed to be the same as the most current
price per ton paid by the Company (RMB 8 per ton). The amortization expense was
approximately $2,171,000 and $1,510,000 for the years ended December 31, 2008
and 2007.
 
 As of
December 31, 2008, the total quantity of coal the Company is legally allowed to
extract under the mining rights of Xing An and Tong Gong was 25,931,500
tons; however,
as noted in the table above, this amount reflects the in place resources on
which the mining rights are based and to which those mining rights extend. But
these amounts, determined by the appropriate PRC authorities, do not coincide
with the definition of proven and probable reserves of as set forth in SEC
Industry Guide 7, which would be 8.9 million tons at December 31,
2008.  The Company has paid for 25,165,295 tons at December 31,
2008, and is committed to pay for 766,205 tons of coal at RMB 8 ($1.17) per ton
for a total of $893,664, which must be paid by September 30, 2017.  The
prepayment of mining rights is accounted for similar to a royalty agreement as
neither the payment terms nor the price per ton is fixed.
  7.
CONSTRUCTION IN PROGRESS
 
 Construction
in progress mainly consisted of the construction of the training room and public
shower room for employees and miners of Tong Gong coal mine.
 
 8.
RELATED PARTY TRANSACTIONS
 
 Advance
to related party
 
 Advance
to related party represented advances of $753,982 to the Company’s principal
shareholder (Heilongjiang Xing An Mining Development Group Co., Ltd) in 2007,
which was repaid during the first quarter of 2008.
 
 Lease
from shareholder
 
 Xing An
leases offices and certain office equipments under long-term leases from a
principal shareholder with monthly payments of approximately $1,800 (RMB
12,500). The operating leases provide that Xing An pays certain operating
expenses applicable to the leased premises.
 
 Advance
from shareholder
 
 The
Company owed a shareholder $1,175,242 for short-term advances at December 31,
2008. Imputed interest expense is charged at 6% per annum on the amount due at
the balance sheet date. Total imputed interest included as additional paid-in
capital amounted to $50,177 and $0 for the years ended December 31, 2008 and
2007, respectively.
 
 Payments
to shareholders
 
 As
discussed elsewhere in this Annual Report, the Company completed the
acquisition of Xing An in April 2008 in which Xing An shareholders, including
Mr. Guoqing Yue, the Company's Chairman of the Board, received  8 million
shares of Songzai common stock and dividends of $30,000,000. On October 15,
2008, a dividend of $18 million was paid to the Xing An shareholders in
accordance with the terms of the Stock Purchase Agreement. The
Company anticipates paying the remaining $12 million of the dividend to
the Xing An shareholders by April 2009.
 
 9.
ACCRUED LIABILITIES AND OTHER PAYABLES
 
 Accrued
liabilities and other payables consisted of the following at December 31, 2008
and December 31, 2007, respectively:
  F-16
 Table of Contents
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Accrued
      liabilities
                                                                                                                            
                                                                                                                            $
                                                                                                                            42,181
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            23,493Other
      payables
                                                                                                                            
                                                                                                                            
                                                                                                                            431,472
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            162,390Other
      government
      levies
                                                                                                                            
                                                                                                                            
                                                                                                                            23,896
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            39,465Total
                                                                                                                            
                                                                                                                            $
                                                                                                                            497,549
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            225,348
 
 Accrued
liabilities mainly represented accrued utility expenses. Other payables mainly
consisted of payroll, welfare payable, employee education and labor union
outlays. Other government levies included the fees Xing An was required to pay
for Anti-flood and Education surcharge tax. Tong Gong was granted by
government for the exemption for such levies.
 
 10.
TAX PAYABLE
 
 Tax
payable consisted of the following at December 31, 2008 and December 31, 2007,
respectively:
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Income
      tax payable
                                                                                                                            
                                                                                                                            $
                                                                                                                            6,054,110
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            6,353,145Value
      added tax payable
                                                                                                                            
                                                                                                                            
                                                                                                                            574,966
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            773,168Resource
      tax payable
                                                                                                                            
                                                                                                                            
                                                                                                                            47,208
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            65,511Urban
      maintenance and construction tax payable
                                                                                                                            
                                                                                                                            
                                                                                                                            23,211
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            61,195Other
      taxes
                                                                                                                            
                                                                                                                            
                                                                                                                            1,406
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -$
                                                                                                                            6,700,901
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,253,019
 
 11.
ASSET RETIREMENT COST AND OBLIGATION
 
 Xing An
has voluntarily applied to Daxinganling District Environment Protection
Bureau for asset retirement obligation to get a tax deduction and is obligated
to account for land subsidence, restoration, rehabilitation and environmental
protection at a rate of RMB 1 per ton for total reserves at the end of the
useful lives of the mines.  These activities include reclaiming the
pit, sealing portals at underground mines, and reclaiming and vegetating refuse
areas.
 
 The
Company accounts for Xing An’s asset retirement obligations in accordance with
SFAS No. 143, “Accounting for Asset Retirement Obligations”. The Company
reviews the asset retirement obligation at least annually and makes necessary
adjustments for permitted changes as granted by state authorities and for
revisions of estimates of the amount and timing of costs. For ongoing
operations, adjustments to the liability result in an adjustment to the
corresponding asset.
 
 The
following tables describe the changes to the Company’s asset retirement cost and
obligation:
 
 Asset
Retirement Cost at December 31, 2008 and December 31, 2007 was:
 
 2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            2007
                                                                                                                              (Restated)Asset
      retirement cost
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,489,454
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,269,409Less:
      Accumulated amortization
                                                                                                                            
                                                                                                                            
                                                                                                                            (859,341
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (565,623
                                                                                                                            )$
                                                                                                                            2,630,113
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            2,703,786
 
 Amortization
expense for asset retirement cost for the years ended December 31, 2008 and 2007
was approximately $268,000 and $236,000, respectively.
 
 Asset
Retirement Obligation activity for the years ended December 31, 2008 and 2007
was:
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Balance
      at January 1
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,577,759
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,213,087Accretion
      expense
                                                                                                                            
                                                                                                                            
                                                                                                                            153,321
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            134,512Foreign
      currency translation gain
                                                                                                                            
                                                                                                                            
                                                                                                                            243,276
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            230,160Ending
      balance
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,974,356
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,577,759
 
 12.
DEFERRED TAXES
 
 Deferred
tax asset represented differences between the tax bases and book bases of
amortization expense of mining rights for reserves under Industry Guide 7,
amortization expense and interest accretion expense on asset retirement cost and
obligation.
  F-17
 Table of Contents
 
 Deferred
tax liability consisted of tax deductible safety and maintenance expenses for
the coal produced to be incurred in the future. It is deductible for tax
purposes at a predetermined rate per ton of coal produced per
year.  For financial reporting purposes, this has been recorded as an
appropriation of retained earnings. As defined under US GAAP, a liability for
safety and maintenance expenses does not exist at the balance sheet date because
there is no present obligation to transfer assets or to provide services as a
result of any past transaction (see Note 14 – Statutory Reserves).
 
 At
December 31, 2008 and December 31, 2007, deferred tax asset (liability)
consisted of the following:
 
 2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            2007
                                                                                                                              (Restated)Deferred
      tax asset for amortization of mining rights, amortization of asset
                                                                                                                              retirement
      cost and accretion of interest expense on asset retirement
      obligation
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,397,679
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,014,420Deferred
      tax liability for reserve for safety and maintenance
                                                                                                                            
                                                                                                                            
                                                                                                                            (1,349,928)
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            (744,956)$
                                                                                                                            47,751
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            269,464
 
 13.
INCOME TAXES
 
 The
Company is subject to income taxes by entity 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.  Songzai has net operating loss carry forwards
for income taxes of approximately $2,742,000 at December 31, 2008 which may be
available to reduce future years’ taxable income as NOL can be carried
forward up to 20 years from the year the loss is incurred. 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
100% deferred tax asset valuation allowance has been provided.
 
 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, Tong Gong was entitled to
full income tax relief for the first two years commencing on January 2005 and
15% for the subsequent three years from 2007 to 2009.  Effective
January 1, 2008, the PRC government implemented new reformed income tax
rates with a maximum of 25%.  Tong Gong was granted by the tax bureau
that starting from January 1, 2008, Tong Gong is subject to 12.5% income tax
rate for 2008 and 2009, and 25% for the years thereafter.  Net income
for the Company for the year ended December 31, 2008 would have been lower by
approximately $1,030,000 or $0.08 basic earnings per share as a result of
reverse merger with Xing An if Tong Gong had not enjoyed a 50% rate deduction in
2008.
 
 Xing An
is governed by the Income Tax Law of the PRC concerning private-run enterprises,
which are generally subject to tax at a statutory rate of 25% on income reported
in the statutory financial statements after appropriated tax
adjustments.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2008 and 2007:
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007US
      statutory rates
                                                                                                                            
                                                                                                                            
                                                                                                                            34.0
                                                                                                                            %
                                                                                                                            
                                                                                                                            
                                                                                                                            34.0
                                                                                                                            %Tax
      rate difference
                                                                                                                            
                                                                                                                            
                                                                                                                            (8.6
                                                                                                                            %)
                                                                                                                            
                                                                                                                            
                                                                                                                            (1.0
                                                                                                                            %)Effect
      of tax holiday
                                                                                                                            
                                                                                                                            
                                                                                                                            (3.1
                                                                                                                            %)
                                                                                                                            
                                                                                                                            
                                                                                                                            -Valuation
      allowance
                                                                                                                            
                                                                                                                            
                                                                                                                            1.2
                                                                                                                            %
                                                                                                                            
                                                                                                                            
                                                                                                                            -Tax
      per financial statements
                                                                                                                            
                                                                                                                            
                                                                                                                            23.5
                                                                                                                            %
                                                                                                                            
                                                                                                                            
                                                                                                                            33.0
                                                                                                                            %
 
 14. MAJOR CUSTOMERSAND VENDORS
 
 Six
customers accounted for 28%, 12%, 11%, 11%, 11% and 10% of the Company’s total
sales for the year ended December 31, 2008, respectively. Three customers
accounted for 50%, 24% and 24% of the Company’s total sales for the year ended
December 31, 2007, respectively.  At December 31, 2008 and 2007, the
total receivable balance due from these customers was $0 and $3,509,445,
respectively.
 
 There
were no major vendors for the Company for the years ended December 31, 2008 or
2007.
  F-18
 Table of Contents
 
 15.
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.
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
 
 Common
welfare fund
 
 Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income, as determined under PRC accounting rules and regulations,
to this fund.  The Company did not make any contribution to this fund
for the year ended December 31, 2008 and 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, and amended ruling No. 168
(2005) on April 8, 2005 by the PRC Ministry of Finance regarding “Accrual and
Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine
Maintenance and Improvement”, the Company is required to accrue safety and
maintenance expenses monthly to the cost of production. The amount of the
accrual is determined based on management’s best estimates within the unit price
range provided by Ministry of Finance of PRC. Currently, Xing An accrues at
RMB 8.7 per ton for safety expense and RMB 3 per ton for maintenance for the
quantity of coal produced; and Tong Gong accrues at RMB 6 per ton for safety
expense and RMB 8.7 per ton for maintenance for the quantity of coal produced.
As defined under US GAAP, a liability for safety and maintenance expenses does
not exist at the balance sheet date because there is no present obligation to
transfer assets or to provide services as a result of any past transactions.
Therefore, for financial reporting purposes, this reserve has been recorded
as an appropriation of retained earnings.
 
 The
following table reconciles the statutory reserves at December 31, 2008 and 2007,
respectively:
 
 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Xing
      An
                                                                                                                            
                                                                                                                            
                                                                                                                            Tong
      Gong
                                                                                                                            
                                                                                                                            
                                                                                                                            TotalStatutory
      surplus reserve
                                                                                                                            
                                                                                                                            $
                                                                                                                            873,974
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,786,347
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            2,660,321
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,415,537Safety
      and Maintenance reserve
                                                                                                                            
                                                                                                                            
                                                                                                                            3,321,862
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,597,163
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            4,919,025
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            1,528,121Total
      statutory reserves
                                                                                                                            
                                                                                                                            $
                                                                                                                            4,195,836
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,383,510
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,579,346
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            2,943,658
 
 16.
STOCK-BASED COMPENSATION PLAN
 
 On June
9, 2008, the Company granted options to an employee under the Company’s 2006
stock option plan to purchase up to 55,000 shares of the Company’s common stock
at an exercise price of $9.35 per share for a period of 5 years. The options
vested and became exercisable immediately upon their issuance. The options were
terminated in March 10, 2008 and replaced by same number of options with
exercise price of $5.36 per share for a period of 5 years under the Company’s
2009 stock option plan, the replaced options vested and became exercisable
immediately upon their issuance.
 
 Based on
the fair value method under SFAS 123R, the fair value of each stock option
granted is estimated on the date of the grant using the Black-Scholes option
pricing model. The Black-Scholes option pricing model has assumptions for risk
free interest rates, dividends, stock volatility and expected life of an option
grant. The risk free interest rate is based upon market yields for United States
Treasury debt securities at a maturity near the term remaining on the option.
Dividend rates are based on the Company’s dividend history. The stock volatility
factor is based on the historical volatility of the Company’s stock price. The
expected life of an option grant is based on management’s estimate as no options
have been exercised in the Plan to date. The fair value of each option grant to
employees is calculated by the Black-Scholes method and is recognized as
compensation expense over the vesting period of each stock option award. For
stock options issued, the fair value was estimated at the date of grant using
the following range of assumptions:
  F-19
 Table of Contents
 
 The
options vested upon the issuance and have a life of 5 years, with volatility of
100%, risk free interest rate of 3.76%, and dividend yield of 0%. No estimate of
forfeitures was made as the Company has a short history of granting
options.
 
 The
following table summarizes activities of these options for the year ended
December 31, 2008:
 
 Number
      of
                                                                                                                              Shares
                                                                                                                            
                                                                                                                            
                                                                                                                            Average
                                                                                                                              Exercise
                                                                                                                              Price
      per Share
                                                                                                                            
                                                                                                                            
                                                                                                                            Weighed
      Average
                                                                                                                              Remaining
                                                                                                                              Contractual
                                                                                                                              Term
      in YearsOutstanding
      at December 31, 2007
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Exercisable
      at December 31, 2007
                                                                                                                            
                                                                                                                            
                                                                                                                            -Granted
                                                                                                                            
                                                                                                                            
                                                                                                                            55,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            9.35
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            5.00Exercised
                                                                                                                            
                                                                                                                            
                                                                                                                            -Outstanding
      at December 31, 2008
                                                                                                                            
                                                                                                                            
                                                                                                                            55,000
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            9.35
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            4.44
 
 The
weighted-average grant date fair value of stock options granted to employee for
the year ended December 31, 2008 was $8.58 per share. The Company recorded
$471,979 of compensation expense for employee stock options during the year
ended December 31, 2008.  There were no options exercised during the
year ended December 31, 2008.
 
 17.
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.
 
 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.
 
 For
mining rights granted to the Company prior to September 1, 2006, the Company is
required to pay for all of the coal underlying such mining rights within five
years from the date such mining rights are approved by the Heilongjiang National
Land Resource Office unless specific good cause exists for
extension.  For mining rights granted on or after September 1, 2006,
full payment is required within ten years. The Company’s operations may be
suspended if it is not able to make full payments within such
periods.
 
 The
Company leases its principal executive office in the United States, which
headquarters some of administrative staff and oversees our operations in the
PRC. The lease agreement for this office is from September 1, 2008 to August 31,
2011, for annual rent of $57,516, and the Company has the option to renew this
lease.
 
 The
Company leases the office for Xing An in Jiagedaqi City and certain
office equipments under long-term lease agreements expiring at July 30, 2015.
The operating lease agreements provide that the Company pays certain operating
expenses applicable to the leased premises. Rental expense for the years ended
December 31, 2008 and 2007 was approximately $21,500 and $21,000.
 
 As of
December 31, 2008, the future minimum annual lease payments required under the
operating leases are as follows:
 
 Year
      Ending December 31,2009
                                                                                                                            
                                                                                                                            $
                                                                                                                            79,0162010
                                                                                                                            
                                                                                                                            
                                                                                                                            79,0162011
                                                                                                                            
                                                                                                                            
                                                                                                                            79,0162012
                                                                                                                            
                                                                                                                            
                                                                                                                            21,5002013
                                                                                                                            
                                                                                                                            
                                                                                                                            21,500Thereafter
                                                                                                                            
                                                                                                                            
                                                                                                                            34,000Total
      future lease payments
                                                                                                                            
                                                                                                                            $
                                                                                                                            314,048
  F-20
 Table of Contents
 
 18.
REVERSE ACQUISITION AND GOODWILL
 
 On April
4, 2008, the Company completed the acquisition of 90% of Xing An pursuant to the
Agreement for an aggregate purchase price  determined by multiplying
the number of shares of Songzai outstanding just prior to the transaction
(400,000 Series A preferred shares and 6,932,582 common shares) by the average
stock price of Songzai stock two days before and two days after the Agreement
date. The beneficial interests to the remaining 10% of Xing An were placed in
trust by the Xing An shareholders for the benefit of the Company because current
PRC regulations restrict foreign ownership of any mining-related company to a
maximum of 90% of such company’s equity interest.  In connection with
the transaction, the Xing An shareholders received 8 million shares of Songzai
common stock and $30 million, which is treated as a dividend pursuant to the
accounting treatment applied to the transaction.  As a result of the
acquisition, the Xing An Shareholders now collectively own 53% of the combined
company. For accounting purposes, the acquisition of Xing An by Songzai is
accounted for as a reverse acquisition of Songzai by Xing An.
 
 The
operating results of Xing An for the year ended December 31, 2008 and Songzai
for the nine months ended December 31, 2008 are included in the accompanying
consolidated statements of operations from the acquisition date.  For
convenience of reporting the acquisition for accounting purposes, April 1, 2008
was designated as the acquisition date.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed of Songzai, at the date of acquisition. . The cash
consideration of $30,000,000 has been treated as dividend payable to the Xing An
shareholders and has been recorded as a charge to retained earnings. The total
purchase consideration exceeded the fair value of the net assets acquired for
the acquisition by $26,180,923 which was recorded as goodwill.
 
 Cash
                                                                                                                            
                                                                                                                            $
                                                                                                                            7,204,465Restricted
      cash
                                                                                                                            
                                                                                                                            
                                                                                                                            206,969Advance
      to suppliers
                                                                                                                            
                                                                                                                            
                                                                                                                            51,002Other
      receivables
                                                                                                                            
                                                                                                                            
                                                                                                                            150,693Inventory
                                                                                                                            
                                                                                                                            
                                                                                                                            37,870Prepaid
      mining rights
                                                                                                                            
                                                                                                                            
                                                                                                                            1,562,426Property
      and equipment
                                                                                                                            
                                                                                                                            
                                                                                                                            6,186,427Goodwill
                                                                                                                            
                                                                                                                            
                                                                                                                            26,180,923Accounts
      payable
                                                                                                                            
                                                                                                                            
                                                                                                                            (317,115
                                                                                                                            )Tax
      payable
                                                                                                                            
                                                                                                                            
                                                                                                                            (342,211
                                                                                                                            )Advances
      from shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            (900,184
                                                                                                                            )Other
      current liabilities
                                                                                                                            
                                                                                                                            
                                                                                                                            (696,394
                                                                                                                            )Deferred
      tax liability
                                                                                                                            
                                                                                                                            
                                                                                                                            (169,990
                                                                                                                            )Purchase
      price
                                                                                                                            
                                                                                                                            $
                                                                                                                            39,154,881
 
 The
following unaudited pro forma consolidated results of continuing operations for
Xing An and Songzai for the years ended December 31, 2008 and 2007 presents the
operations of Xing An and Songzai as if the acquisitions occurred on January 1,
2008 and 2007, 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 ended December 31, 2008 and 2007
                                                                                                                            
                                                                                                                            Pro
      forma
                                                                                                                            
                                                                                                                            
                                                                                                                            Pro
      formaConsolidated
                                                                                                                              2008
                                                                                                                              (Restated)
                                                                                                                            
                                                                                                                            
                                                                                                                            Consolidated
                                                                                                                              2007
                                                                                                                              (Restated)Net
      revenue
                                                                                                                            
                                                                                                                            $
                                                                                                                            61,263,067
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            46,931,777Cost
      of revenue
                                                                                                                            
                                                                                                                            
                                                                                                                            27,589,449
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            20,190,483Gross
      profit
                                                                                                                            
                                                                                                                            
                                                                                                                            33,673,618
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            26,741,294Total
      operating expenses
                                                                                                                            
                                                                                                                            
                                                                                                                            3,222,927
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,278,390Income
      from operations
                                                                                                                            
                                                                                                                            
                                                                                                                            30,450,691
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            23,462,904Total
      non-operating expenses, net
                                                                                                                            
                                                                                                                            
                                                                                                                            (252,921
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (182,019
                                                                                                                            )Income
      before income tax
                                                                                                                            
                                                                                                                            
                                                                                                                            30,197,770
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            23,280,885Income
      tax
                                                                                                                            
                                                                                                                            
                                                                                                                            6,767,011
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            7,004,906Net
      income
                                                                                                                            
                                                                                                                            $
                                                                                                                            23,430,759
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            16,275,979Basic
      weighted average shares outstanding
                                                                                                                            
                                                                                                                            
                                                                                                                            14,932,582
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,932,582Diluted
      weighted average shares outstanding
                                                                                                                            
                                                                                                                            
                                                                                                                            15,332,582
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            15,332,582Basic
      net earnings per share
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.57
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.
      09Diluted
      net earnings per share
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.53
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1.06
  F-21
 Table of Contents
 
 19. US PARENT COMPANY ONLY
FINANCIAL STATEMENTS
 
 BALANCE
      SHEETS
                                                                                                                            
                                                                                                                            2008
                                                                                                                              (Restated)ASSETSCash
                                                                                                                            
                                                                                                                            $
                                                                                                                            36,918Investment
      in subsidiaries
                                                                                                                            
                                                                                                                            
                                                                                                                            85,684,836TOTAL
      ASSETS
                                                                                                                            
                                                                                                                            $
                                                                                                                            85,721,754LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                                                                                            
                                                                                                                            $
                                                                                                                            129,500Dividend
      payable to shareholders of Xing An
                                                                                                                            
                                                                                                                            
                                                                                                                            12,000,000Due
      to subsidiary
                                                                                                                            
                                                                                                                            
                                                                                                                            18,000,000Advance
      from shareholder
                                                                                                                            
                                                                                                                            
                                                                                                                            1,482,140Total
      current liabilities
                                                                                                                            
                                                                                                                            
                                                                                                                            31,611,640STOCKHOLDERS'
      EQUITY:Series
      A Preferred Stock ($0.001 par value, 8,000,000 shares
      authorized,
                                                                                                                              400,000
      shares issued and
      outstanding)
                                                                                                                            
                                                                                                                            
                                                                                                                            400Common
      stock ($0.001 par value, 100,000,000 shares authorized,
                                                                                                                              14,932,582
      and 6,932,000 shares issued and outstanding as of December 31, 2008 and
      December
                                                                                                                              31,
      2007, respectively)
                                                                                                                            
                                                                                                                            
                                                                                                                            14,932Additional
      paid-in
      capital
                                                                                                                            
                                                                                                                            
                                                                                                                            38,726,197Accumulated
      other comprehensive income
                                                                                                                            
                                                                                                                            
                                                                                                                            3,575,866Statutory
      reserves
                                                                                                                            
                                                                                                                            
                                                                                                                            7,579,346Retained
      earnings
                                                                                                                            
                                                                                                                            
                                                                                                                            4,213,373Total
      stockholders' equity
                                                                                                                            
                                                                                                                            
                                                                                                                            54,110,114TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                                                            
                                                                                                                            $
                                                                                                                            85,721,754
 
 20.
RESTATEMENT OF FINANCIAL STATEMENTS
 
 The
financial statements as at and for the year ended December 31, 2008 and 2007
were restated to reflect the following:
 
 Amortization
of mining rights based on salable reserves determined under SEC Industry Guide
7, which resulted in additional $1.6 million and $1.0 million amortization
expense for the year ended December 31, 2008 and 2007,
respectively.  The Company initially calculated the amortization
expense by using tons of coal extracted multiplied by the price per ton that was
paid based on the first in first out method.
  F-22
 Table of Contents
 
 Amortization
of asset retirement obligation based on salable reserves determined under SEC
Industry Guide 7, which resulted in additional $96,018 and $79,533 amortization
expense on asset retirement obligation for the year ended December 31, 2008 and
2007, respectively. The Company initially amortized asset retirement obligation
on a straight line basis over the estimated useful lives of the capped amount of
coal that the Company is legally allowed to extract.
 
 Excluding
the $30 million in cash payable pursuant to the transaction to the Xing An
shareholders as a deduction from the market value of the shares issued in
determining the purchase price which resulted in goodwill of $26,180,923,
additional property and equipment of $4.77 million. The Company originally
subtracted the $30 million in cash payable to the Xing An shareholders from the
market value of Songzai shares in determining the purchase price.
 
 Reclassification
of entire mining rights as noncurrent.
 
 Reclassification
of cash payment for mining rights from operating activities to investing
activities.
 
 The
following table presents the effects of the restatement adjustment on the
accompanying consolidated statements of income for the years ended December 31,
2008 and 2007, respectively:
 
 
 Consolidated
      Statement of
                                                                                                                              Income
      and Comprehensive
                                                                                                                              Income
      for the year ended
                                                                                                                              December 31,
    2008
                                                                                                                            
                                                                                                                            As
      previously Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
                                                                                                                              AdjustmentCost
      of goods sold
                                                                                                                            $
                                                                                                                            23,755,247
                                                                                                                            $
                                                                                                                            25,676,126
                                                                                                                            $
                                                                                                                            1,920,879General
      and Administrative expenses
                                                                                                                            $
                                                                                                                            2,198,910
                                                                                                                            $
                                                                                                                            2,294,928
                                                                                                                            $
                                                                                                                            96,018Income
      from operations
                                                                                                                            $
                                                                                                                            30,676,471
                                                                                                                            $
                                                                                                                            28,659,574
                                                                                                                            $
                                                                                                                            (2,016,897)Income
      before income tax
                                                                                                                            $
                                                                                                                            30,431,084
                                                                                                                            $
                                                                                                                            28,414,187
                                                                                                                            $
                                                                                                                            (2,016,897)Provision
      for income tax
                                                                                                                            $
                                                                                                                            7,145,936
                                                                                                                            $
                                                                                                                            6,690,206
                                                                                                                            $
                                                                                                                            (455,730)Net
      income
                                                                                                                            $
                                                                                                                            23,285,148
                                                                                                                            $
                                                                                                                            21,723,981
                                                                                                                            $
                                                                                                                            (1,561,167)Foreign
      currency translation gain
                                                                                                                            $
                                                                                                                            2,219,843
                                                                                                                            $
                                                                                                                            2,170,763
                                                                                                                            $
                                                                                                                            (49,080)Comprehensive
      income
                                                                                                                            $
                                                                                                                            25,504,991
                                                                                                                            $
                                                                                                                            23,894,744
                                                                                                                            $
                                                                                                                            (1,610,247)Basic
      net earnings per share
                                                                                                                            $
                                                                                                                            1.77
                                                                                                                            $
                                                                                                                            1.65
                                                                                                                            $
                                                                                                                            (0.12)Diluted
      net earnings per share
                                                                                                                            $
                                                                                                                            1.73
                                                                                                                            $
                                                                                                                            1.62
                                                                                                                            $
                                                                                                                            (0.11)
 
 
 Consolidated
      Statement of
                                                                                                                              Income
      and Comprehensive
                                                                                                                              Income
      for the year ended
                                                                                                                              December 31,
    2007
                                                                                                                            
                                                                                                                            As
      previously Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
                                                                                                                              AdjustmentCost
      of goods sold
                                                                                                                            $
                                                                                                                            12,964,485
                                                                                                                            $
                                                                                                                            14,012,207
                                                                                                                            $
                                                                                                                            1,047,722General
      and Administrative expenses
                                                                                                                            $
                                                                                                                            639,865
                                                                                                                            $
                                                                                                                            719,398
                                                                                                                            $
                                                                                                                            79,533Income
      from operations
                                                                                                                            $
                                                                                                                            20,226,235
                                                                                                                            $
                                                                                                                            19,098,980
                                                                                                                            $
                                                                                                                            (1,127,255)Income
      before income tax
                                                                                                                            $
                                                                                                                            20,093,639
                                                                                                                            $
                                                                                                                            18,966,384
                                                                                                                            $
                                                                                                                            (1,127,255)Provision
      for income tax
                                                                                                                            $
                                                                                                                            6,631,364
                                                                                                                            $
                                                                                                                            6,260,444
                                                                                                                            $
                                                                                                                            (370,920)Net
      income
                                                                                                                            $
                                                                                                                            13,462,275
                                                                                                                            $
                                                                                                                            12,705,940
                                                                                                                            $
                                                                                                                            (756,335)Foreign
      currency translation gain
                                                                                                                            $
                                                                                                                            1,118,284
                                                                                                                            $
                                                                                                                            1,085,643
                                                                                                                            $
                                                                                                                            (32,641)Comprehensive
      income
                                                                                                                            $
                                                                                                                            14,580,559
                                                                                                                            $
                                                                                                                            13,791,583
                                                                                                                            $
                                                                                                                            (788,976)Basic
      net earnings per share
                                                                                                                            $
                                                                                                                            1.68
                                                                                                                            $
                                                                                                                            1.59
                                                                                                                            $
                                                                                                                            (0.09)Diluted
      net earnings per share
                                                                                                                            $
                                                                                                                            1.68
                                                                                                                            $
                                                                                                                            1.59
                                                                                                                            $
                                                                                                                            (0.09)
  F-23
 Table of Contents
 
 The
following table presents the effects of the restatement adjustment on the
accompanying consolidated balance sheets at December 31, 2008 and December 31,
2007, respectively:
 
 Consolidated
      Balance Sheet
                                                                                                                              at
      December 31, 2008
                                                                                                                            
                                                                                                                            As
      previously Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
                                                                                                                              AdjustmentPrepaid
      mining rights - current
                                                                                                                            $
                                                                                                                            816,655
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (816,655)$
                                                                                                                            
                                                                                                                            $
                                                                                                                            
                                                                                                                            $Goodwill
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            26,180,923
                                                                                                                            $
                                                                                                                            26,180,923Prepaid
      mining rights, net
                                                                                                                            $
                                                                                                                            22,680,091
                                                                                                                            $
                                                                                                                            19,188,533
                                                                                                                            $
                                                                                                                            (3,491,558)Property
      and equipment, net
                                                                                                                            $
                                                                                                                            8,936,076
                                                                                                                            $
                                                                                                                            13,711,998
                                                                                                                            $
                                                                                                                            4,775,922Deferred
      tax asset
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            47,751
                                                                                                                            $
                                                                                                                            47,751Asset
      retirement obligation
                                                                                                                            $
                                                                                                                            2,922,418
                                                                                                                            $
                                                                                                                            2,630,113
                                                                                                                            $
                                                                                                                            (292,305)Total
      assets
                                                                                                                            $
                                                                                                                            52,514,626
                                                                                                                            $
                                                                                                                            78,918,704
                                                                                                                            $
                                                                                                                            26,404,078Deferred
      tax liability
                                                                                                                            $
                                                                                                                            155,466
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (155,466)Additional
      paid in capital
                                                                                                                            $
                                                                                                                            8,726,197
                                                                                                                            $
                                                                                                                            38,726,197
                                                                                                                            $
                                                                                                                            30,000,000Accumulated
      other
                                                                                                                              comprehensive
      income
                                                                                                                            $
                                                                                                                            3,624,946
                                                                                                                            $
                                                                                                                            3,575,866
                                                                                                                            $
                                                                                                                            (49,080)Retained
      earnings
                                                                                                                            $
                                                                                                                            7,604,749
                                                                                                                            $
                                                                                                                            4,213,373
                                                                                                                            $
                                                                                                                            (3,391,376)Total
      stockholder’s equity
                                                                                                                            $
                                                                                                                            27,550,570
                                                                                                                            $
                                                                                                                            54,110,114
                                                                                                                            $
                                                                                                                            26,559,544
 
 
 Consolidated
      Balance Sheet
                                                                                                                              at
      December 31, 2007
                                                                                                                            
                                                                                                                            As
      previously Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
                                                                                                                              AdjustmentPrepaid
      mining right - current
                                                                                                                            $
                                                                                                                            405,780
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (405,780)$
                                                                                                                            
                                                                                                                            $
                                                                                                                            
                                                                                                                            $Prepaid
      mining right, net
                                                                                                                            $
                                                                                                                            9,097,484
                                                                                                                            $
                                                                                                                            6,823,807
                                                                                                                            $
                                                                                                                            (2,273,677)Deferred
      tax asset
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            269,464
                                                                                                                            $
                                                                                                                            269,464Asset
      retirement obligation
                                                                                                                            $
                                                                                                                            2,901,600
                                                                                                                            $
                                                                                                                            2,703,786
                                                                                                                            $
                                                                                                                            (197,814)Total
      assets
                                                                                                                            $
                                                                                                                            34,169,624
                                                                                                                            $
                                                                                                                            31,561,818
                                                                                                                            $
                                                                                                                            (2,607,806)Deferred
      tax liability
                                                                                                                            $
                                                                                                                            744,956
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (744,956)Accumulated
      other
                                                                                                                              comprehensive
      income
                                                                                                                            $
                                                                                                                            1,405,103
                                                                                                                            $
                                                                                                                            1,372,462
                                                                                                                            $
                                                                                                                            (32,641)Retained
      earnings
                                                                                                                            $
                                                                                                                            16,690,719
                                                                                                                            $
                                                                                                                            14,860,510
                                                                                                                            $
                                                                                                                            (1,830,209)Total
      stockholder’s equity
                                                                                                                            $
                                                                                                                            22,368,542
                                                                                                                            $
                                                                                                                            20,505,692
                                                                                                                            $
                                                                                                                            (1,862,850)
  F-24
 Table of Contents
 
 The
following table presents the effects of the restatement adjustment on the
accompanying consolidated statements of cash flows for the years ended December
31, 2008 and 2007, respectively:
 
 Consolidated
      Statement of
                                                                                                                              Cash
      Flows for the year ended
                                                                                                                              December 31,
    2008
                                                                                                                            
                                                                                                                            As
      previously
                                                                                                                              Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
      AdjustmentNet
      income
                                                                                                                            $
                                                                                                                            23,285,148
                                                                                                                            $
                                                                                                                            21,723,981
                                                                                                                            $
                                                                                                                            (1,561,167)Depreciation
      and amortization
                                                                                                                            $
                                                                                                                            1,318,668
                                                                                                                            $
                                                                                                                            3,335,565
                                                                                                                            $
                                                                                                                            2,016,897Changes
      in deferred tax
                                                                                                                            $
                                                                                                                            455,274
                                                                                                                            $
                                                                                                                            (456)
                                                                                                                            $
                                                                                                                            (455,730)Prepaid
      mining rights
                                                                                                                            $
                                                                                                                            (12,112,245)
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            12,112,245Net
      cash provided by
                                                                                                                              operating
      activities
                                                                                                                            $
                                                                                                                            16,293,147
                                                                                                                            $
                                                                                                                            28,405,392
                                                                                                                            $
                                                                                                                            12,112,245Prepaid
      mining rights
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (12,112,245)
                                                                                                                            $
                                                                                                                            (12,112,245)Net
      cash provided by (used in) investing activities
                                                                                                                            $
                                                                                                                            6,998,305
                                                                                                                            $
                                                                                                                            (5,113,940)
                                                                                                                            $
                                                                                                                            (12,112,245)
 
 
 Consolidated
      Statement of
                                                                                                                              Cash
      Flows for the year ended
                                                                                                                              December 31,
    2007
                                                                                                                            
                                                                                                                            As
      previously
                                                                                                                              Reported
                                                                                                                            
                                                                                                                            Restated
                                                                                                                            
                                                                                                                            Net
      AdjustmentNet
      income
                                                                                                                            $
                                                                                                                            13,462,275
                                                                                                                            $
                                                                                                                            12,705,940
                                                                                                                            $
                                                                                                                            (756,335)Depreciation
      and amortization
                                                                                                                            $
                                                                                                                            631,691
                                                                                                                            $
                                                                                                                            1,758,945
                                                                                                                            $
                                                                                                                            1,127,255Changes
      in deferred tax
                                                                                                                            $
                                                                                                                            361,919
                                                                                                                            $
                                                                                                                            (9,001)
                                                                                                                            $
                                                                                                                            (370,920)Prepaid
      mining right
                                                                                                                            $
                                                                                                                            (6,242,120)
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            6,242,120Net
      cash provided by
                                                                                                                              operating
      activities
                                                                                                                            $
                                                                                                                            11,019,258
                                                                                                                            $
                                                                                                                            17,261,378
                                                                                                                            $
                                                                                                                            6,242,120Prepaid
      mining right
                                                                                                                            $
                                                                                                                            -
                                                                                                                            $
                                                                                                                            (6,242,120)
                                                                                                                            $
                                                                                                                            (6,242,120)Net
      cash used in investing activities
                                                                                                                            $
                                                                                                                            (6,190,079)
                                                                                                                            $
                                                                                                                            (12,432,199)
                                                                                                                            $
                                                                                                                            (6,242,120)