UNITED STATES SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549  FORM 10-KSB  |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the Fiscal Year Ended December 31, 2006      Commission File Number 333-66994  SONGZAI INTERNATIONAL HOLDING GROUP, INC. ------------------------------------------------ (Name of small business issuer in its charter)  Nevada ------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization)  43-1932733 ------------------------------------- (I.R.S. Employer Identification No.)  20337 Rimview Place Walnut, California 91789 Tel: (909) 468-2840 ----------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrants principal executive offices)  Securities registered pursuant to Section 12(b) of the Act: NONE  Securities registered pursuant to Section 12(g) of the Act: NONE        1    Check whether the issuer (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


YES |X|  NO  |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB  |X|



The issuers revenues for the fiscal year ended December 31, 2006 were $3,835,427.



The aggregate market value of the voting stock held by non-affiliates of the registrant on March 27, 2007 was approximately $4,875,631, based on the closing price of such stock of $0.09 on such date. The number of shares outstanding of the registrants Common Stock, $.01 par value, as of March 27, 2007 was 69,323,748.



Transitional Small Business Disclosure format (Check one): YES  |_| NO  |X|













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SONGZAI INTERNATIONAL HOLDING GROUP, INC.

ANNUAL REPORT ON FORM 1 0-KSB/A

FOR THE YEAR ENDED DECEMBER 31, 2005



TABLE OF CONTENTS


Forward Looking StatementsPART IItems 1. and 2. Description of Business and Property
        4Item 3.
        Legal Proceedings
        16Item 4.
        Submission of Matters to a Vote of Security Holders
        16PART IIItem 5.
        Market Price for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
        16Item 6.
        Managements Discussion and Analysis or Plan of Operation
        17Item 7.
        Financial Statements
        22Item 8.
        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
        22Item 8A.
        Controls and Procedures
        22PART IIIItem 9.
        Directors and Executive Officers of the Registrant; Compliance with Section 16 of the Exchange Act
        23Item 10.
        Executive Compensation
        24Item 11.
        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
        25Item 12.
        Certain Relationships and Related Matters
        26Item 13.
        Exhibits
        27Item 14.
        Principal Accountant Fees and Services
        28SIGNATURES
        29



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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS



In addition to historical information, this report contains predictions, estimates and other forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in this report, and some of which we may not know. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, estimates,
predicts, potential, continue or the negative of these terms or other comparable terminology.



Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading Risk Factors. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our managements beliefs and assumptions only as of the date of this report. You should read this annual report on Form 10-KSB/A and the documents that we have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect.



Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.



PART I



ITEMS 1. AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES.



History and Organization



Songzai International Holding Group, Inc. (SGZI, we or the Company) is a company engaged in coal production by locating, assembling, assessing, permitting and developing coal properties in the PRC, or the PRC. After obtaining permits from the National Land and Resources Officer and Heilongjiang Province Economy Committee, we mine our properties for the extraction of coal minerals, and then sell most
of the coal on a per ton basis in cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating. We currently operate the Tong Gong coal mine in northern PRC, located approximately 175 km southwest of Heihe City of Heilongjiang Province.



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 (the Agreement), between and among the Company, Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Ren Gong Si, a corporation organized and existing under the laws of the PRC (Yong Heng), the shareholders of Yong Heng (the Yong Heng Shareholders), and Rohit Patel, former Chairman of the Company (Patel). Pursuant to and at the closing of the Agreement, the Yong Heng Shareholders exchanged all their shares of capital stock for 67,000,000 shares of common stock of the Company, or 98.4% of the Companys then to be outstanding common stock, and Mr. Patel returned his 1,188,088 shares of common stock to the Company for cancellation for a payment of $450,000. Upon completion of the exchange, Yong Heng became a wholly-owned subsidiary of the Company.  On November 5, 2003, the Company changed its name from Heritage
Companies, Inc. to Songzai International Holding Group, Inc.



On September 23, 2004, we acquired a 75% interest in Heilongjiang Tong Gong Kuang Ye You Xian Gong Si (Tong Gong), a corporation organized and existing under the laws of the PRC, and owner of an operational coal mine located near Heihe City in the PRC, pursuant to a Purchase and Sales Agreement,



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dated April 5, 2004. In order to acquire 75% of Tong Gongs registered capital of RMB 33,200,000, which is equal to approximate $4,009,662, the Company issued 400,000 shares of convertible preferred stock which
was then convertible into 40,000,000 shares of common stock at the ratio of 1:100, which convertible preferred stock was part of a class of 8,000,000 shares of so-called blank check preferred that was authorized on July 16, 2004.
On December 19, 2006, the conversion rate was amended to 1:10 such that the
400,000 shares of convertible preferred stock are now convertible into 4,000,000
shares of common stock. The 75% interest in Tong Gong was acquired from Hongwen Li, the Chairman and Chief Executive officer of the Company. In addition to the 75% capital stock of Tong Gong, we acquired a 25% interest in the net profits of Tong Gong from the Harbin Green Ring Biological Degradation Products Developing Co., Ltd., a corporation organized and existing under the laws of the PRC (Harbin Green), and the owner of 25% of the capital stock of Tong Gong. Harbin Green is controlled by Hongwen Li. In
November 2004, Harbin Green assigned all of its interest in the registered capital of Tong Gong to the Company. Therefore, we now
beneficially own 100% or the equity interests in the registered capital of Tong Gong.



Our on-line gift cards and related products business activity was terminated in
October of 2004. This termination was effected by discontinuing the operations
of the Company's subsidiary Yong Heng. Such subsidiary had not earned any revenue since the quarter ended September 30, 2004. On December 28, 2005, pursuant to a Purchase and Sale Agreement, the Company sold 100% interest in its subsidiary - Yong Heng to a third party at the consideration of $241,000, the Company recorded a gain of $107,798 on the sale.



The Company is a fully-reporting 1934 Act company, with the Companys common stock quoted on the National Association of Securities Dealers Over-the-Counter Bulletin Board (OTCBB) under the trading symbol SGZI.



The Tong Gong Coal Mine



Initial exploration of the Tong Gong Coal Mine dates back to 1958-1959 when geological surveys
were performed by the Provincial Geology and Mineral Bureau teams of the PRC. A regional geologic survey was conducted in 1972-1974 to determine coal bearing stratigraphy. An exploratory drilling program was undertaken in 1986 and continued through 1991. The Tong Gong coal 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 for the Jinchang Coal Mine in June of 2004 from Hongwen Li and renamed the mine Tong Gong Coal Mine.



The Tong Gong Coal Mine is an underground coal mine located in the western slope of the Xiaoqinganling Mountain in northern PRC. The mine is accessible by both railway and public roads. The coal reserves are located in the middle of the Heibaoshan-Muer coal basin, as secondary sedimentary basin. Several faults occur in, and define the coal fields with throws ranging from 20 meters to 270 meters. Coal bearing strata in the mine area are contained in the Jiufengshan Group.



The land on which the Tong Gong Coal Mine is located, as well as the land on which most of our mining facilities is located and all mineral rights, are owned by the PRC. We operate the Tong Gong Coal Mine pursuant to a Coal Production Right Permit issued by the Heilongjiang Province Economy Committee. The Coal Production Right Permit provides authorization for the Company to mine up to 150,000 tons of coal per year in a 1.1193 square kilometer area, which comprises the entire area of the mine. The effective period of the current Coal Production Right Permit is from January 25, 2006 through April 30, 2015. Currently the coal mine is applying to increase the annual production capacity under its Coal Production rights Permits from 150,000 tons to 200,000 tons. The costs for such application are approximately $200,000 and we expect the application to be approved by during the second quarter of
2007. Any material change or revocation in the permit by the PRC or the Heilongjiang Province Economy Committee could materially and adversely affect our operations and financial condition.



There are two coal seams in the mine area. Based on information as of December 31, 2005 from John T. Boyd Company, mining and geological consultants, as well as core drillings and surface exploration as well as mine maps, management estimates that the Tong Gong Coal Mine has in-place resources in excess of 3 million tons. In-place resources include proven and probably product reserves, as well as product that is not currently mineable. 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. Based on information as of December 31, 2005 from John T. Boyd Company, as well as core drillings and surface exploration as well as mine maps, management
estimates that there are 1.53 million tons of reserves, 1.36 million tons of which are proven and the remainder of which are probable. Management believes that the reserve estimates have been classified in accordance with the Securities and Exchange Commissions Industry Guide 7.





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Currently all of the property and equipment of the TongGong coal mine is in safe working condition, and all the equipment and machines are under constant maintenance. In addition, every quarter the Company has budgeted the use of approximately 18% of the total retained profit for the acquisition of new equipments and maintenance.



The TongGong coal mines have been commended by local government officials and the coal mine administrating bureau during its annual coal mine production safety inspections.



Our Mining Facilities



The TongGong Coal Mine is located in the western slope of the Xiaoxinganling Mountain in the Heilongjiang Province in Northeastern China. The mine, which was originally installed in 1995 as the Jinchang Coal Mine, was purchased by Songzai in 2003 and renamed TongGong Coal Mine.



The Tong Gong Coal Mine was rehabilitated for production in mid-2004 and hoisting equipment, slopes, surface facilities and mining equipment were then refurbished or replaced. Hongwen Li paid approximately $456,000 in equipment replacement and refurbishment costs. The Company reimbursed Hongwen Li for all of such expenses during 2005. We also incurred approximately $600,000 of additional equipment purchase expenses in 2005 and approximately $930,000 of additional equipment purchase expenses in 2006.



The industrial and home use coal is sold at the mine. 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. A conveyer belt to cover the 500 meter road is also being installed. By the time of completion, the coal will be transported in a ceaseless process from the coal mine to the railroad cargo station.



Mine design capacity is estimated at 150,000 to 200,000 tpa based on mine operating conditions. The mine has government approval for the 150,000 tpa capacity. Mine service life, based on a reserve base of 1.53 million tones (Mt), is 10 years.



The longwall coal mining method employed at the Tong Gong Coal Mine, typical for the Chinese coal mining industry, uses longwall panels and retreating face methods to produce approximately 80%-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 1,100 meters following the coal 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 single hydraulic supports and a small capacity AFC with a 40 kilowatt motor. 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 in the AFC 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. Hoisting capacity based on 14 hour days and 330 operating days a year is 150,000 tons per year, which is the maximum capacity for which the mine currently has regulatory clearance. Higher levels of hoisting output are possible if additional hoisting hours are utilized. 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 PRC 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 utilize. The mines ventilation system includes



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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. We plan to purchase an additional water pump, but we do not believe
that additional material water removal costs will be material in the next 12
months.



The mine is expected to generate approximately 20,000 tons of waste rock annually including ash and boiler slag. We currently store the waste rock in a temporary stockpile near the pit mouth. In time, as opportunities for disposal are identified, we propose to transport waste rock by truck to alternative disposal sites such as road paving, industrial site base material, backfilling low-lying areas for land reclamation, backfilling surface subsidence depressions, etc. We believe that disposal costs will not be material.



The mine operates 330 working days per year, with three coal mining shifts operating per day. Mine design capacity is 150,000 to 200,000 tons per year based on our available hoisting capacity and mine operating conditions. Coal output typically ranges from 150 to 200 raw tons per shift.



Currently the coal mine is applying to increase the annual production capacity under its Coal Production rights Permits from 150,000 tons to 200,000 tons. The costs for such application are approximately $200,000 and we expect the application to be approved by during the second quarter of 2007.



In addition, to the production permit, we must also obtain and maintain a permit for the number of resources and reserves on property that we operate. The permit is issued by the Heilongjiang Province National Resources Administration Bureau. Our current permit allows us to operate on property with resources of 4.5 million tons, which amount is formulated according to the Chinese standard resource estimate that includes all of the coal resources in the mining right area, not all of which are accessible or mineable. As stated above, our current actual reserves are 1.53 million tons, 1.36 million of which are proven and the rest of which are probable. We are seeking to increase our resource permit to 6 million tons in order to allow for further exploration and mining efforts. We can not assure, however, that such efforts will result in an increase in our proven or probable
reserves. The costs for such permit application are $1.5 million and we expect the application to be approved by the end of this year.



Most of the equipment in the TongGong coal mine utilizes the latest technology available for use in the Chinese coal mining industry. All equipment is technologically sufficient to support the mines production capacity. In addition, every quarter the Company has budgeted the use of approximately 18% of the total retained profit for the acquisition of new equipments and maintenance. The usable life of equipment in the mine, which was replaced or refurbished in 2004, is approximately 10-15 years. We may acquire additional driving belts and up to four diesel trailers in order to increase our operating efficiency, but we do not believe that there will be any required material equipment purchase costs in the next 12 months.



Our Administrative Facilities



Our principle headquarters are located in an approximately 36,000 square foot facility in Harbin, China. The Company has no written agreement or formal arrangement pertaining to the use of this space and currently pays no rent. These headquarters house all of our administrative and clerical staff. If necessary, we believe that we would be able to find replacement office space without unreasonable expense or delay.



We also have an operating office located at the Tong Gong Coal Mine that has a total area of approximately 32,000 square feet. Most mining operations are controlled from this office and housing is provided for mine workers. We do not own the land on which this office is located, but we currently pay no rent for use of this space. We have no written agreement or formal arrangement pertaining to the use of this space, but we believe that use of the land and office space is authorized by the Coal Production Right Permit. No other businesses operate from this office. If necessary, we believe that we would be able to find replacement office space without unreasonable expense or delay.



We have no current plans to occupy other or additional office space. We do, however, intend to acquire one or more additional mines located on the same property as its existing mine.



Demand for Coal in the PRC



Coal is one of the worlds most abundant, efficient and affordable natural resources, and is used primarily as fuel for the generation of electricity steel and cement making. According to a July 2005 report



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issued by the Energy Information Administration, or EIA, a division of the United Stares Department of Energy, coal consumption in the PRC is expected to increase from approximately 1.4 billion short tons in 2002, to 2.3 billion in 2010, 2.7 billion in 2015, 3 billion in 2020 and 3.2 billion in 2025. We believe that the increased construction in the PRC to meet the needs for 2008 Olympic Games in Beijing has also increased the demand for steel and cement, which requires more coal as energy source.


According to the EIA, limited supply of export coal is the primary explanation given for the substantial rise in coal prices (both steam and coking). Some of the factors that restrained supply during 2004 included (1) substantial shipping delays at Australian coal ports, as expansions in port infrastructure have not kept pace with the recent surge in the PRCs demand for iron ore and coking coal; (2) reduced exports of steam coal out of South Africa, mostly due to rail-related shipping delays; and (3) reduced exports and increased imports of coking coal by the PRC. Relative to 2003, the PRC imported an additional 4 million tons of coking coal in 2004 and exported 8 million tons less. Other factors affecting coal export prices in 2003 and 2004 were the effects of higher freight rates on international coal markets, increasing concentration in the ownership of coal export supply,
and increasing importance of coal-on-gas competition in international power supply.



Regulatory Considerations



The land on which the Tong Gong Coal Mine is located, as well as the land on which most of our mining facilities is located and all mineral rights, are owned by the PRC. We operate the Tong Gong Coal Mine pursuant to a Coal Production Right Permit issued by the Heilongjiang Province Economy Committee and the National Land and Resources Officer. The Coal Production Right Permits provide authorization for the Company to mine up to 150,000 tons of coal per year in a 1.1193 square kilometer area, which comprises the entire area of the mine. The effective period of the current Coal Production Right Permits extend until April  2015. Currently the coal mine is applying to increase the annual production capacity under its Coal Production rights Permits from 150,000 tons to 200,000 tons. We expect the application to be approved by during the second quarter of 2007. We own the mining equipment
and other physical assets of the mine.



The coal industry in the PRC operates under significantly less developed regulatory regime governing mining and mine safety activities than that in the United States. However, more attention has been paid by the regulators in recent years; more than 10,000 small-size coal mines were forced to close for safety consideration by the central government in 2005, which, in turn, shifts the supply curve further up and drives the coal price higher. We were granted a Certificate of Safety Production by the Heilongjiang Coal Safety Inspection Bureau in February 2006.



We believe that the Coal Production Right Permits, together with the Certificate of Safety Production, are the only authorizations or permits that we currently require to operate the Long Gong Coal Mine. See Risk Factors.



Environmental Law Compliance



The coal mining industry in China to date has not been subject to the type and scope of regulation seen in Europe and the United States. We have planned several actions to minimize the impact of the mines operation on the surrounding area and to comply with existing government standards:





        Install water sprays at coal loading and transfer sites to suppress fugitive dust.
        Install noise reduction boards to minimize noise level of surface fan operation.
        Install a dust removal chamber between the boiler house and chimney house to reducedust emissions.
        Plant trees and vegetation around the industrial site.
        Construct settling ponds for mine water discharge prior to release into the river.

The installation of equipment related to the actions taken above has been completed. We believe that the aggregate cost of satisfying the requirements listed above is currently approximately $45,000. Although there is no specific time period in which we must satisfy these items, we are subject to governmental review on an annual basis. We are not aware of any required governmental permits regarding environmental law or rule compliance. The possibility exists that new legislation or regulations may be adopted or that the enforcement of existing laws could become more stringent. We will make all reasonable efforts to comply with both existing and any new applicable regulations, either of which may have a significant impact on our mining operations.





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Our Products



There are four types of coal: lignite, sub-bituminous, bituminous and anthracite. Each has characteristics that make it more or less suitable for different end uses. In general, coal of all geological composition is characterized by end use as either steam coal or metallurgical coal, sometimes known as met coal. Steam coal is used by electricity generators and by industrial facilities to produce steam, electricity or both. Metallurgical coal is refined into coking coal, which is used in the production of steel. Heat value and sulfur content, the two most important coal characteristics, determine the best end use of particular types of coal. The heat value of coal is commonly measured in 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 comp





osition 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 Tong Gong Coal Mine production is sold on a raw product basis. The raw coal stream is screened to produce sized products sold as steam coal for power generation, cement rotary kilns and other industrial and home heating uses. A typical breakdown and use of the size fractions are:




Coal Size
        Market+50 mm
        Home use and local factories50 mm to 25 mm
        Local industrial25 mm to 0 mm
        Steam coal



The mine is currently screening product at 250 mm with manual hand-cleaning to remove larger impurities. To the extent practicable, coal is selectively separated from the parting bands during the mining process to minimize product contamination.



We have also recently completed the final phase of testing on a new environmentally-friendly briquette for use in both industrial and consumer applications. However, we have not begun production or marketing of the new product. We believe that the new briquette produces higher calories per kilogram (cpk) and burns longer than the existing briquette introduced by the Environmental Protection Bureau of Harbin, China. The current briquette, though environmentally-friendly, does not produce enough calories for industrial use and is generally used for residential heating. We currently anticipate that we will begin to market this new product within the next 9-12 months.



We had no research and development expenses in 2006, compared to similar expenses in 2005 of approximately $32,000. We currently have no plans for additional research and development activities and do not anticipate any further material research and development costs.



We have no material patents, licenses or other intellectual property.



Our Distribution Methods



We sell our coal on a per ton basis in cash on delivery, primarily to power plants, cement factories, whole sellers and individuals for home heating. Industrial and home use coal is sold directly to customers at the mine, and the buyer provides required transportation. We currently require that most of our customers pay for their coal purchases in advance, and we rarely extend credit to customers due to high demand for coal. We currently are not required to provide distribution or delivery services in order to meet the demand for industrial or home use coal.  Once our coal is extracted, it
is typically picked up immediately by customers or loaded immediately for delivery to customers so we do not currently maintain an inventory of extracted coal products. Steam coal is trucked approximately 15 kilometers to the nearest rail siding and sold f.o.b. railcar. The railroad



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was
extended in 2005 and now passes within 500 meters of the mine. In October 2004,
a siding was installed with direct access from the mine via belt conveyor, and
the cost of trucking our product to railcar was substantially reduced.



We currently do not have any material long term supply contracts. We intend to avoid long-term contracts because we believe coal prices will continue to increase during the next 12 months and we wish to maintain the flexibility to raise prices in the future. Coal prices did not change significantly between 2005 and 2006. We sold approximately $799,438 of our products, representing in aggregate 21% of sales in 2006, to one customer and accounted for approximately $425,177 of sales representing in aggregate 15% of sales in 2005. At December 31, 2006 and 2005, accounts receivable from these customers totaled $0 and $0 respectively. Due to the increased demand for coal, our customers are currently required to pre-pay for their purchases of coal and we no longer extend credit to any of our customers.



Competition



There are many coal producers and coal mines in the area in which we operate. However, the demand for coal currently exceeds the supply so we do not face any meaningful competition for the sale of our coal.



Employees



The Company currently employs approximately 348 employees, all of whom are employed full-time.



RISK FACTORS



Our business is subject to certain risks, and we want you to review these risks while you are evaluating our business and our historical results. Please keep in mind, that any of the following risks discussed below and elsewhere in this Annual Report could materially and adversely affect us, our operating results, our financial condition and our projections and beliefs as to our future performance. As such, our results could differ materially from those projected in our forward-looking statements. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business.



RISKS RELATED TO OUR BUSINESS



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:





        continued high pricing environment for our raw materials, including, among other things, diesel fuel, explosives and steel;



        changes in laws or regulations, including permitting requirements;



        litigation;



        work stoppages or other labor difficulties;



        labor shortages;



        changes in coal market and general economic conditions.

The land on which the Tong Gong Coal Mine is located, as well as the land on which most of our mining facilities is located and all mineral rights, are owned by the PRC. We operate the Tong Gong Coal Mine



10



pursuant to a Coal Production Right Permit issued by the Heilongjiang Province
Economy Committee. The Coal Production Right Permit provides authorization for
the Company to mine up to 150,000 tons of coal per year in a 1.1193 square
kilometer area, which comprises the entire area of the mine. The effective
period of the current Coal Production Right Permit is from January 25, 2006
through April 30, 2015. Currently the coal mine is applying to increase the
annual production capacity under its Coal Production rights Permits from 150,000
tons to 200,000 tons. We expect the application to be approved by during the
second quarter of 2007. Any material change or revocation in the permit by the
PRC or the Heilongjiang Province Economy Committee could materially and
adversely affect our operations and financial condition.



Our operations may become subject to regulation which may cause substantial delays or require capital

outlays in excess of those anticipated causing an adverse effect on our company.



The coal mining industry in China to date has not been subject to the type and scope of regulation seen in Europe and the United States. Similarly, the electric generating industry in China, which is the most significant end-user of our coal, is not subject to the same extensive regulation experienced by electric plants in Europe or the United States. However, management believes that the PRC government has recently 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. Therefore, the possibility exists that new legislation or regulations may be adopted or that 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. In fact, the PRC government has recently announced that private mines that do not comply with safety standards may be subject to closure.



We believe that our operations in the PRC 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.



Demand for coal and coal prices are closely linked to consumption patterns of the electric industry in China. Any changes in consumption patterns could affect our operations and profitability.



Demand for coal and the prices that we will be able to obtain for our coal are closely linked to coal consumption patterns of the electric generation industry in China, which has accounted for approximately 58% of overall coal consumption in China in recent years. These coal consumption patterns are influenced by factors beyond our control, including the demand for electricity (which is dependent to a significant extent on summer and winter temperatures and the strength of the economy); government regulation; technological developments and the location, availability, quality and price of competing sources of coal; other fuels such as natural gas, oil and nuclear; and alternative energy sources such as hydroelectric power. Any reduction in the demand for our coal by the domestic electric generation industry may cause a decline in profitability.



If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.



Transportation costs represent a significant portion of the total cost of coal and, as a result, the cost of transportation is a critical factor in a customers purchasing decision. Increases in transportation costs could make coal a less competitive source of energy or could make some of our operations less competitive than other sources of coal.



Our future success depends upon our ability to continue acquiring and developing coal reserves that are economically recoverable.



Our recoverable reserves decline as we produce coal. We may not be able to mine all of our reserves as profitably as we do at our current operations. Our profitability depends substantially on our ability to mine coal reserves that have the geological characteristics that enable them to be mined at competitive costs. Replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristics of the depleting mines. We may in the future acquire coal reserves from third parties. We may not be able to accurately assess the geological characteristics of any reserves that we acquire, which may adversely affect our profitability and financial condition. Exhaustion of reserves at the Tong Gong mine and at mines that we may acquire in the future can also have an adverse effect on operating results that is disproportionate
to the percentage of overall production represented by such mines. Tong Gong mine is



11



estimated to exhaust its current 1.53 million ton reserve in approximately 7-10 years at current production levels 0f 150,000 tons per year, which the Company believes may be increased to more than 200,000 tons per year.



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.



Our estimates of coal reserves are based on estimates that may not be correct.



We base our reserve information on geological data assembled and analyzed by our staff, which includes various engineers and geologists, and periodically reviewed by outside firms. The reserve estimates are annually updated to reflect production of coal from the reserves and new drilling or other data received. There are numerous uncertainties inherent in estimating quantities of recoverable reserves, including many factors beyond our control. Estimates of economically recoverable coal reserves and net cash flows necessarily depend upon a number of variable factors and assumptions, such as geological and mining conditions which may not be fully identified by available exploration data or may differ from experience in current operations, historical production from the area compared with production from other producing areas, the assumed effects of regulation by governmental agencies, and
assumptions concerning coal prices, operating costs, taxes, development costs, and reclamation costs, all of which may cause estimates to vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of net cash flows expected there from, prepared by different engineers or by the same engineers at different times, may vary substantially. Actual coal tonnage recovered from identified reserve areas or properties, and revenues and expenditures with respect to our reserves, may vary from estimates, and such variances may be material. These estimates thus may not accurately reflect our actual reserves.



If we are unable to expand our operations through acquisitions of other business or assets, our profitability may be negatively affected.



We are seeking to expand our operations and coal reserves in the regions in which we operate through acquisitions of businesses and assets, including leases of coal reserves. Acquisition transactions involve inherent risks, such as:





        uncertainties in assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates;



        the potential loss of key personnel of an acquired business;



        the ability to achieve identified operating and financial synergies anticipated to result from an acquisition or other transaction;



        problems that could arise from the integration of the acquired business;



        unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale; and



        unexpected development costs, that adversely affect our profitability.

In addition, we may not be able to successfully negotiate new leases or mining contracts for properties containing additional reserves or maintain our leasehold interests in properties on which mining operations are not commenced during the term of the lease.



Our ability to operate our company effectively could be impaired if we lose key personnel or fail to attract qualified personnel.



12



We manage our business with a number of key personnel, the loss of a number of whom could have a material adverse effect on us. In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. We cannot assure you that key personnel will continue to be employed by us or that we will be able to attract and retain qualified personnel in the future. We do not have key person life insurance to cover our executive officers. Failure to retain or attract key personnel could have a material adverse effect on us.



RISKS RELATED TO 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 the company must conduct its business activities.



The PRC only recently has permitted greater provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require the Company to divest the interests it then holds in Chinese properties or joint ventures. Any such developments could have a material adverse effect on the business, operations, financial condition and prospects of the Company.



Future inflation in China may inhibit economic activity and adversely affect the Companys operations.



In recent years, the Chinese economy has experienced periods of rapid expansion and within which some years with high rates of inflation and deflation, which have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has moderated since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby adversely affect the Companys business operations and prospects in the PRC.



We may be restricted from freely converting the Renminbi to other currencies in a timely manner.



The Renminbi is not a freely convertible currency at present. The Company receives all of its revenue in Renminbi, which may need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective July 1, 1996, foreign currency current account transactions by foreign investment enterprises, including Sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange (SAFE, formerly, State Administration of Exchange Control), but need only a ministerial review, according to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996 (the FX regulations). Current account items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of
services. Distributions to joint venture parties also are considered a current account transaction. Other non-current account items, known as capital account items, remain subject to SAFE approval. Under current regulations, the Company can obtain foreign currency in exchange for Renminbi from swap centers authorized by the government. The Company does not anticipate problems in obtaining foreign currency to satisfy its



13



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 remained stable and has appreciated slightly against the U.S. dollar. 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 from the recent outbreak of severe acute respiratory syndrome in various parts of mainland China, Hong Kong and elsewhere.



Since early 2003, Mainland China, Hong Kong and certain other countries, largely in Asia, have been experiencing an outbreak of a new and highly contagious form of atypical pneumonia, now known as severe acute respiratory syndrome, or SARS. This outbreak has resulted in significant disruption to the lifestyles of the affected population and business and economic activity generally in the affected areas. Areas in Mainland China that have been affected include areas where the Company has business and management operations. Although the outbreak is now generally under control in China, the Company cannot predict at this time whether the situation may again deteriorate or the extent of its effect on the Companys business and operations. The Company cannot assure that this outbreak, particularly if the situation worsens, will not significantly reduce the Companys hotel and travel
related revenues, disrupt the Companys staffing or otherwise generally disrupt the Companys operations, result in higher operating expenses, severely restrict the level of economic activity generally, or otherwise adversely affect products, services and usage levels of the Companys services in affected areas, all of which may result in a material adverse effect on the Companys business and prospects.



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.



Our company has a limited operating history and must be considered in the development stage. Our 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 our company.



14



All of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.



All of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. The foregoing risks also apply to those experts
identified in this prospectus that are not residents of the United States.



If we issue additional shares in the future this may result in dilution to our existing stockholders.



Our Certificate of Incorporation authorizes the issuance of 1,000,000,000 shares of common stock and 8,000,000 shares of preferred stock. Our Board of Directors have 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.



Our stock is a penny stock. Trading of our stock may be restricted by the SECs penny stock regulations which may limit a stockholders ability to buy and sell our stock.



Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term accredited investor refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customers account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive the purchasers written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.



15



NASD sales practice requirements may also limit a stockholders ability to buy and sell our stock.



In addition to the penny stock rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customers financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.



Stockholders Should Have No Expectation Of Any Dividends.



The holders of our common stock are entitled to receive dividends when, as and if declared by the board of directors out of funds legally available therefore. To date, we have not declared nor paid any cash dividends. The board of directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in our business operations.



ITEM 3. LEGAL PROCEEDINGS



The Company was threatened with litigation arising from contracts with financial consultant Greentree Financial Group, Inc. (Greentree). Greentree contended that the Company breached agreements to provide compensation for financial services rendered. The Company claimed Greentree never provided the services for which it now seeks compensation. On November 21, 2006, the Company and Greentree settled the dispute through arbitration. The Company agreed to pay Greentree an aggregate of $125,000, payable over a 12 month period in installments beginning in January 2007. The Company has made four installment payments.



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.



None



PART II



ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.



Our common stock is quoted on the National Association of Securities Dealers OTC Bulletin Board under the symbol SGZI.OB. As of March 27, 2006, we had approximately 899 holders of record and 69,123,748 shares of common stock outstanding. Presented below is the high and low bid information of SGZIs common stock for the periods indicated. The source of the following information is MSN Money. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.





16



OTC Bulletin Board(1)(2)SGZI
			COMMON
			STOCKHIGH
        LOWFISCAL YEAR ENDING DECEMBER 31, 2006:First Quarter
        $.29
        $.28Second Quarter
        $.13
        $.13Third Quarter
        $.08
        $.08Fourth Quarter
        $.05
        $.04FISCAL YEAR ENDING DECEMBER 31, 2005:First Quarter
        $.46
        $.15Second Quarter
        $.40
        $.15Third Quarter
        $.45
        $.16Fourth Quarter
        $.50
        $.14


(1)
        Our common stock began being quoted for trading on the OTC Bulletin Board in October 2003.(2)           Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.



Our common shares are issued in registered form. Gayle Terry of Interwest Transfer Company, Inc (Telephone: 801-272-9294; Facsimile: 801-277-3147) is the registrar and transfer agent for our common shares.



We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Although there are no restrictions that limit the ability to pay dividends on our common shares, our intention is to retain future earnings for use in our operations and the expansion of our business.



RECENT SALES OF UNREGISTERED SECURITIES



None



EQUITY COMPENSATION PLAN INFORMATION



The following table provides information as of December 31, 2006 with respect to compensation plans, under which securities are authorized for issuance, aggregated as to (i) compensation plans previously approved by stockholders, and (ii) compensation plans not previously approved by stockholders.




PLAN CATEGORY
        NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS
        WEIGHTED AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS
        NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a))Equity compensation plans approved by security holders
        0
        $0.00
        0Equity compensation plans not approved by security holders
        50,000
        $0.25
        0Total
        50,000(1)
        $0.25
        0

_____________________________________________________________________________________________________________________

(1)         Of these options, warrants and rights, 50,000 were granted to SGZIs legal counsel with an exercise price equal to the fair market value of SGZIs common stock as of the effective date of the companys retainer agreement with such counsel. For purposes of determining the fair market value of SGZIs common stock as of the effective date, fair market value was calculated based on the closing sale price of one share of SGZI Common Stock on the OTC Bulletin Board on the last trading day prior to the date of the execution of the retainer agreement.



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as anticipate, estimate, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to:



17




        Our expectation of continued growth in the demand for our coal;
        Our expectation that we will continue to have adequate liquidity
			from cash flow from operations;
        A variety of market, operational, geologic, permitting, labor and
			weather related factors; and
        The other risks and uncertainties which are described below under
			RISK FACTORS, including, but not limited to, the following:
        A reduction in consumption may cause our profitability to decline.
        Unanticipated mining conditions may cause profitability to
			fluctuate.
        Decreases in purchases of coal by our largest customers could
			adversely affect our revenues.

Results of Operations





Year Ended December 31, 2006 Compared To Year Ended December 31, 2005




Year Ended December 31
        2006
        
        2005$
        
        % of Sales
        
        $
        
        % of SalesSales
        
        3,835,427
        
        
        
        3,170,445Gross Profit
        
        1,364,987
        
        36%
        
        1,020,091
        
        32%Operating Expenses
        
        771,044
        
        20%
        
        410,583
        
        13%Income from Operations
        
        654,338
        
        17%
        
        609,508
        
        19%Other Income (Expenses),
			net
        
        (6,866)
        
        0.2%
        
        (41,340)
        
        1.3%Net Income
        
        647,472
        
        17%
        
        725,550
        
        23%We commenced coal mining operations in September 2004 and discontinued the on-line gift cards and related products business. Our coal mining production and sales, in tons, from inception through the end of 2006 are set forth below:


Tonggong Coal Mine Production and SalesYear
        Quarter
        Production (tons)
        Sales (tons)2004
        3
        15,261
        15,2614
        43,437
        43,402Sub-total
        58,698
        58,6632005
        1
        10,145
        10,1812
        29,908
        29,9083
        42,654
        42,6544
        46,741
        46,741Sub-total
        129,448
        129,4832006
        1
        27,652
        27,6522
        46,236
        46,2363
        32,673
        32,6734
        70,284
        69,328Subtotal
        176,844
        175,889Total
        
        364,990
        364,035

18



Net Sales.Net sales for 2006 were approximately $3.9 million while our net sales in 2005, our first full year of coal mining operations, were approximately $3.2 million. The increase in revenues of $665,000, or
21%, year to year is primarily due to the increased production and sale of coal in 2006 compared to 2005 of approximately 36%, which was partially offset by an increase in sales tax payable on coal sales. There was no material change in the price of coal between 2005 and 2006.

Cost of sales.Our cost of sales currently consists of cost of coal sales and all depreciation, depletion and amortization attributable to mining operations. Cost of sales increased only
15% from 2005 to 2006 to $2,470,440. The increase in cost of sales resulted from an increase in production of coal from year to year. Our cost of sales will continue to increase as we increase production to meet expected increased demand. Cost of sales as a percentage of sales was approximately
64% for 2006 and was approximately 68% during 2005.

Selling and distribution.Selling and distribution expenses consist primarily of costs associated with the accommodation of the Companys customers while purchasing and loading coal, including food and housing. Selling and distribution expenses were approximately $13,000 in 2006 and approximately $86,000 for 2005. Our selling and distribution expenses declined in 2006, despite the increase in production and sales, as we were able to require that our customers pay their respective shipping and distribution cost, due to the high demand for coal during 2006.

General and administrative. General and administrative expense consists primarily of salaries and related expenses for executive, finance, accounting, legal, information technology, facilities and human resources personnel. General and administrative expenses increased from approximately $314,000 in 2005 to approximately $667,000 in 2006. The increase in general and administrative expenses resulted from an increase in governmental administration fees. In addition, we paid legal and consultancy fees of approximately $266,000 in 2006, while similar fees in 2005 were approximately $25,000.

Depreciation. Depreciation increased from approximately $11,000 for 2005 to approximately $30,000 for 2006 as a result of the acquisition of additional fixed assets during 2005 and 2006.

Other Income (expenses). As a foreign joint venture company in the PRC, we are exempt from income tax for the first two years after our date of establishment. In addition, for the three years subsequent to the initial two year period, our tax liability is reduced by 50%. We were not required to pay income tax in 2006, however, we are subject to value added taxes and various local taxes which have all been fully paid during 2006. Other income includes the amount related to this tax holiday. Our other income (loss) was not material in either 2005 or 2006.

Discontinued Operations. We discontinued the on-line gift cards and related products business previously conducted by our
subsidiary Yong Heng  in 2004 and we generated a gain from the disposal of the subsidiary of approximately $108,000 in 2005. We had no gain or loss on discontinued operations in 2006.

Liquidity and Capital Resources



As of December 31, 2006, the Company had cash and cash equivalents of approximately $130,000, other current assets of approximately $1.9 million and current liabilities of approximately $1.7 million.

The following is a summary of cash provided by or used in each of the indicated types of activities during year ended December 31, 2006 and 2005:



19



Year Ended December 312006
        
        2005Cash provided by (used in):Operating Activities
        $
        862,471
        $
        1,538,659Investing Activities
        
        (930,025)
        
        (867,434)Financing Activities
        
        110,211
        
        (628,133)

Cash provided by operating activities decreased by approximately $676,000 during 2006 compared to 2005 primarily as a result of an increase in accounts receivable of approximately $540,000 and other receivables of approximately $277,000 and a decrease in other payables and accrued expenses of approximately $306,000.



Cash used in investing activities increased during 2006 compared to 2005 by approximately $63,000, from approximately $867,000 to approximately $930,000. The increase was related to an increase in capital expenditures such as the purchase of additional mining equipment, most of which has a 10-15 year usable life, as well as construction of our office building and a ventilation incline in the mine. Similar expenses in 2005 were approximately $611,000, but we also incurred additional expenses in 2005 of approximately $250,000 for the mine use rights as the intangible assets of the Company and acquired the Coal Production Right Permit from the PRC Government as the result of payment. The effective period of the current Coal Production Right Permit extends until April 2015. We own the mining equipment and other physical assets of the mine.

Cash provided by financing activities in 2006 increased to approximately $110,000 from a use of cash in 2005 of approximately $628,000. The increase was related to a reduction in investor relations/public relations expenses. Cash used in financing activities in 2005 was related to the repayment of loan by a stockholder as Tong Gong Coal Mine was rehabilitated for production in mid-2004 and hoisting equipment, slopes, surface facilities and mining equipment were then refurbished or replaced. The stockholder paid for the equipment replacement and refurbishment costs.

We believe we have sufficient cash to continue our current business throughout 2007 due to increased sales revenue and net income. We do not believe that we will be required to make any material capital expenditures in 2007. We would like to acquire additional coal mine assets, but we will finance such acquisitions through the issuance of debt or equity securities. Failure to obtain such financing could have a material adverse effect on our business expansion.

We do not anticipate any additional material research and development expenses during the next 12 months.

We do not believe that inflation had a significant negative impact on our results of operations during 2006.

Critical Accounting Policies and Estimates

We suggest that our significant accounting policies, as described in or consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Managements Discussion and Analysis of Financial Condition and Results of Operations.We have identified one accounting policy area as critical to the understanding of our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting periods. Costs to obtain coal lands and leased mineral rights are capitalized and amortized to operations as depletion expense on the units-of-production
method utilizing only proven and probable reserves in the depletion base. Depletion expense is included in depreciation, depletion and amortization on the accompanying statements of consolidated operations and comprehensive income (loss). Costs of mine development, expansion of the capacity of or extending the life of our mine are capitalized and principally amortized using the units-of-production method over proven and probable reserves directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the estimated useful lives ranging from 1 to 20 years or on a units-of-production basis. Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs
are generally expensed as incurred.

There are numerous uncertainties inherent in estimating quantities of economically recoverable coal reserves. Many of which are beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled by our internal engineers and geologists. We also recently received a report regarding reserves as of the end of 2005 from a third party consultant. Some of the factors and assumptions that impact economically recoverable reserve estimates include:





20



-
        geological and mining conditions;-
        historical production from the area;-
        the assumed effects of regulations and taxes by governmental agencies;-
        assumptions governing future prices;-
        future operating costs; and-
        mining technology improvements.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal from our mine may vary substantially. Actual production, revenues and expenditures with respect to reserves will likely vary from estimates, and these variances may be material.



With respect to net realizable value of the Companys accounts receivable and inventories, significant estimation judgments are made and actual results could differ materially from these estimates.



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest Rate Risk. Changes in United States interest rates would affect the interest earned on our cash and cash equivalents. Based on our overall interest rate exposure at December 31, 2006, a near-term change in interest rates, based on historical movements, would not materially affect the fair value of interest rate sensitive instruments.



OFF-BALANCE SHEET ARRANGEMENTS



We do no have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.



RECENT ACCOUNTING PRONOUNCEMENTS


Effective January 1, 2006, we
adopted the SEC issued Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when quantifying Misstatements in Current
Year Financial Statements" ("SAB 108"). SAB 108 requires companies to evaluate
the materiality of identified unadjusted errors on each financial statement and
related financial statement disclosure using both the rollover approach and the
iron curtain approach. The rollover approach quantifies misstatements based on
the effects of correcting the misstatement existing in the balance sheet at the
end of the current year, irrespective of the misstatement's year(s) of origin.
Financial statements would require adjustment when either approach results in
quantifying a misstatement that is material. Correcting prior year financial
statements for immaterial errors would not require previously filed reports to
be amended. The adoption of SAB 108 did not have a material impact on our
consolidated financial statements.

In February 2006, the FASB
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" (SFAS
155"), which amends SFAS No. 133, "Accounting for Derivatives Instruments and
Hedging Activities" ("SFAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" (SFAS 140"). SFAS 155 amends SFAS 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only such
strips representing rights to receive a specified portion of the contractual
interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. The Company is currently evaluating the impact this new Standard,
but believes that it will not have a material impact on the Company's financial
position.

In March 2006, the FASB issued
SFAS No. 156, "Accounting for Servicing of Financial Assets-an amendment to FASB
Statement No. 140" ("SFAS 156"). SFAS 156 requires that all separately recognized servicing rights be
initially measured at fair value, if practicable. In addition, this statement
permits an entity to choose between two measurement methods (amortization method
or fair value measurement method) for each class of separately recognized
servicing assets and liabilities. This new accounting standard is effective
January 1, 2007. We do not expect the adoption of SFAS 156 to have an impact on
our results of operations or financial condition.

In July   2006, the FASB issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASBStatement109" ("FIN 48"), which clarifies the accounting for uncertainty in tax
positions. This Interpretation provides that the tax effects from an uncertain
tax position can be recognized in the Company's financial statements, only if
the position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of fiscal 2007, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings. The
Company is currently evaluating the impact this new Standard, but believes that
it will not have a material impact on the Company's financial position.



21


       
In September 2006, FASB issued Statement
157, "Fair Value measurements". This statement defines fair value and
establishes aframeworkfor measuring fair value in generally accepted accounting principles ("GAAP").
More precisely, this statement sets forth a standard definition of fair value as
it applies to assets or liabilities, the principal market (or most advantageous
market) for determining fair value (price), the market participants, inputs and
the application of the derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2007. The Company is currently evaluating the
impact this new Standard, but believes that it will not have a material impact
on the Company's financial position.

In September 2006, FASB issued
Statement 158, "Employers' Accounting for Defined Benefit Pension and other
Postretirement Plans, which amend FASB Statements No. 87, 88, 106 and 132(R)".
This statement requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in itsfinancialstatements and to recognize changes in that funded status in the year in which
the changes occur. The effective date for the Company would be for any full
fiscal years ending after December 15, 2006. The Company is currently evaluating
the impact this new Standard, but believes that it will not have a material
impact on the Company's financial position.



ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



The report of Companys Independent Auditor appears at Page F-1 hereof, the Financial Statements of the Company appear at PageF-2 through F-15 hereof.



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



Not applicable.



ITEM 8A. CONTROLS AND PROCEDURES



EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation
of our President (the Companys principal executive officer) and Acting Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of
theperiod
covered by this annual Report on Form 10-KSB. Based on this evaluation, our
President and Acting Chief Financial Officer concluded that these disclosure
controls and procedures were not effective as of such date.

(a) Evaluation of Disclosure Controls and Procedures. An evaluation of the Company's disclosure controls and procedures (as defined in Section13a-15(e) of the Securities Exchange
Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's principal executive officer and principal financial and accounting officer (or those persons acting in such capacity) and several other
members of theCompany'ssenior management at December 31, 2006. Based on this evaluation, and as noted below, the Company's President and Acting Chief Financial Officer concluded that as of December 31, 2006, the Company's disclosure controls and
procedures were not effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's
management (including the President and Acting Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Effective September 26, 2006, the
Companys prior Chief Financial Officer, Mr. Yang Yu, resigned for personal
reasons. On September 27, 2006, the Board of Directors of the Company appointed
Mr. Hong Jun Li, the President of the Company, to fill the role of Acting Chief
Financial Officer until a permanent replacement is named. As of
December31,
2006, the President and the acting Chief Financial Officer determined that that
the Company does not have sufficient accounting expertise in the accounting
department, nor an adequate number of personnel to address the complex issues
associated with the Company's financing transactions and reporting disclosures.

(b) Changes in Disclosure Controls
and Procedures. The Company is in the process of improving its internal controls
in order to assist the President and Acting Chief Financial Officer in his
duties. The Company intends to hire and appoint a full time Chief Financial
Officer with experience in public company disclosure requirements and the coal
extraction business as soon as possible. The Company also will consider and
evaluate hiring an independent consulting firm with experience in public company
disclosure requirements to assist the Companys officers in
theirrespective
duties during the review, preparation and disclosures required in SEC rules and
regulations. The Company will hire additional personnel in its accounting
department to assist the management of the Company, including the President
Acting Chief Financial Officer and, when hired, the full time Chief Financial
Officer. The Company's management and directors will also continue to work with
the Company's auditors and other outside advisors to ensure that its controls
and procedures are adequate and effective in the future.



ITEM 8B. OTHER INFORMATION



None



22



PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



The following table sets forth the names, ages and positions of our directors and executive officers:




Name
        Age
        PositionLi Hongwen
        50
        Chairman of the BoardLi Hongjun
        44
        President, Chief Financial Officer and Director

Each Director will hold office until the next annual meeting of stockholders and until his successor has been elected and qualified.



LI HONGWENhas served as Chairman of the Company since the acquisition with Yong Heng was completed on December 16, 2003. Mr. Li is the founder of Fellow Workers Group, a holding company with subsidiaries in different industries such as HuaFeng Trading Co. in the field of Chinese-Russian trading, SongZai Metal in the field of heavy industry, SenDa Hotel in the field of real estate, and HeiHe JinChang Coal Mine in the field of mining, etc. Within several years, Mr. Li, Hongwens company grew from a small corporation with several employees to a holding company with more than 300 employees. Mr. Li, Hongwen is the brother of Mr. Li, Hongjun.



LI HONGJUN has served as Director and President of the Company since the acquisition with Yong Heng was completed on December 16, 2003. His knowledge in business management was applied to his organization of Rui Gen Te Industrial Resources Co. in the U.S. in 1996. He is the Registered Agent of the company. At the same time, Mr. Li, Hongjun set up Heilongjiang Song Zai Metal Co., Ltd., which is another Chinese company in the business of trading metal parts between China and Russia. Mr. Li, Hongjun is the brother of Mr. Li, Hongwen. On September 27, 2006, the Board of Directors of the Registrant appointed Mr. HongJun Li, President of the Registrant, to fill the role of acting Chief Financial Officer until a permanent replacement is named.

Effective September 26, 2006, Mr. Yang Yu has resigned as the Chief Financial Officer (CFO) of Songzai International Holding Group, Inc. (the Registrant) for personal reasons. Mr. Yus resignation was not a result of any disagreements with the Registrant.

There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.



Involvement in Certain Legal Proceedings



Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:



1.      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;



2.      any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);



3.      being 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 or banking activities; or



4.      being found by a court of competent jurisdiction (in a civil action), the 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.





23



Corporate Governance Matters



Audit Committee. The board of directors has not yet established an audit committee, and the functions of the audit committee are currently performed by our Chief Financial Officer, with assistance by expert independent accounting personnel and oversight by the entire board of directors. We are not currently subject to any law, rule or regulation requiring that we establish or maintain an audit committee. We may establish an audit committee in the future if the board determines it to be advisable or we are otherwise required to do so by applicable law, rule or regulation.



Board of Directors Independence. Our board of directors consists of two members. We are not currently subject to any law, rule or regulation requiring that all or any portion of our board of directors include independent directors.



Audit Committee Financial Expert. Our Board of Directors has determined that it does not have a member of its audit committee that qualifies as an audit committee financial expert as defined in Item 401(e) of Regulation S-B, and is independent as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.



We believe that the members of our Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an audit committee financial expert would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.



Code of Ethics. We have not yet adopted a Code of Business Conduct and Ethics applicable to all of our Officers, Directors and Employees. A Code of Business Conduct and Ethics is a written standard designed to deter wrongdoing and to promote (a) honest and ethical conduct, (b) full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements, (c) compliance with applicable laws, rules and regulations, (d) the prompt reporting violation of the code and (e) accountability for adherence to the Code. We are not currently subject to any law, rule or regulation requiring that we adopt a Code of Ethics. However, a draft of the proposed Code of Ethics is attached hereto as Exhibit 14.1. We anticipate adopting a Code of Ethics during the first half of the current fiscal year. To the extent that we adopt a Code of Ethics, we will file a copy of the Code of Ethics
with the Securities and Exchange Commission, and will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to us at our principal offices.



Nominating Committee. We have not yet established a nominating committee. Our board of directors, sitting as a board, performs the role of a nominating committee. We are not currently subject to any law, rule or regulation requiring that we establish a nominating committee.



Compensation Committee. We have not yet established a compensation committee. Our board of directors, sitting as a board, performs the role of a compensation committee. We are not currently subject to any law, rule or regulation requiring that we establish a compensation committee.



At this stage of our development, we have elected not to expend our limited financial resources to implement these measures. It is possible that if we were to adopt some or all of the corporate governance measures described in this section, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made pursuant to objective criteria, by disinterested directors and that policies had been implemented to define responsible conduct.



SECTION 16(a) OF THE EXCHANGE ACT



We do not have securities registered under Section 12 of the Exchange Act and, accordingly, our directors, officers and affiliates are not required to file reports under Section 16(a) of the Exchange Act. However, to the best of our knowledge, all executive officers, directors and greater than 10% shareholders filed the reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended, in a timely manner.



ITEM 10. EXECUTIVE COMPENSATION.



Neither Li Hongjun, the Companys Chief Executive Officer, nor any other officer or director of the
Company received any compensation for such services, including any deferred
compensation or



24



long-term incentive plan awards, during 2006 and no employee, director, or executive officer has been granted any option or stock appreciation rights; accordingly, no tables relating to such items have been included within this Item.



Director and Executive Officer Compensation



We have no current plans to pay compensation to any director or officer.



Employment Contracts and Termination of Employment and Change-In-Control Arrangements



There are no employment contracts, compensatory plans or arrangements, including payments to be received from the Company, with respect to any director or executive officer of the Company which would in any way result in payments to any such person because of his resignation, retirement or other termination of employment with the Company, any change in control of the Company, or a change in the persons responsibilities following a change in control of the Company.



Securities Authorized for Issuance under Equity Compensation Plans



In March 2006, our Board of Directors authorized and approved the 2006 Stock Option/Stock Issuance Plan. The plan was not yet been approved and ratified by our shareholders. Under the plan, we have reserved a total of 5,000,000 shares of our common stock for issuance upon exercise of incentive and non-qualified stock options, stock bonuses and rights to purchase awarded from time-to-time, to our officers, directors, employees and consultants. As of December 31, 2006, no shares or options to purchase shares were granted or were outstanding under the plan.



The plan is currently administered by our board of directors. Under the plan, the board determines which of our employees, officers, directors and consultants are to be granted awards, as well as the material terms if each award, including whether options are to be incentive stock options or non-qualified stock options.



Subject to the provisions of the plan, and the Internal Revenue Code with respect to incentive stock options, the Board determines who shall receive awards, the number of shares of common stock that may be purchased under the awards, the time and manner of exercise of options and exercise prices. At its discretion, the Board also determines the form of consideration to be received upon exercise and may permit the exercise price of options granted under the plan to be paid in whole or in part with previously acquired shares and/or the surrender of options. The term of options granted under the stock option plan may not exceed ten years, or five years for an incentive stock option granted to an optionee owning more than 10% of our voting stock. The exercise price for incentive stock options may not be less than 100% of the fair market value of our common stock at the time the option is
granted. However, incentive stock options granted to a 10% holder of our voting stock may not be exercisable at less than 110% of the fair market value of our common stock on the date of the grant. The exercise price for non-qualified options will be set by the board, in its discretion, but in no event shall the exercise price be less than 85% of the fair market value of our common stock on the date of grant.



Absent registration under the Securities Act of 1933, as amended, or the availability of an applicable exemption therefrom, shares of common stock issued upon the exercise of options or as restricted stock awards will be subject to restrictions on sale or transfer.



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.



The following tables set forth information as of
May 3, 2007 regarding the beneficial ownership of stock by (a) class, (b) each stockholder who is known by Songzai to own beneficially in excess of 5% of Songzais outstanding stock of the class; (c) each director known to hold stock of the class; (d) the Companys chief executive officer; and (d) the executive officers and directors as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of common stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of stock. The percentage of beneficial ownership is based upon 69,123,748 shares of common stock and 400,000 shares of preferred stock outstanding, as of
May 3, 2007. Unless otherwise
indicated, the address of the following stockholders is c/o Songzai International Holding Group, Inc. 20337 Rimview Place, Walnut, California, 91789. above info need to be updated after replying the SEC comment letter.





25



Security Ownership Of Certain Beneficial Owners, Directors And Executive Officers In Common Stock




Name and Address of Beneficial Owner(1)
        Number of Shares(2)
        % of Class of Stock Outstanding (3)Common
Stock
        Preferred Stock(4)
        Common
Stock
        Preferred StockHongjun Li
        4,229,703
        -
        6.0%
        -Hongwen Li
        10,920,371
        400,000
        16.0%
        100%All Directors and Executive Officers as a
Group (2) persons
        15,150,074
        400,000
        22.0%
        100%


(1)
        Unless otherwise indicated, the address of the following stockholders is 20337 Rimview Place, Walnut, California, 91789.(2)
        Security ownership information for beneficial owners is taken from statements filed with the Securities and Exchange Commission pursuant to information made known by the Company. There are no shares issuable to any beneficial owner, director or executive officer pursuant to stock options that are/or will become exercisable within 60 days of February 17, 2006.(3)
        Based on 69,123,748 shares of Common Stock and Preferred Stock outstanding on February 17, 2006.(4)
        Each share of Preferred Stock is convertible into 10 shares of Common Stock and vote on an as converted basis with the shares of common stock on all matters presented to shareholders. The shareholdings of Mr. Hongwen Li, on a fully converted basis, when added to those of Mr. Hongjun Li, amount to
			approximately 28% of the issued and outstanding shares of common stock of the Company on a fully-converted basis.

Option Exercises and Holdings



None of the persons listed in the Summary Compensation Table hold options for our common or preferred stock.



Changes in Control



We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.



Equity Compensation Plan Information



None



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



On July 16, 2004, Registrant amended its corporate charter to increase its authorized common stock to 1,000,000,000 shares and authorize 8,000,000 shares of blank check preferred stock, issuable on terms and conditions to be approved by the Board of Directors from time to time. On January 13, 2006, Registrant reported on Registrant reported in its Report on Form 8-K that on January 9, 2006, Registrant filed a Certificate of Designation pursuant to which the Board of Directors designated 400,000 shares of its preferred stock as Series A Preferred Stock. All of the issued and outstanding shares of Series A Preferred Stock are held by Li Hongwen, Registrants Chairman do the Board.

On December 19, 2006, Registrant filed an Amendment to Certificate of Designation pursuant to which the Conversion Rate of the Series A Preferred Stock was amended such that each of its shares of Series A Preferred Stock is convertible into ten (10) fully paid and nonassessable shares of Common Stock on the terms set forth in the Certificate of Designation. The Board of Directors and stockholders of the Registrants entitled to vote thereon have approved the filing of the Amendment to Certificate of Designation. No consideration was paid to Li Hongwen or the Company in connection with the Amendment to Certificate of Designation.

Conversion of the preferred shares to common stock will further augment Mr. Li Hongwens voting control of the Company.





26



PART IV


ITEM 13. EXHIBITS.




(a)
        The following financial statements are filed as a part of this Form 10-KSB in Appendix A hereto:i.
        Report Independent Registered Public Accounting Firmii.
        Consolidated balance sheets as of December 31, 2006
			and 2005iii.
        Consolidated statements of operations
			and comprehensive income for the years ended December 31, 2006 and 2005iv.
        Consolidated statements of
			stockholders equity for the years ended December 31, 2006 and 2005v.
        Consolidated statements of cash flows for the years ended December 31, 2006 and 2005vi.
        Notes to consolidated financial statements
			as of December 31, 2006 and 2005(b)
        The following Exhibits are filed as part of this Report on Form 10-KSB:(III) INDEX OF EXHIBITS:EXHIBIT NO.
        DESCRIPTION3.1
        Articles of Incorporation dated June 7, 2001 is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.3.2
        Certificate of Amendment to Articles of Incorporation dated October 23, 2003 is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.3.3
        Articles of Exchange among Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Reng Gong Si and Songzai International Holding Group, Inc. is incorporated herein by reference from Registrants Current Report on Form 8-K/A filed with the SEC on May 14, 2004.3.4
        Certificates of Amendments to Articles of Incorporation, dated October 23, 2003 is incorporated herein by reference from Registrants Current Report on Form 8-K/A filed with the SEC on May 14, 2004.3.5
        Certificate of Amendment to Articles of Incorporation dated July 16, 2004 is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.3.6
        Certificate of Designation, Preference and Rights of Convertible Preferred Stock dated January 9, 2006 s incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.3.7
        By-laws are incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.10.1
        2006 Stock Option/Stock Issuance Plan is incorporated herein by reference from Registrants Registration Statement on Form S-8 filed with the SEC on March 8, 200610.2
        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 is incorporated herein by reference from Registrants Current Report on Form 8-K filed with the SEC on January 2, 2004.10.3
        Purchase and Sale Agreement By and Among Songzai Metal Products Co. Ltd and Songzai International Holding Group, Inc covering the acquisition of certain assets formerly owned by Heihe Jinchang Coal Mine Company, LLC is incorporated herein by reference from Registrants Current Report on Form 8-K filed with the SEC on April 8, 2004.14.1
        Draft Code of Ethics of Songzai International Holding Group, Inc. is incorporated herein by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on April 12, 2004.16.2
        Letter Regarding Change in Certifying Accountant is incorporated herein by reference from Registrants Current Report on Form 8-K filed with the SEC on January 20, 2005.21
        List of subsidiaries is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.23.1
        Consent of independent auditors Jimmy C.H. Cheung & Co.*23.2
        Consent of John T. Boyd Company, independent geologists *24.1
        Power of Attorney (included in the Signatures section of this report)

27



31.1
        Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer*31.2
        Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer *32.1
        Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2
        Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*99.1
        Coal Mining Right Permit issued by the Heilongjiang Province National Land and Resources Officer, dated December 31, 2005 is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.99.2
        Coal Mining Right Permit issued by the Heilongjiang Province Economy Committee, dated December 31, 2005is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.99.3
        Safe Production Certificate issued by the Heilongjiang Coal Safety Inspection Bureau, dated February 16, 2006 is incorporated by reference from Registrants Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.


*
        Filed herewith

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.



Jimmy Cheung & Co., Certified Public Accountants, are Songzais independent auditors engaged to examine the financial statements of Songzai for the fiscal years ended December 31, 2005 and December 31, 2006. The following table shows the fees that we paid or accrued for the audit and other services provided by Jimmy Cheung & Co., for the fiscal years ended December 31, 2006 and December 31, 2005. update by Jimmy or Jason.




Years Ended December 31,2006
        2005Audit Fees
        $36,900
        $34,900Audit-Related Fees
        --
        --Tax Fees
        --
        --Other Fees
        --
        --

Audit Fees



This category includes the audit of our annual financial statements, review of financial statements included in our annual and quarterly reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.



Audit-Related Fees



This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under Audit Fees. The services for the fees disclosed under this category include services relating to our registration statement and consultation regarding our correspondence with the SEC.



Tax Fees



This category consists of professional services rendered for tax compliance and tax advice.



All Other Fees



This category consists of fees for other miscellaneous items.



28



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Songzai International Holding Group, Inc. has duly caused this annual report on Form 10-KSB/A to be signed on its behalf by the undersigned, thereunto duly authorized.



Date:
May 3, 2007




SONGZAI INTERNATIONAL HOLDING GROUP, INC.By:
        /s/  Hongjun LiName:
        Hongjun Li,Title:
        President

Each person whose signature appears below appoints Hongjun Li his or her attorney-in-fact, with full power of substitution and resubstitution, to sign any and all amendments to this report on Form 10-KSB/A of Songzai International Holding Group, Inc., and to file them, with all their exhibits and other related documents, with the Securities and Exchange Commission, ratifying and confirming all that their attorney-in-fact and agent or his or her substitute or substitutes may lawfully do or cause to be done by virtue of this appointment. In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities and on the dates indicated.




Name
        Title
        Date/s/ Hongwen Li
        Chairman of the Board
        May 3, 2007Hongwen LiPresident, Chief Financial Officer and Director/s/ Hongjun Li
        (Principal Executive Officer)
        May 3, 2007Hongjun Li










29



APPENDIX A



FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm, together with consolidated financial statements for the Company and subsidiary, including:




a.
        Consolidated balance sheets as of December 31, 2006
			and 2005b.
        Consolidated statements of operations
			and comprehensive income for the years ended December 31, 2006 and 2005c.
        Consolidated statements of changes in stockholders
			equity for the years ended December 31, 2006 and 2005d.
        Consolidated statements of cash flows for the years ended December 31, 2006 and 2005e.
        Notes to consolidated financial statements
			as of December 31, 2006 and 2005.









SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005














SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES



CONTENTS




PagesReport of Independent Registered Public Accounting Firm
        F-1Consolidated Balance Sheets as of December 31, 2006
			and 2005
        F-2Consolidated Statements of Operations and Comprehensive
			income for the years ended December 31, 2006 and 2005
        F-3Consolidated Statements of Stockholders Equity for the years ended December 31, 2006 and 2005
        F-4Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005
        F-5Notes to Consolidated Financial Statements as of December 31, 2006 and 2005
        F-6 
			15






Jimmy C.H. Cheung & Co
Certified Public Accountants
(A member of Kreston International)
        Registered with the Public Company
Accounting Oversight Board



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors of:

Songzai International Holding Group, Inc.



We have audited the accompanying consolidated balance sheets of Songzai International Holding Group, Inc. and subsidiaries as of December 31, 2006
and 2005 and the related consolidated statements of operations and comprehensive
income, consolidated changes in stockholders equity and consolidated cash flows for the years ended December 31, 2006 and 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits of the financial statements provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Songzai International Holding Group, Inc. and subsidiaries, as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.







JIMMY C.H. CHEUNG & CO

Certified Public Accountants



Hong Kong



Date: February 1, 2007






1607 Dominion Centre, 43 Queens Road East, Wanchai, Hong Kong
Tel: (852) 25295500   Fax: (852) 28651067   Email: jchc@krestoninternational.com.hk
Website: http://www.jimmycheungco.com



F-1



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2006 AND 2005ASSETS2006
	
	2005CURRENT ASSETSCash and cash equivalents
	$
	130,222
	$
	82,561Accounts receivable, net of allowances
	
	370,388
	
	-Other receivables and prepayments
	
	1,369,961
	
	777,496Inventories, net
	
	9,063
	
	-Total Current Assets
	
	1,879,634
	
	860,057PROPERTY AND EQUIPMENT, NET
	
	5,530,211
	
	4,875,691INTANGIBLE ASSETS, NET
	
	228,378
	
	245,462TOTAL ASSETS
	$
	7,638,223
	$
	5,981,210LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable
	$
	364,861
	$
	185,169Other payables and accrued liabilities
	
	1,073,826
	
	755,406Other taxes payable
	
	84,576
	
	39,143Due to a stockholder
	
	104,235
	
	-Note payable
	
	47,077
	
	41,101Total Current Liabilities
	
	1,674,575
	
	1,020,819COMMITMENTS AND CONTINGENCIES
	
	-
	
	-STOCKHOLDERS' EQUITYSeries A Preferred Stock ($Nil par value, 8,000,000 sharesauthorized, 400,000 shares issued and outstanding)
	
	-
	
	-Common stock ($0.001 par value, 1,000,000,000 shares authorized,69,323,748 shares issued and outstanding as of December31, 2006; 69,123,748 shares issued and outstanding as ofDecember 31, 2005)
	
	69,324
	
	69,124Additional paid-in capital
	
	4,576,130
	
	4,526,766Retained earningsUnappropriated
	
	743,285
	
	200,857Appropriated
	
	280,615
	
	175,571Accumulated other comprehensive income (loss)
	
	294,294
	
	(11,927
	)Total Stockholders' Equity
	
	5,963,648
	
	4,960,391TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
	$
	7,638,223
	$
	5,981,210

The accompanying notes are an integral part of these financial statements



F-2



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2006 AND 20052006
	
	
	2005NET SALES
	$
	3,835,427
	
	$
	3,170,445COST OF SALES
	
	(2,470,440
	)
	
	(2,150,354
	)GROSS PROFIT
	
	1,364,987
	
	
	1,020,091OPERATING EXPENSESSelling expenses and distribution expenses
	
	13,311
	
	
	85,931General and administrative expenses
	
	667,182
	
	
	314,095Depreciation
	
	30,156
	
	
	10,557Total Operating Expenses
	
	710,649
	
	
	410,583INCOME FROM OPERATIONS
	
	654,338
	
	
	609,508OTHER INCOME (EXPENSE)Interest expense
	
	(7,540
	)
	
	(11,260
	)Interest income
	
	211
	
	
	-Other income (expense)
	
	463
	
	
	(30,080
	)Total Other Expenses, net
	
	(6,866
	)
	
	(41,340
	)INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
	
	647,472
	
	
	568,168INCOME TAX BENEFIT
	
	-
	
	
	49,584NET INCOME FROM CONTINUING OPERATIONS
	
	647,472
	
	
	617,752GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
	
	-
	
	
	107,798NET INCOME
	
	647,472
	
	
	725,550OTHER COMPREHENSIVE INCOME (LOSS)Foreign currency translation gain (loss)
	
	306,221
	
	
	(11,927
	)COMPREHENSIVE INCOME
	$
	953,693
	
	$
	713,623Net income per share-basic and dilutedNet income per common shareBasic
	$
	0.01
	
	$
	0.01Diluted
	$
	0.01
	
	$
	0.01Weighted average number of shares outstanding during the yearBasic
	
	69,268,406
	
	
	68,875,118Diluted
	
	73,268,406
	
	
	72,875,118



The accompanying notes are an integral part of these financial statements



F-3



SONGZAI INTERNATIONAL HOLDING GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYFOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005Series A
	
	
	
	
	
	
	Additional
	
	
	Unappropriated
	
	
	Appropriated
	
	Accumulated otherPreferred Stock
	Common Stock
	
	
	paid-in
	
	
	retained
	
	
	retained
	
	ComprehensiveShares
	
	Amount
	
	Shares
	
	Amount
	
	
	capital
	
	
	earnings (deficit)
	
	
	earnings
	
	gain (loss)
	
	
	TotalBalance at December 31, 2004
	400,000
	$
	-
	
	68,873,748
	$
	68,874
	
	$
	4,480,990
	
	$
	(367,372
	)
	$
	18,250
	$
	-
	
	$
	4,200,742Issuances of common stock for services
	-
	
	-
	
	250,000
	
	250
	
	
	39,750
	
	
	-
	
	
	-
	
	-
	
	
	40,000Net income for the year
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	725,550
	
	
	-
	
	-
	
	
	725,550Foreign currency translation loss
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	-
	
	
	-
	
	(11,927
	)
	
	(11,927
	)Imputed interest on advances froma stockholder
	-
	
	-
	
	-
	
	-
	
	
	6,026
	
	
	-
	
	
	-
	
	-
	
	
	6,026Transfer from retained earnings tostatutory and staff welfare reserves
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	(157,321
	)
	
	157,321
	
	-
	
	
	-Balance at December 31, 2005
	400,000
	
	-
	
	69,123,748
	
	69,124
	
	
	4,526,766
	
	
	200,857
	
	
	175,571
	
	(11,927
	)
	
	4,960,391Issuances of common stock for services
	-
	
	-
	
	200,000
	
	200
	
	
	47,800
	
	
	-
	
	
	-
	
	-
	
	
	48,000Net income for the year
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	647,472
	
	
	-
	
	-
	
	
	647,472Foreign currency translation gain
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	-
	
	
	-
	
	306,221
	
	
	306,221Imputed interest on advances froma stockholder
	-
	
	-
	
	-
	
	-
	
	
	1,564
	
	
	-
	
	
	-
	
	-
	
	
	1,564Transfer from retained earnings tostatutory and staff welfare reserves
	-
	
	-
	
	-
	
	-
	
	
	-
	
	
	(105,044
	)
	
	105,044
	
	-
	
	
	-Balance at December 31, 2006
	400,000
	$
	-
	
	69,323,748
	$
	69,324
	
	$
	4,576,130
	
	$
	743,285
	
	$
	280,615
	$
	294,294
	
	$
	5,963,648The accompanying notes are an integral part of these financial statementsF-4

SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006 AND 20052006
	
	
	2005CASH FLOWS FROM OPERATING ACTIVITIESNet income
	
	647,472
	
	
	725,550Adjusted to reconcile net income to net cash providedby operating activities:Gain on disposal of discontinued operations
	
	-
	
	
	(107,798
	)Depreciation - cost of sales
	
	538,594
	
	
	433,031Depreciation
	
	30,156
	
	
	10,557Amortization on mining rights
	
	25,056
	
	
	2,063Issuance of common stock for services
	
	48,000
	
	
	40,000Imputed interest expenses
	
	1,564
	
	
	6,026Changes in operating assets and liabilities(Increase) decrease in:Accounts receivable
	
	(370,388
	)
	
	170,011Inventories
	
	(9,063
	)
	
	-Other receivables and prepayments
	
	(592,465
	)
	
	(314,975
	)Increase (decrease) in:Accounts payable
	
	179,692
	
	
	53,822Other payables and accrued liabilities
	
	318,420
	
	
	624,082Other taxes payable
	
	45,433
	
	
	(103,710
	)Net cash provided by operating activities
	
	862,471
	
	
	1,538,659CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment
	
	(930,025
	)
	
	(610,996
	)Acquisition of intangible assets
	
	-
	
	
	(247,525
	)Discontinued operations, net
	
	-
	
	
	(8,913
	)Net cash used in investing activities
	
	(930,025
	)
	
	(867,434
	)CASH FLOWS FROM FINANCING ACTIVITIESIncrease (decrease) in amounts due to stockholders
	
	104,235
	
	
	(620,742
	)Increase (decrease) in note payable
	
	5,976
	
	
	(7,391
	)Net cash provided by (used in) financing activities
	
	110,211
	
	
	(628,133
	)NET INCREASE IN CASH AND CASH EQUIVALENTS
	
	42,657
	
	
	43,092EFFECT OF EXCHANGE RATE ON CASH
	
	5,004
	
	
	(11,927
	)CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
	
	82,561
	
	
	51,396CASH AND CASH EQUIVALENTS AT END OF YEAR
	$
	130,222
	
	$
	82,561SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the year for:Income taxes
	$
	-
	
	$
	10,289Interest expenses
	$
	5,976
	
	$
	5,234SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES:During 2006, the Company issued 200,000 shares of restricted common stock valued at $48,000 for services.





The accompanying notes are an integral part of these financial statements



F-5



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005




1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION


(A)
        Organization

Songzai International Holding Group, Inc. (Songzai or the Company) was incorporated in Nevada on June 7, 2001 under the name of Heritage Companies, Inc. (Heritage). On November 5, 2003, the Articles of Incorporation were amended to change the name of the Company to Songzai International Holding Group, Inc.



Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Ren Gong Si (Yong Heng) was incorporated in the Peoples Republic of China (PRC) on September 12, 2003. The principal activity of Yong Heng is the sale of e-commerce gift cards.



On September 23, 2004, the Company acquired a 75% interest in Heilongjiang Tong Gong Kuang Ye You Xian Gong Si (Tong Gong), an operational coal mine located near Heihe City in the PRC. The Company issued 400,000 shares of blank check preferred stock that is convertible into 40,000,000 shares of common stock to exchange for a 75% interest in Tong Gongs registered capital of $4,009,662 (RMB33,200,000). To effect the payment of the purchase price, the Company authorized a class of 8,000,000 convertible preferred shares under Nevada law. In addition to the 75% interest in Tong Gong, Harbin Green Ring Biological Degradation Products Developing Co., Ltd. (Harbin Green) transferred a 25% net profits interest in Tong Gong to the Company. Harbin Green is controlled by Mr. Hong Wen Li, Chairman and Chief Executive officer of the Company.



Subsequently, Harbin Green assigned all of its interest in the registered capital of Tong Gong to the Company. Therefore, the Company is now the beneficial owner of 100% interest in the registered capital of Tong Gong.



During October 2004, the Company discontinued the operations of Yong Heng, those are recorded as discontinued operations in 2005.



On December 28, 2005, pursuant to a Purchase and Sale Agreement, the Company sold 100% interest in its subsidiary - Yong Heng to a third party for $241,000.




(B)
        Principles of consolidation

The accompanying consolidated financial statements include the financial statements of Songzai and its 100% owned subsidiary Tong Gong. All significant inter-company accounts and transactions have been eliminated in consolidation.




(C)
        Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.




(D)
        Cash and cash equivalents

For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with a maturity of less than three months.




(E)
        Accounts receivable

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.   An allowance for doubtful accounts is established and recorded based on managements assessment of the credit history with the customer and current relationships with them.



As of December 31, 2006 and 2005, the Company considers all its accounts receivable to be collectible and no provision for doubtful accounts has been made in the financial statements.



F-6



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION (CONTINUED)


(F)
        Inventories

Inventories consists of coal extracted from the ground that is available for delivery to customers, as well as extracted coal which has been removed from the ground but not yet processed through a wash plant. Inventories of coal are valued at the lower of average cost or market, cost being determined on a first in, first out method and includes labor and benefits and all expenditures directly related to the removal of coal.




(G)
        Property and equipment

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.



Depreciation is provided on a straight-line basis, less estimated residual value over the assets estimated useful lives. The estimated useful lives are as follows:




Plant and machinery
        10 - 15 YearsMotor vehicles
        5 YearsBuilding and mining structure
        10 years

Building and mining structure includes the main and auxiliary mine shafts and underground tunnels. Depreciation is provided to write off the cost of the mining structure using the units of production method based on the estimated production volume for which the structure was designed.



Based on updated geological report and new estimated production volume, the estimated useful life of buildings and mining structure was changed during the year from 30 years in 2004 to 10 years commencing 2005.




(H)
        Long-lived assets

The Company accounts for long-lived assets under the Statements of Financial Accounting Standards Nos. 142 and 144 Accounting for Goodwill and Other Intangible Assets and Accounting for Impairment or Disposal of Long-Lived Assets (SFAS No. 142 and 144). In accordance with SFAS No. 142 and 144, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets and intangible assets, the recoverability test is performed using undiscounted net cash follows related to the long-lived assets.




(I)
        Fair value of financial instruments

Statement of Financial Accounting Standards No. 107, Disclosure About Fair Value of Financial      Instruments, requires certain disclosures regarding the fair value of financial instruments. 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 receivable (trade and others), accounts payable (trade and related party) and accrued liabilities approximate their fair value because of the short-term nature of these instruments. The Company places its cash and cash equivalents with what it believes to be high credit quality financial institutions. The Company has a diversified customer base, most of which are in the PRC. The Company controls credit risk related to accounts receivable through credit approvals, credit limit and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.



F-7



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION (CONTINUED)


(I)
        Fair value of financial instruments (Continued)

All of the Companys operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollars (US$) and the Chinese Renminbi (RMB). On July 21, 2005, the PRC allowed the RMB to fluctuate, ending its decade-old valuation peg to the US$. The new RMB rate reflects an approximately 2% increase in value against the US$. Historically, the PRC government has benchmarked the RMB exchange ratio against the US$, 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 PRC government continues to benchmark the RMB against the US$.




(J)
        Revenue recognition

The Company recognizes revenue upon delivery or shipment of the products, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable.




(K)
        Income taxes

The Company accounts for income taxes under the SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.




(L)
        Foreign currency translation

Songzai and Tong Gong maintain their accounting records in their functional currency in US$ and RMB respectively.



Foreign currency transactions during the year are translated to their functional currencies at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. No-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.



The financial statements of the subsidiaries whose functional currencies are RMB are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity. A translation gain of $306,221 was recorded for the year ended December 31, 2006 and a translation loss of $11,927 was recorded for the year ended December 31, 2005.




(M)
        Comprehensive income (loss)

The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in RMB to US$ is reported as other comprehensive income (loss) in the statements of operations and stockholders equity. Comprehensive income (loss) for the years ended December 31, 2006 and 2005 was income of $306,221 and loss of $11,927 respectively.



F-8



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION (CONTINUED)


(N)
        Income per share

Basic income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income per share is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.




(O)
        Segments

The Company operated in one reportable segment and therefore segment disclosure is not presented.




(P)
        Environmental costs

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




(Q)
        Asset retirement obligations

The Company adopts the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires the Company to recognize the fair value of asset retirement obligations in the financial statements by capitalizing that cost as a part of the cost of the related asset. With regard to the Company, asset retirement obligations primarily relate to the abandonment of coal mine facilities. The Company did not incur and does not anticipate to incur any material dismantlement, restoration and abandonment costs given the nature of its producing activities and the current PRC regulations surrounding such activities.




(R)
        Recent accounting pronouncements

Effective January 1, 2006, we adopted the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach. The rollover approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatements year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require
previously filed reports to be amended. The adoption of SAB 108 did not have a material impact on our consolidated financial statements.



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155), which amends SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities  (SFAS 133) and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 140). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to




beneficial interests that itself is a derivative instrument. The Company is currently evaluating the impact this new Standard, but believes that it will not have a material impact on the Companys financial position



F-9



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION (CONTINUED)


(R)
        Recent accounting pronouncements (Continued)

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment to FASB Statement No.140(SFAS 156). SFAS 156 requires that all separately recognized servicing rights be initially measured at fair value, if practicable. In addition, this statement permits an entity to choose between two measurement methods (amortization method or fair value measurement method) for each class of separately recognized servicing assets and liabilities. This new accounting standard is effective January 1, 2007. We do not expect the adoption of SFAS 156 to have an impact on our results of operations or financial condition.



In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the Companys financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact this new Standard, but believes that it will not have a material impact on the Companys
financial position.



In September 2006, FASB issued Statement 157, Fair Value measurements. This statement defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles (GAAP). More precisely, this statement sets forth a standard definition of fair value as it applies to assets or liabilities, the principal market (or most advantageous market) for determining fair value (price), the market participants, inputs and the application of the derived fair value to those assets and liabilities. The effective date of this pronouncement is for all full fiscal and interim periods beginning after November 15, 2007. The Company is currently evaluating the impact this new Standard, but believes that it will not have a material impact on the Companys financial position.



In September 2006, FASB issued Statement 158, Employers Accounting for Defined Benefit Pension and other Postretirement Plans, which amend FASB Statements No. 87, 88, 106 and 132(R). This statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its financial statements and to recognize changes in that funded status in the year in which the changes occur. The effective date for the Company would be for any full fiscal years ending after December 15, 2006. The Company is currently evaluating the impact this new Standard, but believes that it will not have a material impact on the Companys financial position.











F-10



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






2.
        GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS

On December 28, 2005, pursuant to a Purchase and Sale Agreement, the Company sold 100% of its interest in Yong Heng to a third party for $241,000. The gain on the disposal of discontinued operations are summarized as follows:


Net assets disposed of:

Fixtures and equipment
	$
	20,417Cash in bank
	
	8,913Due from related companies
	
	164,377Other payables
	
	(1,318
	)Due to a stockholder
	
	(58,587
	)133,802Consideration by cash of:
	
	(241,600
	)Gain on disposal of discontinued operations
	$
	(107,798
	)Analysis of the net outflow of cash and cash equivalent in respect of the disposal of discontinued operations is as follows:



Cash consideration received
	$
	-Less: cash and cash equivalents disposed
	
	(8,913
	)Net cash outflow
	$
	(8,913
	)
In June 2006, the total cash consideration in respect of the sale of a subsidiary of $241,600 has been received in full.






3.
        ACCOUNTS RECEIVABLE, NET

Accounts receivable at December 31, 2006 and 2005 consist of the following:



2006
	
	
	2005Accounts receivable
	$
	370,388
	
	$
	-Less: allowance for doubtful accounts
	
	-
	
	
	-Accounts receivable, net
	$
	370,388
	
	$
	-
As of December 31, 2006 and 2005, the Company considered all accounts receivable collectable and has not recorded a provision for doubtful accounts.






4.
        INVENTORIES, NET

Inventories at December 31, 2006 and 2005 consist of the following:


2006
	
	
	2005Finished goods
	$
	9,063
	
	$
	-Less: provision of obsolescence
	
	-
	
	
	-Inventories, net
	$
	9,063
	
	$
	-
As of December 31, 2006 and 2005, the Company has not recorded a provision of obsolete inventories.

F-11



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005






5.
        OTHER RECEIVABLES AND PREPAYMENTS

Other receivables and prepayments at December 31, 2006 and 2005 consist of the following:


2006
	
	2005Other receivables
	$
	51,314
	$
	43,862Consideration receivable on disposal of subsidiary
	
	-
	
	241,600Deposits paid to suppliers
	
	304,312
	
	290,429Prepaid production materials
	
	117,899
	
	201,605Prepaid resources fee for expansion of mining reserve
	
	896,436
	
	-$
	1,369,961
	$
	777,496


6.
        PROPERTY AND EQUIPMENT, NET

The following is a summary of property and equipment at December 31, 2006 and 2005:


2006
	
	2005Plant and machinery
	$
	533,834
	$
	298,296Motor vehicles
	
	77,415
	
	74,048Buildings and mining structure
	
	5,987,613
	
	4,951,648Construction in progress
	
	-
	
	11,2506,598,862
	
	5,335,241Less: accumulated depreciation
	
	1,068,651
	
	459,550Property and equipment, net
	$
	5,530,211
	$
	4,875,691
Depreciation expense for the years ended December 31, 2006 and 2005 was $568,750 and $443,588 respectively.




7.
        INTANGIBLE ASSETS, NET

Intangible assets at December 31, 2006 and 2005 consist of the following::



2006
	
	2005Mining rights
	$
	256,125
	$
	247,525Less: Accumulated amortization
	
	27,747
	
	2,063Intangible Assets, net
	$
	228,378
	$
	245,462Intangible assets represent the renewal of mining rights from the PRC government
on December 31, 2005.



Intangible assets are stated at cost, less accumulated amortization and will be
amortized on a straight line basis over the estimated useful live of ten years
from the date of acquisition. Amortization expense for the years ended December
31, 2006 and 2005 was $22,747 and $2,063 respectively.





8.
        OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued liabilities at December 31, 2006 and 2005 consist of
the following:

2006
	
	2005Other payables
	$
	210,451
	$
	117,178Accrued expenses
	
	373,993
	
	204,544Legal Settlement
	
	77,923
	
	-Deposits received from customers
	
	411,459
	
	433,684$
	1,073,826
	$
	755,406
F-12



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005





9.
        NOTE PAYABLE

Note payable at December 31, 2006 and 2005 consist of the following:



2006
	
	2005Convertible note payable
	$
	47,077
	$
	41,101
The Company has a note payable at December 31, 2006 and 2005 of $47,077 and $41,101 respectively.



The note payable is unsecured and bears interest at a rate of approximately 9% per annum. The Company scheduled monthly payments, each in the amount of $1,000 starting from December 25, 2003 with the balance of $38,000 due and payable on November 25, 2004.



The note remained unpaid after its due date and went into default.



In April 2006, the note holder filed an action against the Company in Broward County, Florida, seeking damages of $243,500 for the repayment of the note due including $210,500 for sums due under service contracts with the Company for rendered services, interest, late interest charges, and attorney fees. The Company disputes the claims and asserts that the note holder failed to perform services it was contractually obligated to perform.



In August 2006, a disposition subpoena was issued by the court in Broward County, Florida allowing the disputes between the Company and the note holder to be settled by arbitration.



On November 21, 2006, the Company and the note holder settled their dispute through arbitration. Whereupon the Company agreed to pay $125,000 to the note holder, commencing January 2007, $15,000 in the first month and $10,000 each month for the subsequent 11 months as full and final settlement. As of December 31, 2006, the Company has accrued $77,923 being the
balance of legal settlement amount less the note payable.






10.
        COMMITMENTS AND CONTINGENCIES

Employee benefits



The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees salaries and make contributions to the plans  out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits for the years ended December 31, 2006 and 2005 were $154,478 and $118,064 respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.











F-13



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005





11.
        INCOME TAX

It is the managements intention to reinvest all the income attributable to the Company earned by its operations outside the US. Accordingly, no US corporate income taxes are provided for in these financial statements.



The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.



Songzai was incorporated in the United States and has incurred net operating loss for income tax purposes for 2006 and 2005.



Songzai has net operating loss carry forwards for income taxes amounting to approximately $877,000 as at December 31, 2006 which may be available to reduce future years taxable income. These carry forwards, will expire, if not utilized, commencing in 2024. Management believes that the realization of the benefits from these losses appears uncertain due to the Companys limited operating history and continuing losses. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. The valuation allowances at December 31, 2006 and December 31, 2005 were $298,089 and $161,078 respectively. The net change in the valuation allowance was an increase of $137,011.



Tong Gong is a Sino-foreign joint venture enterprise formed in the PRC that is subject to PRC income tax computed according to the relevant laws and regulations in the PRC. According to the PRC government local tax bureau, the Company is entitled to full income tax relief for the first two years commencing on January 2005 and a reduction in income tax rate from 33% to 15% for the subsequent three years from 2007 to 2009.



The income tax benefit for 2006 and 2005 are summarized as follows:



PRC Income Tax
	
	2006
	
	2005Current benefit
	$
	-
	$
	(49,584
	)


12.
        NET INCOME PER SHARE

The following is net income per share information at December 31:



2006
	
	2005Net income
	$
	647,472
	$
	725,550Basic weighted-average common stock outstanding
	
	69,268,406
	
	68,875,118Effect of dilutive securitiesSeries A Preferred Stock
	
	4,000,000
	
	4,000,000Diluted weighted-average common stock outstanding
	
	73,268,406
	
	72,875,118Net income per share - basic
	$
	0.01
	$
	0.01Net income per share - diluted
	$
	0.01
	$
	0.01




On December 19, 2006, the Company filed an Amendment to Certificate of Designation pursuant to which the conversion rate of its Series A Preferred Stock was amended such that each of its shares of Series A Preferred Stock is convertible into ten fully paid and non-assessable shares of common stock, such Series A Preferred Stock being previously convertible into one hundred fully paid and non-assessable shares of common stock. The effect of dilutive securities was retroactively adjusted to reflect the change of conversion rate.



F-14



SONGZAI INTERNATIONAL HOLDING GROUP, INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005




13.
        STOCKHOLDERS EQUITY

(A)  Issue of preferred shares



On September 23, 2004, the Company issued 400,000 shares of blank check preferred stock that is convertible into 40,000,000 (post a one for one hundred reverse split) shares of common stock to exchange for a 75% interest in Tong Gongs registered capital of $4,009,662 (RMB33,200,000). On January 9, 2006, the Company filed a Certificate of Designation pursuant to which the Board of Directors designated 400,000 shares of preferred stock as Series A Preferred Stock.



On December 19, 2006, the Company filed an amendment to the Certificate of Designation pursuant to which the conversion rate of the Series A Preferred Stock was amended that each share of Series A Preferred Stock is convertible into ten fully paid and non-assessable shares of common stock.



(B)  Stock issuances



During April 2006, the Company issued 200,000 shares of its restricted common stock to a service provider having a fair value of $48,000. The value of the common stock issued was determined based on the closing market price of $0.24 per share on April 12, 2006. The Company recognized marketing and promotion expenses of $48,000 as of December 31, 2006.



(C)  Appropriated retained earnings



The Companys PRC subsidiary is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on the after-tax net income determined in accordance with the laws and regulations of the PRC. Prior to January 1, 2006 the appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the laws and regulations of the PRC until the reserve is equal to 50% of the entities registered capital. Appropriations to the statutory public welfare fund are at 5% to 10% of the after tax net income determined by the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10 percent of net income after tax per annum, such contributions not to exceed 50 percent of the
respective companies registered capital.



The statutory reserve funds are restricted for use to set off against prior period losses, expansion of production and operation or for the increase in the registered capital of the Company. The statutory public welfare fund is restricted for use in capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation.



During 2006 and 2005, the Company appropriated $105,044 and $157,321 respectively to the reserves funds based on its net income in accordance with the laws and regulations of the PRC.




14.
        RELATED PARTY TRANSACTIONS

In 2006 and 2005, the Company owed a stockholder $104,235 and $0 respectively for short-term advances. Imputed interest expense is charged at 6% per annum on the amount due. Total imputed interest included as additional paid-in capital amounted to $1,564 and $6,026 for the years ended December 31, 2006 and 2005 respectively.




15.
        CONCENTRATION AND RISKS

During 2006 and 2005, 100% of the Companys assets were located in China and 100% of the Companys revenues were derived from customers in China.



The Company relied on one customer for approximately $799,438 representing in aggregate 21% of sales in 2006, and one customer for approximately $425,177 representing in aggregate 15% of sales in 2005. At December 31, 2006 and 2005, accounts receivable from these customers totaled $0 and $0 respectively.



F-15