Filing Compare · China Energy CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Tx Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended November 30, ~~2011~~2012.

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 000-52409

CHINA ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA	98-0522950
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
No. 57 Xinhua East Street Hohhot, Inner Mongolia, People’s Republic of China 010010
(Address of principal executive offices) (Zip Code)
+86-0471-466-8870 (Registrant’s telephone number, including area code)
+86-471-466-8870 (Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value Common
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the ~~preceding~~preceding12 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if a smaller reporting company)

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

The aggregate market value of the 1418,~~470~~070,893 shares of ~~voting~~ voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $75,~~235~~059,~~447~~850 as of May 31, ~~2011~~ 2012, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $0.5028 per share, as reported on the OTC Bulletin Board.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 45,060,000 as of March 14, ~~2012~~2013.

Documents incorporated by reference: None

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TABLE OF CONTENTS

PART I
ITEM 1.	BUSINESS	54
ITEM 1A.	RISK FACTORS	27
ITEM 1B.	UNRESOLVED STAFF COMMENTS	27
ITEM 2.	PROPERTIES	27
ITEM 3.	LEGAL PROCEEDINGS	28
ITEM 4.	MINE SAFETY DISCLOSURES	28
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.	29
ITEM 6.	SELECTED FINANCIAL DATA	30
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	43
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	43
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	43
ITEM 9A.	CONTROLS AND PROCEDURES	43
ITEM 9B.	OTHER INFORMATION	4544
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	4445
ITEM 11.	EXECUTIVE COMPENSATION	4847
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	5049
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	5150
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	5351
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	5452

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INTRODUCTORY NOTE

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, among other things:

general economic and business conditions, both nationally and in our markets,

our expectations and estimates concerning future financial performance, financing plans and the impact of competition,

our ability to implement our growth strategy,

anticipated trends in our business,

advances in technologies, and

other risks set forth herein.

In addition, in this report, we use words such as “anticipates,” ”believes,” “plans,” ”expects,” “future,” ”intends,” and similar expressions to identify forward-looking statements.

China Energy Corporation (including its subsidiaries, unless the context indicates otherwise or otherwise stated, “CEC” or the “Company”) undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this annual report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

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ITEM 1.

BUSINESS

Company Overview

We are producer and processor of raw coal and provider of heating and electricity services in the Inner Mongolia Autonomous Region of the PRC. We also buy and sell coal as part of our expanding proprietary coal trading activities. Our coal is produced out of the Laiyegou coal mine in ~~the~~ Dongsheng District of Ordos City and is primarily used for domestic heating, electrical generation, and coking purposes for steel production. Our heating and electricity ~~services~~ provide ~~those~~services ~~requirements~~ throughout Xuejiawan Town, the administrative center of Zhunger, one of the seven counties of Ordos. For the fiscal year ended November 30, ~~2011~~ 2012, approximately 8891.7% of our revenues ($~~139~~225.56 million) were derived from our coal segment and approximately 128.3% of our revenues ($1820.85 million) were derived from our heating and electricity segment.

We are structured as a holding company that controls, through contractual arrangements, two operating companies: Inner Mongolia Tehong Coal & Power Group Co., Ltd. (“Coal Group”) which operates our coal ~~mining~~ segment and Inner Mongolia Zhunger Heat Power Co., Ltd. (“Heat Power”,” and together with Coal Group, the “Operating Companies”), which operates our heating and electricity services segment.

Our Strengths and Strategy

Coal Consumption in China has been steadily rising; Inner Mongolia has the largest verified coal reserves in China

According to the National Bureau of Statistics of China, consumption of coal has been increasing in China, growing at a 9.3.8% annual growth rate from 183.752 billion ~~metric~~ tons in ~~2004~~2011 to 343.865 billion ~~metric~~ tons in ~~2011~~2012. According to the General Administration of Customs of China, demand for coal has been so strong in China that China’s coal imports have increased from 40.4 ~~million~~ and 130.0 million ~~metric~~ tons in ~~2008~~2008and ~~and~~2009to ~~2009 to 164~~182.84 ~~million~~ and ~~182.4~~289 million ~~metric~~ tons in ~~2010~~ 2011 and ~~2011~~2012. According to Inner Mongolia Autonomous Region Department of Land and Resource, Inner Mongolia has the largest verified coal reserves in China, amounting to ~~700~~800 billion ~~metric~~ tons. According to Inner Mongolia Autonomous Region Bureau of Coal Industry, the region produced ~~979 million~~1.08 ~~metric~~billion tons in ~~2011~~2012, representing a growth of ~~25.1~~10% as compared to ~~2010~~2011.

The wide and varied uses of coal in China help us to maintain a diverse customer base, including coal fired power plants, heating plants, steel manufacturing, and metallurgy of non-ferrous metals. The government of Inner Mongolia is emphasizing six competitive industries: energy, chemicals, metallurgy, equipment manufacturing, processing of farm (including dairy) produce and high technology products. We believe that our coal production and trading platforms are well-positioned in Inner Mongolia to capitalize on growth opportunities resulting from the region’s resources and China’s demand for coal, while at the same time maintaining the diversification of risk associated with a steady, multi-faceted customer base.

Because new and existing industrial facilities in Inner ~~Mongolia~~ Mongolia can be placed relatively close to sources of coal, we believe that Inner Mongolia’s coal resources are a significant driver in the region for continued strong economic and industrial expansion. As with much of China, industrial expansion has led to a boom in construction, including new commercial developments and large apartment complexes as wealth among the population increases and more people move into cities. According to Bureau of Statistics of Inner Mongolia Autonomous Region, economic expansion within Inner Mongolia continues to proceed at a rapid pace with the nominal GDP of the region growing to RMB1,~~424~~598.68 billion (US$~~220~~254 billion) in ~~2011~~2012, a growth of 1411.37% from ~~2010~~2011. We believe that our expertise in the heat and power generation business will offer us continued opportunities for expansion ~~opportunities~~ for our energy services platform in Ordos, as well as in other areas of the region.

Significant Reserves and High Coal Quality

As of the end of fiscal ~~2011~~2012, recoverable reserves at our Laiyegou coal mine were approximately 75.19 million metric tons, while the mine is capable of producing 800,000 metric tons of coal per year. The coal produced has a high level of heat and electricity generation power, with an energy producing capability of 6,100 to 7,100 Kcal. The coal produced at Laiyegou also contains low levels of potentially harmful particulate matter , such as sulphur, ash and phosphorus, thereby meeting the stringent environmental requirements set by the PRC central government and making the product more versatile because it can be used for more applications.

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Superior, More Efficient and Safer Mining Technology

Through ~~a two-year~~ infrastructure improvement program, we made a significant capital investment of approximately $11 million in ~~the~~our Laiyegou mine to expand and improve our mining ~~method~~ method by installing equipment for longwall mining, a more efficient and safer mining method than room and pillar mining, the traditional method of coal mining in China. At Laiyegou, as a result of the installation of the longwall system, the coal recovery rate has increased from 40% to as high as 80%. The national average recovery rate in China is 30% (Source: 2007 China Energy Development Report published by Chinese Academy of Social Sciences).

Sustainable Development Model for Coal and Energy Services

~~We believe our businesses are positioned for sustainable growth.~~ Coal Group has leased land surrounding the Laiyegou coal mine and the mine itself for a period of approximately 50 years (through 2049), and holds mining rights for coal extraction until the depletion of the mine. New roads leading to our coal mine have been built in 2009, improving transportation. In addition, a new railway from Inner Mongolia to the port of Caofeidian is under construction and is expected to be completed in 2015.

With respect to Heat Power, we are the exclusive operator and manager of the Zhunger Banner Heating Supply Station and the heating supply station of Ordos Xinsha Real Estate Development Co., Ltd. These stations supply heat in Xuejiawan within Zhunger ~~county~~County in Ordos.

Fragmented Coal Mining Industry Offers Acquisition Opportunities

China’s coal industry ~~traditionally~~ traditionally has been fragmented among large, state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines. The top four Chinese coal companies produce less than 20% of domestic coal, and the top eight produce less than 28%. (Source: China National Coal Association). In other coal producing countries, those percentages are much higher. For example, the eight largest coal producers in USU.S contributed to 58% of the country’s output. In India and Russia, the numbers are 77% and 95%, respectively. (Source: Energy Information Association). Shenhua, the largest coal producer in the world, accounted for less than 7% of China’s coal production in 2010 (Source: China National Coal Association). Even though smaller coal mines hold a sizeable portion of the market, many of them are inefficient, outdated and have poor safety records. Chinese ~~government~~ government policy currently encourages industry consolidation and greater investment in new technologies to improve production ~~and~~ and safety. In certain instances, the government also has required mines below a certain size threshold to close. In Inner Mongolia, for example, all coal mines with an annual production of less than 300,000 ~~metric~~ tons have been required to cease operations since September 2005. According to the Inner Mongolia Autonomous Region Bureau of Coal Industry, from 2000 to 2009, the number of coal mines fell from 2,000 to 501 as a result of consolidation and shut-downs. In Shanxi province, from 2008 to 2009, the number of coal mines fell from 2,600 to 1,053. We believe that this consolidation trend will lead to valuable, reasonably-priced acquisition opportunities for us in the marketplace.

Dynamic Coal Trading Platform

Each year the PRC government regulates the amount of coal we and other coal producers are able to sell by allocating space to coal mines in Inner Mongolia to ship their coal on rail cars to the port in Qinhuangdao, where regional users come to buy coal on the open market. In order to capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then pay to have that coal delivered by rail from their mine to the Qinhuangdao port. Our ~~business of buying and selling coal on a proprietary basis expanded in 2011 as a result of our receipt of additional quota from the local railway bureau. Our~~ official confirmed quota ~~increased~~decreased from ~~660~~760,000 ~~metric~~ tons in ~~2010~~2011 to ~~760~~590,000 ~~metric~~ tons in ~~2011. In~~2012 ~~addition,~~from ~~occasionally~~a local rail road bureau. Occasionally the government grants a discretionary increase in the quota depending upon business conditions. ~~Due to the increased discretionary quota in 2011, we were able to trade more coal.~~ Parties are awarded additional quotas based on their successful use of the ~~quota~~quotas in the previous year. We Private ~~believe~~parties ~~that,~~also ~~given~~trade unused ~~the~~quotas. ~~demand~~We ~~for~~received ~~coal~~a ~~and~~quota ~~our past track record~~ of ~~successfully filling our extra quota~~590,000 wetons ~~will~~in be2013 ~~able~~from tothe ~~grow~~local ~~our~~rail ~~coal~~road ~~trading~~bureau, ~~business through increased quotas granted to us by~~ the ~~local~~same ~~railway~~as ~~bureau;~~in ~~however,~~2012. Our ~~our~~ ability to use any or ~~all of~~ our entire quota in ~~2012~~2013 will vary with market conditions and is depends on our ability to source commercially acceptable coal purchases and subsequent trades.

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Corporate Structure

We control the Operating Companies through China Tehong Energy Corporation (“~~Tehong BVI~~TehongBVI”), our subsidiary organized in the British Virgin Islands, China Tehong Energy Corporation HK Limited (“Tehong HK”), our subsidiary organized in the Hong Kong Special Administrative Region, Beijing Tehong Energy Technology Consulting Co., Ltd. (“Tehong Consulting”), our subsidiary organized in the PRC, and through contractual arrangements commonly known as “VIE” or “variable interest entity” arrangements on the mainland in the PRC. Our current corporate structure is set forth below:

We own directly 100% of the equity interests of ~~Tehong BVI~~TehongBVI, ~~which~~ which owns directly 100% of the equity interests of Tehong HK, which owns directly 100% of the equity interests of Tehong Consulting.

Our businesses in China are operated through the contractual arrangements among Tehong Consulting, the Operating Companies and the registered equity owners (the “Registered Owners”) of the Operating Companies. Pursuant to the contractual arrangements, Tehong Consulting exercises control over, and derives substantially all of the economic benefits from, the Operating Companies, and holds contractual rights to acquire registered ownership of the Operating Companies, to the extent possible under applicable PRC law.

Contractual Arrangements

Exclusive Business Cooperation Agreements. Pursuant to the exclusive business cooperation agreements executed by Tehong Consulting with each of the Operating Companies on November 30, 2010, Tehong Consulting provides technical and consulting services related to the business operations of each of the Operating Companies. As consideration for such services, each of the Operating Companies has agreed to pay an annual service fee to Tehong Consulting in an amount equal to 100% of the Operating Companies’ net income for such year. The term of each of these agreements is 10 years from the date thereof. Tehong Consulting may terminate the agreements at any time upon giving 30 days’ prior written notice to each of the Operating Companies.

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Exclusive Option Agreements. Tehong Consulting entered into option agreements on November 30, 2010 with each of the Operating Companies, and each of the Registered Owners of the Operating Companies, pursuant to which Tehong Consulting has an exclusive option to purchase, or to designate another qualified person (s) to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in each of the Operating Companies owned by each of the Registered Owners of the Operating Companies. To the extent permitted by the PRC laws, the purchase price for the entire equity interest is RMB1.00 Yuan or the minimum amount required by PRC law or government practice. Each of the exclusive option agreements has a 10 year term, with renewal for an additional 10 years at the option of Tehong Consulting.

Powers of Attorney. Each of the Registered Owners of the Operating Companies signed a power of attorney dated November 30, 2010 providing Tehong Consulting with the power to act as his/her or its exclusive agent with respect to all matters related to his/her or its ownership interest in each of the Operating Companies, including the right to attend shareholders’ meetings of each of the Operating Companies and the right to exercise voting rights to which he/she or it is entitled under PRC law.

Equity Interest Pledge Agreements. Pursuant to equity interest pledge agreements dated November 30, 2010, each of the Registered Owners of the Operating Companies pledged his/her or its equity interest in the Operating Companies to Tehong Consulting to secure obligations of each of the Operating Companies under the exclusive business cooperation agreements as described above. In addition, the Registered Owners of the Operating Companies agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in the Operating Companies that would affect Tehong Consulting’s interests. The equity interest pledge agreements will expire when each of the Operating Companies fully performs its obligations under the exclusive business cooperation agreements described above. All the equity interest pledges became effective on November 30, 2010 upon their registration with the competent administration of industry and commerce.

In addition to the Contractual Arrangements, Coal Group is also the direct registered owner of 51% of the equity interests of Heat Power.

Majority Shareholder. Fortune Place Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“Fortune Place”), owns 60% of our common stock. Pursuant to a Share Transfer Agreement dated November 30, 2010 (the “Share Transfer Agreement”) between ~~WenXiang~~Wenxiang Ding, our President and Chief Executive Officer, and ~~the~~ Ninghua Xu, the shareholder of Fortune Place, ~~WenXiang~~ Wenxiang Ding purchased ~~can purchase~~ 100% of the equity interests of Fortune Place at certain prices that vary depending upon whether we ~~achieve~~achieved certain revenue targets. See the section entitled “Transactions with Related Persons, Promoters and Certain Control Persons,” below. Ms. Xu has also entrusted control over the shares of our common stock held by Fortune Place to Wenxiang Ding pursuant to an entrustment agreement dated November 30, 2010 between her and ~~WenXiang~~Wenxiang Ding. On August 228, ~~2011~~2012, Mr. Ding exercised anthe option to purchase the last 1/3 of the outstanding shares of Fortune Place Holdings Limited pursuant to such Share Transfer ~~Agreement~~ Agreement and thus replaced Ninghua Xu and became athe sole shareholder of Fortune Place Holdings Limited.

Corporate History

We were incorporated in the State of Nevada on October 11, 2002 for the purpose of producing coal to meet the increasing demand in power and heating industries and also to provide heat and electricity to networks in rural developments. We were considered a shell company until we entered into a share exchange agreement (the “Exchange Agreement”) to acquire our Operating Companies on November 30, 2004 (the “2004 Share Exchange”). ~~WenXiang~~Wenxiang Ding, President and Chief Executive Officer of the Company, and his family owned substantially all of the shares of Coal Group and held an indirect majority interest in Heat Power. Although we were the legal survivor of this acquisition and the registrant with the Securities and Exchange Commission, under accounting principles generally accepted in the United States, the transaction was accounted for as a reverse merger, whereby Coal Group was considered our “acquirer” for financial reporting purposes as its shareholders, through us, control a majority of the post transaction combined company.

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On September 8, 2006, new regulations came into effect concerning the merger and acquisition of domestic PRC companies by foreign investors (“New Regulations”) promulgated by the PRC’s Ministry of Commerce and other regulatory departments. We determined that, under the New Regulations, we were required to undergo an application process to convert each of Coal Group and Heat Power from a domestic PRC company to a Foreign Invested Enterprise (“FIE”) pursuant to which a FIE business license would be obtained. In doing so, the acquisition of both the companies by us under the New Regulations would be classified as an “Equity Acquisition” pursuant to which the Company, being the foreign investor, would obtain the equity interest of both Operating Companies with the acquisition price to be determined by and based on an asset valuation of both companies prepared by a qualified PRC asset valuation company as approved by the Ministry of Commerce. Pursuant to the New Regulations, the acquisition price should not be lower than the asset valuation. Compliance with the New Regulations was deemed to be required to complete the formal transfer of registered ownership of the Operating Companies on the records of applicable PRC regulatory authorities to the name of China Energy Corporation from the former PRC shareholders of the Operating Companies (the “PRC Shareholders”).

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In connection with the FIE plan, on December 31, 2007, our former direct, wholly owned subsidiary, Pacific Projects Inc., a Nevada corporation (“PPI”) entered into a trust agreement with all the PRC Shareholders, pursuant to which all the PRC Shareholders agreed to hold their interests in Coal Group and Heat Power (represented by their registered paid up capital contributions to date) in trust for PPI for an eight year term, extendable for five additional years. Under the plan contemplated by the trust agreement, PPI planned to raise the monies required by the New Regulations to convert each of Coal Group and Heat Power to a FIE eligible business pursuant to which a FIE business license would be issued. PPI intended to fund the acquisition price by funds raised pursuant to a share trust agreements dated January 3, 2008 with Georgia Pacific Investments Inc. (“GPI”) and Axim Holdings Ltd. (“Axim”).

In connection with the foregoing, the four family members of Mr. Wenxiang Ding (the “Ding Family”) entered into trust arrangements with GPI and Axim pursuant to which they deposited 30,589,107 shares of our common stock (the “Subject Shares”), ~~constituting 68% of the outstanding common stock of the Company as of the date of this report,~~ into the GPI and Axim trusts. According to the terms of these trusts, GPI and Axim planned to sell the Subject Shares in order to fund the FIE plan; however, no Subject Shares were in fact sold under these arrangements.

On November 30, 2010, we consummated a corporate restructuring (the “Corporate Restructuring”). The objective of the ~~corporate~~Corporate ~~restructuring~~Restructuring was to (i) terminate the PPI trust arrangement pursuant to which we controlled the Operating Companies prior to the Corporate Restructuring, and (ii) control the Operating Companies on a going-forward basis through “variable interest entities” or VIEs, with the objective of mitigating any PRC regulatory risks that could potentially arise from our pre-Restructuring foreign ownership structure. Pursuant to the Corporate Restructuring, we permitted formal registered ownership of Coal Group and Heat Power to be held by certain individuals and corporations domiciled in, or citizens of, the PRC and we caused Tehong Consulting, our indirect, wholly-owned PRC subsidiary to enter into the contractual arrangements with the Registered Owners of the Operating Companies pursuant to which Tehong Consulting exercises control over the Operating Companies, is the beneficiary of the economics of ownership of the Operating Companies, and holds contractual rights to acquire registered ownership of the Operating Companies (other than the equity interest of Heat Power held by Coal Group), to the extent possible under applicable PRC law.

Concurrently with the Corporate Restructuring, the Ding Family terminated the two trust arrangements with GPI and Axim (the “Trust Termination”). In connection with the termination of those trust arrangements, GPI and Axim transferred the Subject Shares to Fortune Place (together with the Trust Termination, the “Family Restructuring”).

In connection with the Corporate Restructuring and the Family Restructuring, PPI was merged with and into China Energy Corporation in November 2010.

Operating Companies

Coal Group

Coal Group, organized in China on July 20, 2000, produces coal from the Laiyegou coal mine located in Ordos City, Inner Mongolia, PRC. Since the acquisition of Laiyegou in 1999, Coal Group’s principal activities consist of the production of “powdered” coal and “lump” coal from raw coal and the sale of products to heating and power industries, distributors and coking factories for steel production. Coal Group also buys, sells, and transports coal, as part of its proprietary coal trading activities.

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

Year		Tons Produced			Purchased from Third Parties**
	2007		459,055		132,764
	2008*		264,098	*	50,000
	2008*		264,098	*	50,000
	2009		453,430		154,584
	2009		453,430		154,584
	2010		820,303		196,952
	2010		820,303		196,952
	2011		1,080,833		935,976
	2011		1,080,833		935,976
	2012***		905,928	***	2,584,564

___________________

* Production levels dropped in 2008 due to the closing of the mine for three months to complete our mine expansion and also due to an additional shut down for two months mandated by the PRC government during the 2008 summer Olympics.

** For the ~~years~~year ~~2007 to~~ 2008 the amounts purchased from third parties represents coal purchased from a third party as part of our transportation quota trading as described below.

*** Production levels dropped in 2012 due to a decline in demand and increased competition from both domestic coal producers and importers of coal.

Coal Trading

Each year the PRC government regulates the amount of coal we we and other coal producers are able to sell in the open market at the port in Qinhuangdao by allocating rail space to coal ~~mines~~ mines in Inner Mongolia to ship their coal to the port. In order to capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then paid to have that coal delivered by rail from the other producers’ mine to the Qinhuangdao port. Prior to 2009, our coal trading activities consisted of transportation quota trading in which we purchased coal from one or more third party coal producers without sufficient rail space allocation to ship their coal, arranged and paid for the rail transportation of such coal, and then sold the coal back to the original coal producer at the port for a fixed profit. In 2009, we were able to expand our coal trading business as a result of our receipt of increased quota from the local railway bureau. Due to the increased quota, we were able to buy excess coal from other coal producers in Inner Mongolia, transport the coal from the other companies’ mines to be sold in the open market at the Qinhuangdao port. Parties are awarded additional quotas based on their successful use of the quota in the previous year. Private parties also trade unused quotas. Our official confirmed quota increased from 500,000 ~~metric~~ tons in 2009 to 660,000 ~~metric~~ tons in 2010, and 760,000 ~~metric~~ tons in 2011, but decreased to 590,000 tons in 2012. In addition, occasionally the government grants a discretionary increase in the quota depending upon business conditions. We ~~believe that, given the demand for coal~~also ~~and~~purchase ~~our~~quotas ~~past~~from ~~track~~other ~~record~~parties ~~of successfully filling our extra quota, we will be able~~ to ~~grow~~meet our ~~coal~~ trading ~~business through increased quotas granted to us by the local railway bureau~~requirements. ~~However,~~ Our ~~our~~ ability to use any or ~~all of~~ our entire quota in ~~2012~~2013 will vary with market conditions and depends on our ability to source commercially acceptable coal purchases and ~~subsequent~~ subsequent trades. Coal that we produce and sell directly to our customers is customarily transported at the buyer’s expense and therefore does not count against our quota.

The following table reflects the tonnage of coal resold by the coal trading segment in the past 5 years (the years prior to 2009 reflect the sales made from transportation quota trading):

Year	Sales Volume
2007		132,764
2008		51,313
2009		296,919
2010		702,876
2011		1,~~366~~376,~~755~~599
2012		2,471,433

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Coal Production

Laiyegou coal mine and related Mining Rights

-Most 10land -in China is owned by the state or collectives. Land use right acquisition in the PRC is primarily through 40, 50 or 70 year lease agreements. Coal Group acquired the rights to the Laiyegou coal mine and the land surrounding the mine in September 1999 for a period of 50 years. Coal Group’s State Owned Land Usage Certificate covers the land and allows the Company to use the storage facility, office and “dormitory” for such period. In addition, Coal Group has all six required governmental permits necessary to mine the reserves in the Laiyegou coal mine.

~~All~~The ~~land~~regulatory inbody ~~the~~responsible ~~PRC~~for ~~belongs~~approving to the ~~PRC~~rights ~~state. Property~~to ~~acquisition in~~ the ~~PRC~~mine is ~~through~~the ~~40,~~Provincial 50Bureau orof 70National ~~year~~Land ~~lease agreements~~ and ~~this~~Resource, isa ~~the~~division ~~only type~~ of ~~ownership~~the ~~permitted~~Inner inMongolia ~~the~~provincial ~~PRC~~government. ~~Coal~~ ~~Group~~In ~~acquired~~December 2005, ~~the~~in ~~rights~~accordance towith ~~the~~governmental ~~Laiyegou~~policy, ~~coal~~Coal ~~mine~~Group’s ~~and~~mining ~~the~~right ~~land~~was ~~surrounding~~assessed ~~the~~to ~~mine~~have ~~in September 1999 for~~ a ~~period~~value of 50approximately $3.7 ~~years~~million. ~~Coal~~This ~~Group’s~~mining ~~State~~right ~~Owned~~is ~~Land~~regarded ~~Usage~~as ~~Certificate~~an ~~covers~~intangible ~~the~~asset ~~land~~currently ~~and~~being ~~allows~~amortized using the ~~Company~~units toof ~~use~~production ~~the storage facility,~~methodology. ~~office~~As ~~and~~of ~~“dormitory”~~November ~~for~~30, ~~such period. In addition~~2008, ~~Coal~~we ~~Group~~have ~~has~~fulfilled ~~all~~our ~~six~~obligations ~~required~~and ~~governmental~~have ~~licenses~~made ~~necessary to~~full ~~mine~~payment ~~the~~for ~~reserves in~~ the ~~Laiyegou coal mine~~right.

The ~~regulatory~~Laiyegou ~~body~~coal ~~responsible~~mine ~~for~~is ~~approving~~capable ~~the~~of ~~rights~~producing to800,000 metric ~~the~~tons ~~mine~~of iscoal ~~the~~per ~~Provincial~~year ~~Bureau~~after ofundergoing ~~National~~a ~~Land~~two year infrastructure expansion and ~~Resource~~improvement program which was completed in 2008. Our coal license permits us to produce up to 600,000 ametric ~~division~~tons of coal on an annual basis. Notwithstanding such license, the ~~PRC~~local government. Inhas, ~~December~~since ~~2005~~2009, inallowed ~~accordance with~~us ~~governmental~~to ~~policy~~produce up to 800,000 ~~Coal~~metric ~~Group’s~~tons ~~mining~~of ~~right~~coal ~~was~~on ~~assessed~~an annual basis. Full production resumed in 2009 following the 2008 adjustments made to ~~have~~the afacility. The ~~value~~cost of the expansion and improvements was approximately $~~3.7~~10 million. ~~This~~and ~~mining right~~was isfinanced ~~regarded~~through asshareholder anand ~~intangible~~bank ~~asset~~loans. The ~~currently~~expansion ~~being~~included ~~amortized~~the ~~using~~installation of “longwall” mining equipment, the ~~units~~construction of ~~production~~wider ~~methodology.~~laneways Asfor ofaccess ~~November~~to ~~30,~~the mine and from the mine to coal ~~2008~~field, weconstruction ~~have~~of ~~fulfilled~~seven ~~our~~work ~~obligations~~stations and ~~have~~emergency ~~made~~exits ~~full~~and ~~payment~~improvements ~~for~~to the ~~right~~draught system.

~~Our~~The raw coal ~~license~~produced ~~permits~~is usnon tocaking ~~produce up to 600,000 metric tons of~~ coal onwhich andoes ~~annual~~not ~~basis. Notwithstanding such license, the local PRC government has, since~~fuse ~~2009,~~together ~~allowed~~or uscake towhen ~~produce~~heated upbut toburns ~~approximately~~freely ~~800,000~~and ~~metric~~is ~~tons~~used ofmainly ~~coal~~for ~~through~~heating ~~2010,~~ and upelectric topower ~~approximately~~generation. It 1has ~~million~~a ~~metric~~high ~~tons~~ash ofmelting ~~coal~~point ~~through~~with ~~2011,~~high onthermal anvalue ~~annual~~used ~~basis. Full~~almost ~~production~~exclusively ~~resumed~~as infuel ~~2009~~for ~~following~~steam-electric ~~the 2008 adjustments made to the facility~~power. ~~The~~It ~~cost~~has oflow sulphur, ~~the~~low ~~expansion~~ash and ~~improvements~~low ~~was approximately~~phosphorus ~~$10~~content ~~million and~~with ~~was~~heating ~~financed~~capability ~~through~~6,100-7,100 ~~shareholder and bank loans~~K. ~~The~~cal. ~~expansion~~With ~~included~~such ~~the~~minimal ~~installation~~harmful ~~of “longwall”~~chemical ~~mining equipment~~content, it ~~the~~meets ~~construction of wider laneways for access to~~ the ~~mine~~stringent ~~and~~environmental ~~from~~standards ~~the~~set ~~mine~~by ~~to coal field, construction of seven work stations and emergency exits and improvements to~~ the ~~draught~~central ~~system~~PRC government.

The raw coal produced is non caking coal which does not fuse together or cake when heated but burns freely and is used mainly for heating and electric power generation. It has a high ash melting point with high thermal value used almost exclusively as fuel for steam-electric power. It has low sulphur, low ash and low phosphorus content with heating capability 6,100-7,100 K.cal. With such minimal harmful chemical content, it meets the stringent environmental standards set by the central government of the PRC.

As is shown below, the location intersects with national highways making access to the mine central to regional areas through No. 210 National Highway. The distance from Laiyegou to each of the following locations is as follows:

	·	Dongsheng – 70km
	·	Baotou City – 170km
	·	Xuejiawan Town – 145km
	·	Yulin City, Shaanxi Province – 215 km
	·	Wuhai City – 370km

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In addition, the BaoShen Railway crosses Dongsheng where Dongsheng Coalfield and Shenfu Coalfield are located. These mines are 35 km away from a railway collection station and therefore a convenient location where Coal Group is able to purchase raw materials and transport coal to customers.

Access to our property is monitored strictly by mine managers. Prior to entering the premises, mine managers assess condition and safety reports from the previous day and determine location and safety parameters for employees. Condition and safety reports are prepared on a daily basis and serve as a basis for permitting entry to the mine and locations where employees are assigned to work.

Reserves Survey

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

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Reserve. That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.

Proven (Measured) Reserves. Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

Probable (Indicated) Reserves. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measure) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

A survey of the district of Hongjingta was performed by No. 153 Exploration Team of Inner Mongolia Coalfield Geological Bureau in 2005, covering an area of 7,800 hectares (approximately 19,266 acres) (the “2005 Survey”). The Laiyegou coal mine included in the Hongjingta district is located at the Dongsheng Coalfield near Dongsheng City, southeast of Bianjia road, the administrative center of the prefectural region of Ordos in Inner Mongolia. The Laiyegou mine represents approximately 3% of the total survey area (or 230.3 hectares; approximately 569 acres).

The 2005 Survey established that the Laiyegou mine has recoverable reserves (see definition below) of 11.34 million metric tons as of 2005. Recoverable reserves represent coal that is, or can be, extracted from a coal bed during mining. The recoverable reserves in the mine decreased gradually from 2005 to approximately 75.19 million metric tons as of the end of ~~2011~~2012:

			Recoverable Reserves2
	Total Mine Lifetime Reserves1		2005		~~2011~~2012
Proven reserves3		21,160,000		9,527,000		54,~~966~~929,~~360~~540
Probable reserves3		4,930,000		1,817,000		1940,~~137,910~~160
Total reserves		26,090,000		11,344,000		75,~~104~~869,~~270~~700

_________

(1) “Total Mine Lifetime Reserves” represent the aggregate amount of reserves at the mine site at the initiation of mining activity at the site prior to 2005, as set forth by the 2005 Survey. At the time of the 2005 Survey, 6,590,000 metric tons included in the 21,160,000 Total Mine Life Proven Reserves had already been extracted from the mine.

(2) “Recoverable Reserves” are that portion of proven and probable reserves adjusted downward for (i) reliability of recovery of probable reserves, (ii) non-minable reserves constituting permanent protective coal pillars (located at the rim of the mine and separating the coal mine from others) and laneway protective coal pillars (located within the coal mine and used for coal transportation and for the entry and exit of miners), and (iii) recovery rate (actual production volume, taking into account reserves lost in the ordinary course of the mining process). As a result of the installation of the longwall mining equipment, our current recovery rate is approximately 80%.

(3) Proven and probable reserve figures for Total Mine Lifetime Reserves and 2005 recoverable reserves are derived from the 2005 Survey. The portions of the total recoverable reserves for ~~2011~~2012 shown as proven and probable represent management’s good faith estimates based on the actual extractions from the mine since 2005 and assuming the same proportion in ~~2011~~2012 between proven and probable reserves as reflected in the 2005 Survey results.

- 13 12-

The risks associated with proven reserves are less than of probable reserves due to the assumption of continuity of coal layers between sample points for probable reserves.

All reported reserves will be mined out within the period of the existing 50 year permit.

Coal Specifications

Coal produced from the Laiyegou coal mine does not undergo any washing or any other preparation prior to the sale to customers as its raw form is satisfactory in meeting the needs and requirements of such customers. As a result, the Laiyegou coal mine does not have wash plant facilities nor it is necessary to account for dilution of its products. Below is a summary of the specifications of the coal we produce.

Coal Bed	Proximate Analysis			Sulfur Content of Dry Coal (St,d %)	Net Calorific Value of Dry Coal (Qnet,d Kcal/kg)
		Proximate Analysis
	Moisture in Air of Dry Coal (Mad %)	Ash Content in Fully Dried Coal (Ad %)	Volatile Matter Content in Dry – Free Coal (Vdaf %)
Coal Bed		Moisture in Air of Dry Coal (Mad %)		Ash Content in Fully Dried Coal (Ad %)		Volatile Matter Content in Dry – Free Coal (Vdaf %)	Sulfur Content of Dry Coal (St,d %)	Net Calorific Value of Dry Coal (Qnet,d Kcal/kg)
4-1	~~8.88-9.90~~	118.9288-139.5490	~~36.87-38.41~~	011.2892-013.3354	~~6,300-6,500~~	36.87-38.41	0.28-0.33	6,300-6,500
4-2 Upper	~~8.48-9.80~~	68.5648-89.5080	~~36.92-37.68~~	06.2256-8.50	~~6,700-6,900~~	36.92-37.68	0.22	6,700-6,900
4-2	~~8.30-8.62~~	78.7830-128.9462	~~36.69-37.05~~	07.1678-012.3394	~~6,300-7,000~~	36.69-37.05	0.16-0.33	6,300-7,000
6-2	~~7.34-8.36~~	47.7834-158.2836	~~33.80-36.47~~	04.1678-015.2228	~~6,100-7,100~~	33.80-36.47	0.16-0.22	6,100-7,100

Mining Method

Coal Group currently uses the “longwall” production of mining whereby large rectangular blocks of coal are defined during the development stage of the mine and are then extracted in a single continuous operation. Each defined block of coal, known as a panel, is created by driving a set of headings from main or trunk roadways in the mine, some distance into the panel. The panel or block of coal up to 1,000 feet wide and two or three miles long is completely extracted. The working area is protected by movable hydraulic powered roof supports called shields. The longwall employs a shearer, with two rotating cutting drums, which is dragged mechanically back and forth across the coal face. The coal which is cut falls onto a heavy chain conveyor which delivers it to a belt conveyor system for removal out of the mine. The longwall shields advance with the machine as mining proceeds and provide not only high levels of production but also increased miner safety.

Longwall mining systems employ sensors to detect how much coal remains in the seam being mined as well as robotic controls to enhance efficiency. Microprocessors record seam data as a longwall miner makes its initial pass, subsequent passes then follow the previous route resulting in high efficiencies.

With the use of a longwall system, the amount of coal which is recovered in a given area increases from 40% to as much as 80%. The carefully planned longwall process has a positive influence on minimizing the effects of subsidence. Gradual or occasionally abrupt collapse of rock layers sometimes occurs between an underground mine and the surface. With the longwall operation, such ground movements are completed in a shorter period of time and the settling process occurs in a more uniform and predictable manner helping to minimize surface impacts. Our change to a longwall system has led to a significant increase in our efficiency and production.

Coal Products

Coal Group’s main products are “powdered” coal and “lump” coal, representing approximately 70% and 30%, respectively, of Coal Group’s production volume.

Lump Coal. We sell lump coal to local customers that resell to distributors or end-users for heating purposes.

- 14 13-

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

Screening, Crushing and Loading Facilities

We use an automatic conveyor system to filter and divide the coal into powdered and lump coal. We do not have crushing facilities. We also do not have washing facilities and therefore do not incur losses of product from this process. Our loading facilities consist of equipment leased from a contractor. We require the use of four loaders with a capacity of 1.5 ~~metric~~ tons each.

Transportation Infrastructure

Customers who purchase coal from the Laiyegou coal mine provide their own transportation of goods from production to their desired location. Coal sold as part of our trading activities, which is subject to the quota requirements, is transported at our expense using third party contractors.

Resources and Utilities

The source of water for the mine is ~~ZhungerKeyuan~~Zhunger Keyuan Water Supply Co., Ltd., a public utility company owned by the government. Electric power is sourced by Agricultural Supply Bureau and the Ordos Power Industry Bureau, both utilities owned by the government.

Pricing

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

Year	Tons Produced			Weighted Average Price
2007		459,055		$	25
2008		264,098	*	$	33
2008		264,098*		$	33
2009		453,430		$	37
2009		453,430		$	37
2010		820,303		$	44
2010		820,303		$	44
2011		1,080,833		$	53
2011		1,080,833		$	53
2012		905,928	**	$	51

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

** Production levels dropped in 2012 as a result of our decline in coal sales, which was in turn caused by increased competition from both domestic coal producers and coal importers combined with decreased demand of coal for electricity generation.

Competition

~~Due~~The tooverall ~~existing~~demand ~~market~~for ~~conditions~~coal asin ~~discussed~~China ~~above,~~has ~~Coal~~been ~~Group~~flat in 2012 ~~does~~compared ~~not~~with ~~face~~2011 ~~any~~primarily ~~competition~~due into the ~~usual~~electricity ~~sense~~consumption ofand generation in China have been flat. Electricity generation consumes the ~~term~~most coal in China. ~~There~~The ~~are~~increase ~~approximately~~in ~~30,000~~the amount of coal ~~mining~~imported ~~companies~~from ~~throughout~~overseas ~~China; however,~~producers ~~since~~has ~~demand~~also helped ~~currently~~to ~~exceeds~~turn ~~supply,~~the ~~competition~~Chinese iscoal ~~not~~market to a ~~primary~~buyer’s ~~concern~~market in ~~the~~2012. ~~operation~~According ofto ~~our~~the ~~business.~~data Wefrom ~~currently~~General Administration ~~anticipate~~of ~~that~~Customs of the PRC, China’s imported approximately 290 million tons of coal ~~industry~~from ~~will~~overseas, ~~remain~~a 29.8% increase over a ~~large~~year ago. Our competition is not only from imported coal. There are approximately 30,000 ~~growing~~coal ~~and~~mining ~~chronically~~companies ~~under-supplied~~throughout ~~customer~~China. ~~base~~There is ~~for~~no sign that the ~~foreseeable future~~growth of production capacity of coal has been slowing down from previous years. Our ~~competitors~~direct competitors currently include, Inner Mongolia Yitai Group Co., Ltd., Inner Mongolia Manshi Coal Group Co., Ltd., Inner Mongolia Yidong Coal Group Co., Ltd. and Inner Mongolia Huineng Coal & Power Group Co., Ltd.

Although there are pressures from the PRC government to use clean and other alternative energies instead of coal due to environmental concerns, coal reserves in China are abundant and less expensive than other energy sources and a switch to other forms of resources to generate energy is unlikely.-14-

-There 15are -also concerns that the PRC government is stepping up its push for using clean and other alternative energies instead of burning coal due to environmental concerns. Even though coal reserves in China are abundant and less expensive than other energy sources, the pressure for switching to other forms of resources to generate energy is higher than ever before due to the more frequent occurrences of high profile environmental incidents throughout China.

Customers

The following table shows each of our customers who account for greater than 5% of sales of Coal Group:

Name	2011
		2012
	($ ‘000)	%
Name		($ ‘000)		%
Zhejiang Coal Resource Development Co., Ltd.	19,504	12.4%
Zhonghai Jiaye (Tianjin) International Trading Limited			36,508		14.8	%
Huadian Coal Industry Group Co., Ltd.	13,998	8.9%
Shanxi Hengyuan Coal and Electricity Group Company Limited			20,635		8.4	%

Regulatory Compliance

In order to maintain our business license, we are required to pass random periodic safety inspections which check for gas and water seepage, ventilation, communication methods between in and outside of mine, any breach of environmental laws and certifications of employees who work in the mine. Mine managers and staff must be trained and have mine management qualification certificates obtained through the Coal Safety Production Bureau. To date, we have not breached any of the rules and regulations which would render our mine unsafe. Mine managers on site perform daily safety inspections.

Future Demand for Coal

~~Integral~~The togrowth ~~China’s~~for ~~industrial~~demand ~~expansion~~for ~~and~~coal ~~related~~in ~~energy demand~~China ~~escalation~~has atbeen ~~the~~slowing ~~present~~down. In ~~time~~2012, the ~~PRC~~coal ~~government~~market ishas ~~encouraging~~turned ~~sectors~~into toa ~~build~~buyer’s ~~more~~market ~~power~~in ~~stations,~~China. ~~coking~~With ~~factories, calcium~~many ~~carbide~~uncertainties ~~factories~~in ~~and silicon iron factories across~~ the ~~country.~~global Asand aChinese ~~consequence~~economies, ~~the future demand in China for coal~~ ~~remains~~we ~~strong;~~do anot ~~key~~anticipate ~~factor~~any ~~underpinning~~change to the ~~output~~flat ofcoal ~~power~~market ~~stations~~in ~~and~~China ~~such factories potentially reaching 3~~soon.0 ~~billion~~The ~~metric tons~~increasing volume in ~~2010~~imported coal and ~~3.4~~the ~~billion~~PRC ~~metric~~government’s policy ~~tons~~of bystepping ~~2020~~up ~~according~~efforts to ~~the~~curtail ~~estimates~~pollution ~~made~~create bydownward ~~National~~pressure ~~Energy~~on ~~Bureau~~the ofChinese ~~China~~coal ~~in 2009~~market.

Diesel isand annatural gas are alternative competing energy ~~source~~ sources to coal;. ~~however, it~~Currently isthey are not widely used as most energy generation plants and users are only equipped to receive coal as a raw material. The use of diesel is also not cost effective as it is four times higher in price when compared to coal products; however, diesel’s energy rate is approximately 10,000Kcal/kg, which is higher than coal. The supply of natural gas in China is anticipated to grow thanks to discovery of new reverses and more importantly the fast development of exploration technologies in the industry.

Heat Power

Heat Power offers two distinct services to its Xuejiawan customers. Heat Power supplies (i) heating and (ii) electricity to end users. In 2003, the Zhunger local government transferred the operation and management of the Zhunger Banner Heating Supply Station and the heating supply station of Ordos Xinsha Real Estate Development Co., Ltd. to Heat Power. The transfer station supplies heat to the entire Xuejiawan district. In order to have sufficient heating supply, in 2004 Heat Power began construction on a thermoelectric plant which was completed in September 2006. Heat Power also buys steam from third parties to ensure a stable and reliable heat supply as we increased our service coverage area. In conjunction with the thermoelectric plant, Heat Power also owns and operates 32 heat transfer stations. The transfer stations are located on property owned by the residential community.

-15-

Heat Power is a regulated utility company and meets the current regulatory requirements applicable to such Company. Heat Power supplies electricity to its customers through a government controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd. (“Electric Power Group”) in accordance with the Purchase and Sale of Electricity Contract dated September 15, 2009. Electric Power Group is also subject to regulated utility company rules and regulations consisting of compliance with safety and environmental standards. In addition, the prices that we charge are set by the local government. The government reviews the price of heating and electricity from time to time as market conditions change. We purchase coal from suppliers to fuel our boilers at market prices; therefore, we bear the risk that market prices for raw materials exceed the regulated prices paid by end users. We expect to receive governmental subsidies from time to time to offset this risk.

-Heat 16Power -was founded in September 2003 in Xuejiawan, the administrative center of Zhunger, one of the seven counties of Ordos, Inner Mongolia. The prefectural administrative region of Ordos occupies 86,752 square KMs, and is one of 12 prefectural administrative regions of Inner Mongolia. Ordos is comprised of one district, Dongsheng, the administrative center of the region, and seven counties, including Zhunger. Through Heat Power, we provide heating and electricity requirements to all of Xuejiawan. Since its inception, Heat Power operated an existing heat power plant in Xuejiawan as part of its agreement with the Zhunger County government to phase out the existing heating plant for development of a more efficient and effective plant with heating and electricity generation capabilities pursuant to the terms of its license granted by the government.

Heat Power was founded in September 2003 in Xuejiawan, the administrative center of Zhunger, one of the seven counties of Ordos, Inner Mongolia. The prefectural administrative region of Ordos occupies 86,752 km2 , and is one of 12 prefectural administrative regions of Inner Mongolia. Ordos is comprised of one district, Dongsheng, the administrative center of the region, and seven counties, including Zhunger. Through Heat Power, we provide heating and electricity requirements to all of Xuejiawan. Since its inception, Heat Power operated an existing heat power plant in Xuejiawan as part of its agreement with the Zhunger County government to phase out the existing heating plant for development of a more efficient and effective plant with heating and electricity generation capabilities pursuant to the terms of its license granted by the government.

In the Xuejiawan area, few families own a home boiler. Accordingly, Heat Power supplies heat through its closed pipeline system to residents that do not have a home heating system. Water is first heated in our thermoelectric plant using coal burning boilers and then piped directly to private dwellings, businesses and municipal facilities. The water is then piped back to the thermoelectric plant with the process repeating again. The following diagram illustrates the heat supply pipeline system:

Process of generating electricity during the non-~~heat~~heating season

~~Process of generating electricity and supplying heating within heating season~~-16-

-Process 17of -generating electricity and supplying heat within heating season

Heat Power obtains its supply of powdered coal required to generate heat production principally from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”), an unrelated third party vendor. It also obtains coal from various other coal mines in the area. We do not supply Heat Power with coal for fuel because our thermoelectric plant operates efficiently on coal of a lesser quality, and at a lower cost, than the coal we produce.

As part of our agreement with the Zhunger government, we constructed a new, more efficient thermoelectric plant, which became operational in September 2006, to serve Xuejiawan. Our plant generates centralized heat and electricity supply of 10,400,000 MJ and 144 MW, respectively. Heat Power supplies heat by sending steam through its closed pipeline system to customers who do not otherwise have a home or commercial heating system. The plant also uses powdered coal as 95% of its raw material, which is regarded as environmentally friendly coal.

Heat Supply License

On July 29, 2003, Heat Power entered into an agreement with the Zhunger County government, pursuant to which the operation and management of the Zhunger Banner Heating Supply Station and the heating supply station of Ordos Xinsha Real Estate Development Co., Ltd. was transferred to Heat Power. The agreement enables Heat Power to provide centralized heating service to the entire Xuejiawan area, including the Donghua and Yinze residential areas. The agreement is for an undetermined period of time provided that Heat Power maintains production capabilities and predetermined prices set by the Zhunger County government. Heating requirements are supplied throughout the Xuejiawan area through underground pipelines. New pipelines are added as additional residential areas are added in the service coverage area.

Heating Pricing Regulated by local Pricing Bureau

The price charged to supply heating to end-users is regulated and controlled by the Inner Mongolia Zhunger Pricing Bureau, which means that the supplier of such heat may not be able to recoup increases in the cost of raw materials or expenses for an undetermined period of time until application to increase prices is approved. For example, the pricing structure for the Xuejiawan area as of February ~~2012~~2013 is approximately as follows per square meter per month (excluding any applicable government subsidies):

Residential: $0.40

Non-residential: $0.67

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

-17-

Thermoelectric Plant

Heat Power completed construction of a thermoelectric plant in December 2005 which was put into operation effective September 2006. The thermoelectric plant allows for a centralized heat and electricity supply in the area with 10,400,000 MJ and 144 MW, respectively, generated per year.

Heat Power has two distinct operations: it supplies steam heating directly to end users throughout the Xuejiawan district in Ordos City, Inner Mongolia, and it also supplies electricity through Electric Power Group. Heat Power has also constructed additional heat transfer stations, totaling 32 as of November 30, ~~2011~~2012, to improve the efficiencies and reliability of the thermoelectric plant. Heat Power also buys steam from third parties to ensure a stable and reliable heat supply as we increased our service coverage area.

Heat Power requires approximately 170,000 metric tons of powdered coal per year to sustain current operations.

Supply of Powdered Coal

The powdered coal required to generate heating is supplied principally by Guanbanwusu and has a heating capability of 4,600-4,900 Kcal and is low sulphur, low phosphorus, medium ash, with a high ash melting point, which satisfies the government Environmental Protection Standard and is regarded as environmentally friendly coal. The coal must have a minimum heating capacity of 4,600 Kcal or reduction of price per ton is implemented. Guanbanwusu is responsible for transporting coal to the plants.

- 18 -

Heat Power also obtains its supply of powdered coal from other suppliers, with which it has no formal agreement. Suppliers are hesitant to enter into agreements for a fixed price as a result of the price of coal generally increasing.

Competition

Heat Power does not have competition as it holds an exclusive right to supply heating and electricity to serviced areas. We were granted the right to supply the heating and electricity for an undetermined period of time given that production capabilities and prices are maintained. As long as heat is supplied to the specified area, we expect that the agreement will not be terminated.

Tax Exemption

The Ministry of Finance and National Tax Administration Bureau has granted Value Added Tax (“VAT”) exemptions for residential heat supply industries operating in certain Chinese provinces where VAT applicable on revenue will not be required to be remitted or withheld, respectively. The exemption is effective through December 31, 2015. Therefore, we will continue to enjoy the tax exemption benefit through December 31, 2015.

Employees

As of November 30, ~~2011~~2012, Heat Power employs approximately ~~210~~213 full-time employees and 9094 part-time employees, while Coal Group employs ~~100 full~~91full-time employees and subcontracts approximately ~~150~~ 162 laborers from a third-party provider. All of the Company’s employees are employed by the Company’s subsidiaries. Management believes that relations with its employees are good.

Research and Development

We do not devote significant resources to research and development.

Intellectual Property

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

-18-

Insurance

The Coal Group maintains insurance to cover work-related injuries to our employees as per government regulations and damage to our vehicles in amounts customary to the industry. Heat Power maintains insurance to cover damage to our vehicles and machinery in amounts customary to the industry. We ~~also~~maintained ~~maintain~~ director and officer’s liability insurance until the end of July 2012.

Legal Proceedings

We are not currently a party to any material legal proceedings. However, we may become subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.

Government Regulation

Coal Group

Coal Law

On August 29, 1996, the PRC government promulgated the People’s Republic of China Coal Law (the “Coal Law”), which became effective on December 1, 1996. The Coal Law sets forth requirements for all coal mines, including state-owned mines and privately owned mines, mainly providing for resource exploitation planning, approval of new mines, the issuance of mining and safety production permits, implementation of safety standards, processing of coal, business management, protection of mine areas from destructive exploitation, and safety protection for miners and administrative supervision.

-According 19to the Coal Law, entities seeking to establish mining enterprises must apply to the relevant government office and obtain all necessary approvals. Upon obtaining such approvals, the entities concerned will be granted a Exploitation License from the Ministry of Land and Resources. Thereafter, an entity must obtain a coal production permit and a coal operation permit and other related quality permits in order to commence coal production and sell coal products in the PRC. The PRC government is in the process of amending the Coal Law, in response to concerns over the lack of a well-coordinated development plan for mining, which contributed to a significant amount of waste of valuable coal resources. The lack of effective penalty provisions or the lenient enforcement of existing provisions in the Coal Law has been cited as another important reason for the current rulemaking effort.

According to the Coal Law, entities seeking to establish mining enterprises must apply to the relevant government office and obtain all necessary approvals. Upon obtaining such approvals, the entities concerned will be granted an Exploitation License from the Ministry of Land and Resources. Thereafter, an entity must obtain a coal production permit and a coal operation permit and other related quality permits in order to commence coal production and sell coal products in the PRC. The PRC government is in the process of amending the Coal Law, in response to concerns over the lack of a well-coordinated development plan for mining, which contributed to a significant amount of waste of valuable coal resources. The lack of effective penalty provisions or the lenient enforcement of existing provisions in the Coal Law has been cited as another important reason for the current rulemaking effort.

Mining activities in the PRC are also subject to the People’s Republic of China Mineral Resources Law (“Mineral Resources Law”), promulgated by the PRC Government on March 19, 1986 and amended on August 29, 1996. The Mineral Resources Law regulates matters relating to the planning or engaging in the exploration, exploitation and mining of mineral resources. According the Mineral Resources Law all mineral resources, including coal, are owned by the state. Except under limited circumstances, any enterprise planning to engage in the exploration, exploitation and mining of mineral resources must first apply for and obtain exploration rights and mining rights before commencing the relevant activities. The Mineral Resources Law prohibits the transfer of exploration and exploitation rights in general unless the transfer falls within certain specified circumstances.

We are principally subject to governmental supervision and regulation by the following agencies of the PRC government:

·	the State Council, which is the highest level of the executive branch, is responsible for the examination and approval of major investment projects specified in the 2004 Catalogue of Investment Projects released by the PRC Government;

the National Development and Reform Commission (“NDRC”) and its local counterparts, which formulate and implement major policies concerning China’s economic and social development, examine and approve investment projects exceeding certain capital expenditure amounts or in specified industry sectors, including examination and approval of foreign investment projects, oversees reform of state-owned enterprises and formulates industrial policies and investment guidelines for the natural resource industries, such as coal production. In addition, the NDRC administers coal export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the price-linking mechanism between the prices of coal and power;

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·	the Ministry of Land and Resources (“MLR”) and its local counterparts, which have the authority to grant land use licenses and mining right permits, approves transfer and lease of mining rights, and reviews mining rights premium and reserve valuation;

·	the State Administration of Coal Mine Safety (“SACMS”), which is responsible for the implementation and supervision of the relevant safety laws and regulations applicable to coal mines and coal mining operations;

·	the State Environmental Protection Administration of China (“SEPA”) and its local counterparts, which supervise and control environmental protection and monitors China’s environmental system at the national level; and

·	the Ministry of Construction (“MOC”) and its local counterparts, which are responsible for the management of survey and design of construction projects, including but not limited to the survey and design of coal mines.

The following is a brief summary of the principal laws, regulations, policies and administrative directives to which we are subject.

Pricing

-Until 202002, the production and pricing of coal was largely subject to close control and supervision by the PRC government, which centrally manages the production and pricing of coal. Previously, the price of coal was determined based on a government-devised pricing guideline which set out the suggested prices for coal. However, to effectuate the transformation from planned economy to market economy practices, from January 1, 2002 China eliminated the state guidance price for coal and allowed prices for all types of coal to be determined in accordance with market demand. However, as the PRC government continues to maintain control over the national railway system, which is the primary means for coal transportation in China, the PRC government still may exert influence over the pricing of coal through its allocation of railway transportation capacity for coal. The local government increased our annual quota from 760,000 metric tons in 2011, and770,000 metric tons in 2012.

Until 2002, the production and pricing of coal was largely subject to close control and supervision by the PRC government, which centrally manages the production and pricing of coal. Previously, the price of coal was determined based on a government-devised pricing guideline which set out the suggested prices for coal. However, to effectuate the transformation from planned economy to market economy practices, from January 1, 2002 China eliminated the state guidance price for coal and allowed prices for all types of coal to be determined in accordance with market demand. However, as the PRC government continues to maintain control over the national railway system, which is the primary means for coal transportation in China, the PRC government still may exert influence over the pricing of coal through its allocation of railway transportation capacity for coal. The local PRC government increased our annual quota from 660,000 metric tons in 2010, and 760,000 metric tons in 2011.

In addition, under the Price Law of the PRC, promulgated December 29, 1997, effective May 1, 1998, in the event of an actual increase or potential increase in the prices of important products such as coal, the State Council and the provincial governments, autonomous regions and municipalities directly under the PRC Government may adopt intervention measures, such as restricting the ratio of price differentials or of profits, and imposing price limits, etc. In August 2004, the NDRC issued a notice setting forth temporary measures to be imposed on thermal coal prices for certain regions. In December 2004, the NDRC issued a notice setting forth guidelines for pricing of thermal coal sales in 2005. Under these guidelines, the coal suppliers and their customers may not negotiate for the sale of coal at prices exceeding the government suggested price range.

Similar to coal pricing, the production and supply of coal, which is dictated by the PRC government’s annual state coal allocation plan, has been gradually liberalized and largely subject to market forces. Major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and quantity of coal to be supplied and purchased for the coming year through the signing of letters of intent and short and long-term supply contracts.

On December 18, 2006, the National Development and Reform Committee issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (FaGai Yun Xing (2006) (No. 2867). According to the notice, in 2007, policies were required to be implemented to encourage the reform of the market system for determining coal prices by allowing parties to determine prices through discussions in accordance with market demand, and to encourage price determination based on quality. On December 27, 2006, the relevant government departments and units, such as the National Development and Reform Committee for railway operations, and the Transportation Department, convened a 2007 coal industry video and telephone conference. This symbolized the end of the Annual National Coal Trading Convention that has been in place for over 50 years. Under the State’s macroeconomic controls, the new mechanism for enterprises to freely determine prices through negotiations was put in place.

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On December 6, 2010, the NDRC issued a notice asking certain coal mining companies in China to maintain 2010 prices as a means to ensure sufficient supplies of electricity during 2011. We do not believe that the requirement will have a material impact on us, as spot coal market sellers such as China Energy were not included in the directive.

Fees and Taxes

There are various taxes and fees that are imposed upon coal producers in the Inner Mongolia Autonomous Region, as well as statutory reserves which coal producers ~~are~~ required to set aside. Such taxes, fees and statutory reserves as applicable to Laiyegou at November 30, ~~2011~~2012 are as follows:

Item	Base	Rate
Enterprise income tax	Taxable income	25%
VAT	Value addition to a material or product	17%
Urban maintenance and construction tax	Amount of turnover tax	5%
Education surcharge	Amount of turnover tax	3%
Local education surcharge	Amount of turnover tax	12%
Water conservancy construction fund	Proceeds from the sale of coal	0.1%
Resource tax	Volume of sale of coal produced	RMB3.2 per ton
Compensation for the depletion of coal resources	Volume of sale of coal produced	RMB2.86 per ton
Adjustment fund	Volume of raw coal produced	RMB15 per ton
Mine maintenance fund	Volume of raw coal produced	RMB7 per ton
Safety fund	Volume of raw coal produced	RMB3 per ton

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Under the Mineral Resources Law, if mining results in damage to arable land, grasslands or forest areas, the mining enterprise must take effective measures to return the land to an arable state, plant trees or grass or take other specific measures. The Mineral Resources Law and other applicable laws and regulations also state that anyone who causes others to suffer loss in terms of production or in terms of living standards is held liable for the loss under the law and is required to compensate the persons affected and to remedy the situation. In addition, the Mineral Resources Law also provides for (i) regulations concerning labor safety and hygiene and (ii) environmental protection.

All coal producers are subject to PRC environmental protection laws and regulations which currently impose fees for the discharge of waste substances, require the payment of fines for serious pollution and provide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage. All environmental protection facilities must be inspected and certified by relevant governmental authorities as being in compliance with PRC environmental protection laws and regulations.

Domestic Trading of Coal

Pursuant to the Measures for the Regulation of Coal Operations promulgated by the NDRC on December 27, 2004, the state implemented a system to examine coal operation qualifications in respect of coal operations, including the wholesale and retail ~~sale~~ of raw coal and processed coal products, and the processing and distribution of coal for civilian use. Before an enterprise can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprise that deals in coal products which it did not itself produce and process is required to obtain coal operation qualifications. The enterprise is also prohibited from dealing in coal products produced and/or processed by a coal mine enterprise that does not have a coal production permit. An enterprise is also prohibited from selling coal products to a coal operation enterprise that does not have coal operation qualifications. Our Coal Operation License expires on April 30, 2013 but it is expected that it will be renewed in time.

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Although the PRC government indirectly influences coal prices through its broad regulation of electricity prices and control over the allocation of national railway capacity, domestic coal prices have mainly been market-driven since 2002, when the PRC government eliminated the price control measures for coal used in electric power generation. Prior to 2006, however, the PRC government continued to implement temporary measures to prevent and control any unusual fluctuations in thermal coal prices. This, among other reasons, has caused thermal coal contract prices for major users to be generally lower than spot market prices during this period. On January 1, 2006, the NDRC announced the elimination of such temporary intervention practices on thermal coal price, thus completely removing control over thermal coal prices, including contract prices for major users.

Environmental Protection Laws and Regulations

Pursuant to the Environmental Protection Law, SEPA is empowered to formulate national environmental quality and discharge standards and to monitor China’s environmental system at the national level for the purpose of preventing and eliminating environmental pollution and damage to ecosystems. Environmental protection bureaus at the county level and above are responsible for environmental protection within their areas of jurisdiction.

Environmental regulations require companies to file an environmental impact report with the relevant environmental authority for approval before undertaking the construction of a new production facility or any major expansion or renovation of an existing production facility. New facilities built pursuant to this approval are not permitted to operate until the relevant environmental authority has performed an inspection and has found that the facilities are in compliance with environmental standards.

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Mining operations, including both open pit mines and underground mines, may result in disturbances of surface and underground land and cause water pollution, landslides and other types of environmental damage. To manage the adverse effects that the coal industry has on the environment, China promulgated a series of laws and regulations. Through these laws and regulations, China established national and local environmental protection legal frameworks and issued standards applicable to emission controls, discharges of wastes and pollutants to the environment, generation, handling, storage, transportation, treatment and disposal of waste materials by production facilities, land rehabilitation and reforestation.

The Environmental Protection Law, promulgated by the National People’s Congress December 26, 1989, is the cardinal law for environmental protection in China. The law establishes the basic principle for coordinated advancement of economic growth, social progress and environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards. The Environmental Protection Law requires any entity operating a facility that produces pollutants or other hazards to incorporate environmental protection measures into its operations and to establish an environmental protection responsibility system, which must adopt effective measures to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials.

New construction, expansion or reconstruction projects and other installations that directly or indirectly discharge pollutants to the environment shall be subject to relevant state regulations governing environmental protection for such projects. Entities undertaking such projects must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment to the competent authorities for examination. The authorities will allow the construction project operator to release a certain amount of pollutants into the environment and will issue a pollutant discharge license for that amount of discharge subject to the payment of discharge fees. The release of pollutants is subject to monitoring by the competent environmental protection authorities. If an entity discharges more than the amount permitted by the pollutant discharge license, the local environmental protection bureau can fine the entity up to several times the discharge fees payable by the offending entity for its allowable discharge, require the offending entity to close its operations, or take other measures to remedy the problem.

In the environmental impact statement of a construction project, the project operator shall make an assessment regarding the pollution and environmental hazards the project is likely to produce and its impact on the ecosystem, and measures for their prevention and control. The operator shall submit the statement according to the specified procedure to the competent environmental protection authority for examination and approval. The building of sewage outlets within any water conservancy projects, such as canals, irrigation channels and reservoirs, shall be subject to the consent of the competent authority in charge of water conservancy projects.

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The facilities for the prevention and control of pollution must be designed, constructed and put into use or operation simultaneously with the main part of a construction project. Such facilities must be inspected by the competent environmental protection authority. If they do not conform to the specified requirements, the operator shall not be permitted to put the new facility into operation or use.

The rehabilitation of mining sites is another important issue the PRC government has sought to address. Under the Law of Land Administration of the People’s Republic of China, promulgated on June 25, 1986, and amended on August 28, 2004, and the Land Rehabilitation Regulations, issued by the State Council in in 1988 and effective January 1, 1989, coal producers must undertake measures to restore the mining site to its original state within a prescribed time frame if mining activities result in damage to arable land, grassland or forest. The rehabilitated land must meet rehabilitation standards, as required by law from time to time, and may only be subsequently used upon examination and approval by the land authorities. A coal producers’ failure to comply with this requirement or its failure to return the mining site to its original state will result in the imposition of fines, rehabilitation fees and/or rejection of applications for land use rights by the local bureau of land and resources.

Emissions of waste water by coal mines and coking plants are regulated by the Law on Prevention and Control of Water Pollution of the PRC, promulgated by the National People’s Congress in 1984 and effective as amended in 1996, and the Administrative Regulations on the Levy and Use of Discharge Fees, issued by the State Council on January 2, 2003 and effective July 1, 2003. Any new construction projects, such as coal mines and coking plants, must submit an environmental impact statement, which shall include an assessment on the water pollution hazards the project is likely to produce and its impact on the ecosystem. The environment impact statement must also contain measures to prevent and control the water pollution hazards. Every new production facility must be equipped with waste water processing facilities which must be put in use together with the production facilities. Construction projects that discharge pollutants into water shall pay a pollutant discharge fee in accordance with state regulations.

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Violators of the Environmental Protection Law and various environmental regulations may be subject to warnings, payment of damages and fines. Any entity undertaking construction work or manufacturing activities before the pollution and waste control and processing facilities are inspected and approved by the environmental protection department may be ordered to suspend production or operations and may be fined. The violators of relevant environment protection laws and regulations may be exposed to criminal liability if violations resulted in severe loss of property, personal injuries or death.

In addition to the PRC environmental laws and regulations, China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1998 Kyoto Protocol, which propose emission targets to reduce greenhouse gas emissions. The Kyoto Protocol came into force on February 16, 2005. At present, the Kyoto Protocol has not set any specific emission targets for certain countries, including China.

Mineral Resources Laws and Regulations

Exploration, exploitation and mining operations must comply with the relevant provisions of the Mineral Resources Law and other relevant regulations, and are under the supervision of the Ministry of Land and Resources. Exploration and exploitation of mineral resources are also subject to examination and approval by the Ministry of Land and Resources and relevant local authorities. Upon approval, a mining permit is issued by the relevant administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdiction. The holders of mining rights are required to file Annual Reports with the relevant administrative authorities.

The Mineral Resources Law governs, among other things, the assignment of mining rights. If the entity holding the mining rights is to be changed due to a sale of enterprise assets or other circumstances that may cause a change in the property rights to the assets of the enterprise, the enterprise may assign its mining rights, subject to approval according to the Coal Law, the Mineral Resources Law and other laws and regulations.

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The PRC government permits mine operators of collectively owned mines to exploit mineral resources in designated areas and individuals to mine scattered mineral resources. Such mine operators and individuals are subject to government regulation. Mining activities by individuals are restricted. Individuals are not permitted to exploit mineral reserves allocated for exploitation by a mining enterprise or company or protected reserves. Indiscriminate mining that damages mineral resources is prohibited.

It is unlawful for an entity or individual to conduct mining operations in areas designated for other legal mining operators. A mining operator whose exploitation causes harm to others in terms of production or in terms of living standards is liable for compensation and is required to take necessary remedial measures. When a mine is closed, a mine closure report and information concerning the mining facilities, hidden dangers, remediation and environmental protection must be submitted for examination and approval in accordance with the relevant law.

Mineral products illegally extracted and incomes derived from such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious circumstances, criminal liability.

Mining safety

On June 7, 2005, the State Council promulgated Several Opinions on Promoting the Healthy Development of the Coal Industry (the “Opinions”), announcing the PRC Government’s policies with respect to the development and restructuring of the coal industry. The Opinions resonated with the NDRC’s announcement on the revision of the Coal Law and reiterated the PRC Government’s policies with respect to the administration of coal reserves, enhancement of coal mine safety, encouragement of industry consolidation among coal producers, acceleration of the construction of large coal production bases, improvement of mining techniques and equipment for coal production and the organization and regulation of small coal mines.

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The Measures for Implementing Work Safety Permits in Coal Mine Enterprises

The State Administration of Work Safety and the SACMS issued “The Measures for Implementing Work Safety Permits in Coal Mine Enterprises,” which came into effect on May 17, 2004. Pursuant to this document, a coal mine enterprise without a work safety permit may not engage in coal production activities. Coal mining enterprises and their mines that do not satisfy the safety conditions set forth in this document, or those that violate the provisions of this document, will be punished accordingly. Our Safety Production License ~~was~~has ~~originally~~been ~~granted on~~renewed ~~January 19, 2010~~ and ~~expired~~will be onvalid ~~January 19, 2012. We have obtained a renewal of such license which is effective~~ through January 19, 2014.

Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines and Five Sets of Supplemental Rules and Regulations

The Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines were promulgated and entered into effect on September 3, 2005. This regulation specifies that coal mine enterprises are responsible for preventing coal mine work safety-related accidents. If a coal mine has not obtained, in accordance with the law, a mining right permit, work safety permit, coal production permit or business license and if the mine manager has not obtained, in accordance with the law, a mine manager qualification certificate and a mine manager safety qualification certificate, the coal mine may not engage in production. We have obtained our Exploration Rights License, Coal Production License and Safety Production License which expire on ~~March~~October 1817, ~~2012~~2015, May 31, 2024 and January 19, ~~2012~~2014, respectively. A coal mine should have adequate safety equipment, facilities and resources and should have in place measures to guard against the occurrence of work safety related accidents, as well as a sound contingency plan to deal with emergencies. Coal mining enterprises should establish a sound system for the detection, elimination, treatment and reporting of latent work safety-related dangers. If a major latent work safety-related danger as specified exists in a coal mine, the enterprise should immediately suspend production and eliminate the latent danger. Coal mining enterprises should provide their personnel working underground and their special operation personnel with safety education and training in accordance with relevant state regulations. The person in charge of a coal mine and the production and operation management personnel should go into mines and act as foremen on a rotating basis in accordance with state regulations, while a file recording their entry into the mine should be maintained. In addition, the State Administration of Work Safety issued five sets of supplemental measures:

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(i) The Measures for Determining Major Latent Work Safety Related Dangers in Coal Mines (for Trial Implementation) stipulates the specific criteria for determining major latent work safety-related dangers. It further defines each of the latent safety related dangers specified in the Special Regulations of the State Council on Preventing Work Safety Related Accidents in Coal Mines, and lists more than 60 major latent safety related dangers.

(ii) The Implementing Measures for the Detection and Elimination of Latent Dangers in Coal Mines and the Rectification and Closure of Such Mines (for Trial Implementation) specifies that coal mining enterprises are responsible for the detection and elimination of latent work safety-related dangers and that the main persons in charge of coal mining enterprises are fully responsible for the detection, elimination and treatment of latent work safety-related dangers in their enterprises.

(iii) The Measures for the Supervision and Inspection of Coal Mine Safety Training (for Trial Implementation) specifies that coal mining enterprises must arrange and provide safety education and training to all of their mining personnel in accordance with relevant regulations; select and send their principal persons in charge, work safety management personnel and special operation personnel to qualified coal mine safety training institutions for training in a timely manner; and obtain the corresponding qualification certificates.

(iv) The Guiding Opinions on Persons in Charge of Coal Mines and Production and Operation Management Personnel Going into Mines as Foremen requires the various types of coal mines to arrange for their persons in charge and production and operation management personnel to go into the mines to act as foremen and to ensure that each shift has at least one such person on site directing the operations. Coal mining enterprises are required to establish such procedures, clarify foremen’s duties and responsibilities and strictly implement internal management and performance appraisal.

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(v) The Measures for Rewarding the Reporting of Major Latent Work Safety Related Dangers in, and Violations of the Law by, Coal Mines (for Trial Implementation) specifies that all units or individuals have the right to report major latent work safety-related dangers in, and violations of law by, coal mines.

Circular on the Opinions of Further Strengthening the Works of Shutting Down Coal Mines by State Administration of Work Safety and other relevant governmental authorities

The Circular on the Opinions of Further Strengthening the ~~Works~~ Works of Shutting Down Coal Mines went into effect on September 28, 2006. This regulation set forth 16 standards by which small coal mines would be shut down, including but not limited to the annual coal production capacity of 30,000 tons or less, as well as those coal mines without proper licenses or permits. The objective of the regulation is to reduce both the high rate of accidents and pollution in the PRC coal mining industry. The regulation specifies that the Central Government will support the development of large coal mining operations, defined as having annual coal production capacity of 300,000 ~~metric~~ tons or more in Shanxi Province, Shaanxi Province, and Inner Mongolia, of 150,000 ~~metric~~ tons or more in Gansu Province, Qinghai Province and six other regions, and of 90,000 ~~metric~~ tons or more in Southwest and Midwest region. The work of shutting down small coal mines is a joint effort by several governmental authorities, including National Development and Reform Commission and the Ministry of Land and Resources.

National Development and Reform Committee issued Guidance Relating to Better Performance Coal Production Transportation Works

On December 14, 2009, the National Development and Reform Committee issued Guidance Relating to Better Performance Coal Production Transportation Works (FaGai Yun Xing (2009) No. 3178). Pursuant to which the railway bureau is encouraged to link up and cooperate with the coal mine operating entity for the railway capacity and transportation relationship. It is also required that the railway capacity shall be increased across the provinces and coals from Shan Xi, Inner Mongolia and Shan‘xi are encouraged to be transported out of the provinces or autonomous regions. In addition, newly increased railway capacity shall be strengthened for the transportation of coals used for electricity and the supplying and demanding enterprises shall enter into contracts based on the allocation intention framework of the railway capacities. The Guidance further promotes the price formation mechanism and encourages a marketing price mechanism and certain conditional competition, which requires that the coal price shall be determined by quality and shall reflect marketing demand and supply.

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Heat Power

Except for the construction and operation of small power grids in Xizang, Xinjiang, and Hainan provinces, foreign investment in the construction and operation of any coal-fired condensing thermal power station with single-machine capacity of no more than 300 MW or any thermal coal-fired condensing steam extraction of dual-use cogeneration power plant with single machine capacity of no more than 100 MW is currently prohibited in the PRC. As a Nevada corporation, we do not qualify to conduct such business under PRC regulations. As a result, we operate the Heat Power business through contractual arrangements.

Heating Supply Industry

Our heating supply business is mainly regulated by the Administrative Measures for the Concession Operation of the Municipal Public Utilities effective in 2002 and latest amended in 2009 (the “Concession Operation Measures”), the Circular on the Opinion of Promoting the Reform and Development of Municipal Public Utilities in Our Region issued by the People’s Government of Inner Mongolia Autonomous Region in 2001 and the Administrative Measures of Ordos for the Concession Operation of the Municipal Public Utilities promulgated on April 13, 2005. Pursuant to these regulations, companies which supply heat are deemed to be municipal public utilities and any entity proposing to engage in such business need to enter into a concession agreement with the competent government authority. The heating supply operator must comply with certain requirements set out by the government utility regulator and shall neither discharge the franchising agreement nor shall cease the operation without prior approval of the competent government authority and/or the municipal or county government. However, the concession agreement and the corresponding concession right might be terminated by the competent government authority in light of certain violation of such heating supply operator, including the transfer or lease of concession right without approval of government authority, or the cease of operation without prior approval which causes materially adverse effect to the public interest and safety.

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Electric Power Industry

Pursuant to the Electric Power Law effective on April 1, 1996 and amended in 2009, the Electric Power Business License Administration Regulation promulgated in 2005 (the “License Regulation”), any entity engaging in the electric power industry, including electricity generation, electricity transportation, electricity supply, shall apply and obtain a Electricity Power Business License. If any entity engages in two or more kinds of electricity power business, then it shall apply for a separate Electricity Power Business License for each kind of electricity power business. Furthermore, any entity who applies for the applicable Electricity Power Business License for electricity generation shall obtain the approvals on the construction of the electricity generation plants, the operation capacity of electricity generation and complying with the laws and regulations on environment made by related governmental authorities. Our Electricity Power Business License for electricity generation expires on December 30, 2028. With respect to the price of electricity power which is mainly regulated by the Electricity Power Law, the Reforming Plan of the Price of Electricity Power approved by the State Council in July 2003, the On-grid Power Price Administration Provisional Measures promulgated by the NDRC on March 28, 2005, the price of electricity power shall be determined on the basis of the principles of reasonable compensation of cost and reasonable determination of profits, legal incorporation of taxes, fairly shared burdens and promotion of electricity power construction, In addition, the price of electricity power shall be proposed by electricity generation enterprise and electricity grid operation enterprise and approved by the competent governmental authorities.

Reports to Security Holders

We ~~deliver annual reports on Form 10-K, which include our financial statements to our shareholders. We~~ file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy these materials at the Securities and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically.

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ITEM 1A.

RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

ITEM 2.

PROPERTIES

Coal Group Principal Business Office

Our principal business office is located on the third floor of No.57, Xinhua East Street, Hohhot City, Inner Mongolia, where our sales, legal, administration, accounting, finance and management departments are located. The third floor is approximately 5,050 square feet.

-The 27office -building was purchased by our President, Wenxiang Ding, in July 1998 on behalf of Coal Group and he subsequently transferred title to Coal Group once it obtained a business license. The full purchase price has been paid and no amounts remain outstanding for this property. The building has three floors and is 14,674 square feet.

The office building was purchased by our President, WenXiang Ding, in July 1998 on behalf of Coal Group and he subsequently transferred title to Coal Group once it obtained a business license. The full purchase price has been paid and no amounts remain outstanding for this property. The building has three floors and is 14,674 square feet.

We occupy the third floor and the first and second floors are occupied by XianGrong Commercial & Trade Co., Ltd. where they operate a restaurant. Coal Group provides this space in exchange for property maintenance and catering services. Catering services and various banquets held throughout the year for promotion purposes cost approximately $25,000. We only pay for catering expenses exceeding $25,000.

The land on which the office building is situated is leased from the PRC government or previous holders of the lease for a period of 50 years, expiring in 2048. A lease from the PRC government grants use of land by obtaining a State Owned Land Usage Certificate and a lease obtained through previous lease holders grants use of land by obtaining a Collective Land Usage Certificate. Land in China cannot be owned and the only form of ownership is by way of lease for a period of up to 50 years. Coal Group is required to use the land as specified in its business license. Any changes in use must be approved by the PRC government.

In August 2005, Coal Group entered into an agreement with Deheng Assets Management Co., Ltd. (“Deheng Assets”) to purchase two office buildings located at Building 3 in Hongqi Street in Hohhot City (Property Certificate No. 2003001090) and Building 8 in Hongqi Street in Hohhot City (Property Certificate No. 2003002197). Coal Group holds this property as an investment and leases the units for commercial use. The two buildings are currently vacant with the exception of 3 floors which were previously occupied by one tenant. The space is rented on a month to month basis. There are no renovation plans for these properties.

Laiyegou Coal Mine

Please refer to the disclosure under Item 1 above with regard to the location and description of the Laiyegou coal mine.

Heat Power’s office and Real Property

Heat Power’s Administration, Finance, and Heat Station and Project Management Departments are located in newly constructed thermoelectric plant in Yingze Residential Area, Xuejiawan Town, Zhunger County. The office space is approximately 24,272 square feet.

The 3.96 hectares land where the office building and our thermoelectric plant are located is leased from the PRC government for a period of 50 years, expiring in 2053. Land in the PRC usually cannot be directly owned by a private party and the only form of ownership is by way of lease for a period of up to 50 70 years. In order to maintain the lease, we must use the land as specified in the business license.

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Please refer to the disclosure under Item 1 above for information regarding the production, reserves, locations, development and the nature of our interests in such properties.

ITEM 3.

LEGAL PROCEEDINGS

Neither we nor any of our subsidiaries, nor any of our property or the property of our subsidiaries, is currently subject to any material pending legal proceedings, other than ordinary routine litigation incidental to our business. To the best of our knowledge, there are also not currently any material proceedings to which any of our directors, officers or affiliates or five percent shareholders, or any associate of any such person, is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or our subsidiaries.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.

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

Market Information

Our common stock is traded on the over-the-counter market and quoted through the OTCBB under the symbol “CHGY.” The following table sets forth the high and low bid prices for our common stock as reported by the OTCBB in U.S. dollars for the periods listed below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

	High ($)		Low ($)
Fiscal Year Ended November 30, 2010
First Quarter (December 1, 2009–February 28, 2010)		0.95		0.66
Second Quarter (March 1, 2010–May 31, 2010)		4.12		0.75
Third Quarter (June 1, 2010–August 31, 2010)		2.30		1.20
Fourth Quarter (September 1, 2010–November 30, 2010)		2.20		1.15
Fiscal Year Ended November 30, 2011
First Quarter (December 1, 2010–February 28, 2011)		1.91		1.31
Second Quarter (March 1, 2011–May 31, 2011)		1.32		0.416
Third Quarter (June 1, 2011–August 31, 2011)		0.55		0.652
Fourth Quarter (September 1, 2011–November 30, 2011)		0.46		0.25
Fiscal Year Ended November 30, 2012
First Quarter (December 1, 2011–February 29, 2012)		0.36		0.25
Second Quarter (March 1, 2012–May 31, 2012)		0.39		0.26
Third Quarter (June 1, 2012–August 31, 2012)		0.32		0.13
Fourth Quarter (September 1, 2012–November 30, 2012)		0.20		0.11
Fiscal Year Ended November 30, 2013
First Quarter (December 1, 2012–February 28, 2013)		0.15		0.11

Holders

As of March 14, ~~2012~~2013, there were ~~318~~317 holders of record of our common stock, although we believe the number of beneficial holders is substantially greater. The transfer agent for our common stock is QuickSilver Stock Transfer, LLC. The transfer agent’s contact information is 6623 Las Vegas Blvd. South, Las Vegas, NV 89119. The transfer agent’s telephone number is +1 (702) 629-1883.

Dividend Policy

We do not anticipate paying cash dividends in the foreseeable future. Presently, we intend to retain all of our earnings, if any, to finance development and expansion of our business.

We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries. As a result of our holding company structure, we rely entirely on certain payments from the Operating Companies to Tehong Consulting, followed by dividend payments from Tehong Consulting. PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which is required to be set aside for certain reserve funds. In addition, PRC capital and currency regulations may limit our ability to pay dividends. Our inability to receive all of the revenues from the Operating Companies’ operations may provide an additional obstacle to our ability to pay dividends if we so decide in the future.

-29-

Equity Compensation Plan Information

The following is a summary of all of our equity compensation plans as of November 30, ~~2011~~2012.

Equity Compensation Plan Information

- 29 -

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c))
Equity compensation plans approved by security holders	0	0	0
Equity compensation plans not approved by security holders 1	85,000	1.54	0
Total	85,000	1.54	0

1Included in this category are 115,000 shares of common stock of the Company issuable upon the exercise of outstanding stock options for our independent directors as of November 30, 2012. All those options outstanding for our independent directors have fully vested with an expiration period of ten years from the date of grant.

1Included in this category are 85,000 shares of common stock of the Company issuable upon the exercise of outstanding stock options for our independent directors as of November 30, 2011. All those options outstanding for our independent directors have fully vested with an expiration period of ten years from the date of grant.

Unregistered Sales of Equity Securities

The Company has not had any sales of unregistered securities within the last three years.

Issuer Purchase of Securities

We did not repurchase any of shares of our common stock during the fourth quarter of fiscal ~~2011~~2012.

ITEM 6.

SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our operations and our present business environment. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto included elsewhere in this annual report.

Overview

We are structured as a holding company that controls our two PRC Operating Companies: Coal Group, which operates our coal segment, and Heat Power, which operates our heating and electricity service segment. Through Coal Group, we produce coal using the longwall method of mining at the Laiyegou coal mine located in the Dongsheng coal field in the Dongsheng district of Ordos City, Inner Mongolia.

Coal Group is the major revenue and profit driver of the Company. For the fiscal year ended November 30, ~~2011~~2012 and ~~2010~~2011, Coal Group contributed 8892% and 8188% of our total revenue, respectively, with the balance attributable to Heat Power. While the sales prices of heat and electricity units generated by Heat Power are regulated by the government, sales prices of coal are market driven to a significant extent. Therefore, Coal Group enjoys a higher gross margin.

Through Coal Group, we produced and sold 1,080,833 metric tons of coal in 2011 at our Laiyegou coal mine, representing a 32% increase over 2010 and we also increased our coal trading volume by selling 1,366,755 metric tons of coal in 2011, representing a 94% increase over 2010. Going forward, we plan to leverage on the rich coal reserve in Inner Mongolia and acquire coal mine(s) if we can locate acceptable targets at reasonable prices, while continuing to increase our trading volume. We expect Coal Group to continue to be the key growth factor of the Company.-30-

-Through 30Coal -Group, we produced and sold 905,928.14 tons of coal in 2012 at our Laiyegou coal mine, representing a 16% decrease over 2011 primarily caused by the dramatic decline in our coal sales in the second half of the year. The decline in coal sales was in turn primarily caused by increased competition from both imported coal from overseas and domestic coal producers combined with decreased demand of coal for electricity generation. However, we increased our coal trading volume by selling 2,471,433 tons of coal in 2012, representing an 81% increase over 2011. Going forward, we plan to leverage on the rich coal reserves in Inner Mongolia and acquire coal mine(s) if we can locate acceptable targets at reasonable prices, while continuing to increase our trading volume. We expect Coal Group to continue to be the key growth factor of the Company.

In addition to directly selling coal from our mine location, Coal Group also buys, sells and transports coal as part of its expanding proprietary coal trading business. Each year the PRC government regulates the amount of coal we and other coal producers are able to sell in the open market at the port in Qinhuangdao by allocating rail space to coal mines in Inner Mongolia to ship their coal to the port. In order to capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then paid to have that coal delivered by rail from the other producer’s mine to the Qinhuangdao port. The source of the coal sold by our trading business is either from the Laiyegou coal mine or from other local coal producers. Our business of buying and re-selling coal expanded in 2011 as a result of our receipt of additional quota from the local railway bureau. Due to the increased quota, we were able to sell more coal. Parties are awarded additional quotas based on their successful use of the quota in the previous year. Our official confirmed quota ~~increased~~ decreased from ~~660~~760,000 ~~metric~~ tons in ~~2010~~2011 to ~~760~~590,000 ~~metric~~ tons in ~~2011. In addition, occasionally the government grants~~2012 from a ~~discretionary~~local ~~increase~~railway inbureau ~~the~~as ~~quota~~a ~~depending~~result ~~upon~~of ~~business conditions. We believe that, given~~ the ~~demand~~overall ~~for coal~~decrease ~~and~~in ~~our~~transport ~~past~~capacity ~~track record~~ of ~~successfully filling our extra quota, we will be able to grow our coal trading business through increased quotas granted to us by the~~ local railway. Our ~~bureau; however, our~~ ability to use any or all of our quota in ~~2012~~ 2013 will vary with market conditions and depends on our ability to source commercially acceptable coal purchases and subsequent ~~sales~~trades. Coal that we produce and sell directly to our customers is customarily transported at the buyer’s expense and therefore does not count against our quota.

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

During ~~2011~~2012, Heat Power increased its coverage area from 34,~~300~~000,000 m2m2to to 4,~~000~~200,~~000~~000m2 m2 due to the development of the Xuejiawan area. WeElectricity ~~maintained~~sales ~~the~~by Heat ~~same~~Power ~~level~~in 2012 of ~~electricity~~approximately ~~sales~~106 inmillion ~~2011~~kWh were approximately 8% lower than our sales of approximately ~~1,148~~115 million kkWh ~~Wh.~~in ~~which~~2011as a weresult ~~experienced~~of the longer down time caused by necessary repairs and maintenance in ~~2010~~the plant and unexpected down time in the latter half of the year.

Seasonality

Coal Group experiences lower sales volume in the first fiscal quarter of each year due to the Chinese New Year holidays, when most businesses are closed. Heat Power provides heating from October 15th each year to April 15th of the next calendar year, resulting in higher sales and profit in the first fiscal quarter, lower sales in the second and fourth fiscal quarter, and no sales from heating in the third fiscal quarter of each year.

Results of Operations

Fiscal Year Ended November 30, ~~2011~~2012 Compared to the Fiscal Year Ended November 30, ~~2010~~2011

Revenues

Coal Group

Coal Group	~~2011~~2012		% Total Revenues			~~2010~~2011		% Total Revenues
Revenues	$	~~138~~225,~~857~~560,~~447~~187		8892	%	$	70138,~~951~~857,~~123~~447		8188	%
Cost of Revenues		87188,~~926~~033,~~121~~148		5576	%		3987,~~930~~926,~~436~~121		4555	%
Gross Profit	$	5037,~~931~~527,~~326~~039		3316	%	$	3150,~~020~~931,~~687~~326		3633	%

Revenues for Coal Group were $138,857,447 in 2011 compared to $70,951,123 in 2010. The $67,906,324, or 96%, of increase was as a result of a permission granted by local government to increase the coal volume which is allowed to be produced and sold by the Company during 2011. Coal Group was selected by the Inner Mongolia Autonomous Region Coal Industry Bureau as one of the 44 major coal enterprises in the Inner Mongolia region to be promoted by the Inner Mongolia Government. The Company believes that this governmental decision to promote the Company is the reason behind the Company being permitted to produce and sell more coal than previously allowed. We produced and sold 1,080,833 metric tons of coal in 2011 compared to 820,303 metric tons of coal in 2010. In addition, our coal production revenues increased because the weighted average price received per ton increased from $44 in 2010 to $53 in 2011. We also increased our proprietary coal trading volume by selling 1,366,755 metric tons of coal in 2011, as compared to 702,876 tons of coal in 2010. The decrease in our overall gross profit margin was primarily attributable to the fact that Coal Group purchased more coal from third parties for its coal trading business during the second half year of 2011, which purchases were less profitable than coal purchased from Laiyegou coal mine in terms of gross margin.-31-

-Revenues 31for -Coal Group were $225,560,187 in 2012 compared to $138,857,447 in 2011. The $86,702,740, or 62%, increase was the result of an increase in our proprietary coal trading volume. We increased our proprietary coal trading volume by selling 2,471,433 tons of coal in 2012, as compared to 1,366,755 tons of coal in 2011. The weighted average price received per ton, however, decreased from $53 in 2011 to $51 in 2012. The decrease in our overall gross profit margin was primarily attributable to the fact that Coal Group purchased more coal from third parties for its coal trading business during the second half year of 2012, which purchases were less profitable than coal purchased from Laiyegou coal mine in terms of gross margin.

The following is a breakdown of the revenues for the Coal Group for the years ended November 30, ~~2011~~2012 and November 30, ~~2010~~2011:

Coal Trading	~~2011~~2012		% Total Revenues			~~2010~~2011		% Total Revenues
Revenues	$	81184,~~342~~177,~~144~~101		5275	%	$	34106,~~672~~181,~~760~~593		4067	%
Cost of revenues		69171,~~630~~835,~~834~~589		4470	%		2769,~~132~~630,~~734~~834		3144	%
Gross Profit	$	1112,~~711~~341,~~310~~512		85	%	$	736,~~540~~550,~~026~~759		923	%
Coal Production	2011		% Total Revenues			2010		% Total Revenues
Revenues	$	57,515,303		36	%	$	36,278,363		41	%
Cost of revenues		18,295,287		11	%		12,797,702		14	%
Gross Profit	$	39,220,016		25	%	$	23,480,661		27	%

The following is a breakdown of the revenues for Heat Power for the years ended November 30, 2011 and November 30, 2010:

Coal Production	2012		% Total Revenues			2011		% Total Revenues
Revenues	$	41,383,086		17	%	$	32,675,854		21	%
Cost of revenues		16,197,558		7	%		18,295,287		12	%
Gross Profit	$	25,185,528		10	%	$	14,380,567		9	%

Heat Power	2011		% Total Revenues			2010		% Total Revenues
Revenues	$	18,828,607		12	%	$	17,094,152		19	%
Cost of revenues		17,007,589		11	%		14,187,683		16	%
Gross Profit	$	1,821,018		1	%	$	2,906,469		3	%

The following is a breakdown of the revenues for Heat Power for the years ended November 30, 2012 and November 30, 2011:

Heat Power has two distinct operations: it supplies heating directly to end users throughout the Xuejiawan district in Ordos City, Inner Mongolia, and it also supplies electricity through Electric Power Group. Revenues generated by Heat Power were $18,828,607 in 2011 compared to $17,094,152 in 2010. The $1,734,455 or 10% increase was a result of an increase in sales volume due to an over 20% increase in the coverage area of Heat Power’s operations.

Heat Power	2012			% Total Revenues			2011		% Total Revenues
Revenues	$	20,502,660			8	%	$	18,828,607		12	%
Cost of revenues		21,092,411			9	%		17,007,589		11	%
Gross Profit	$	(589,751	)		(1	)%	$	1,821,018		1	%

WeHeat ~~also~~Power ~~received~~has ~~government~~two ~~subsidies~~distinct ofoperations: ~~$1,060,309~~it insupplies ~~2011~~heating ~~compared~~directly to ~~$5,511,922~~end inusers ~~2010,~~throughout tothe ~~compensate~~Xuejiawan ~~for~~district ~~lower~~in ~~government~~Ordos ~~regulated~~City, ~~heat~~Inner ~~prices~~Mongolia, and ~~market-driven~~it ~~cost~~also ofsupplies ~~coal~~electricity ~~used in~~through ~~providing~~Electric ~~heat~~Power Group. Revenues ~~This~~generated ~~decrease~~by ~~was~~Heat ~~mainly~~Power ~~attributable~~were $20,502,660 in 2012 compared to ~~the~~$18,828,607 ~~fact~~in ~~that~~2011. weThe $1,674,053 or ~~received~~9% anincrease ~~additional~~was ~~one-off~~a result ~~government~~of ~~subsidy~~an increase in ~~2010,~~ ~~amounting~~sales tovolume ~~$3,333,539.~~due Noto ~~such~~an ~~subsidies~~over ~~were~~5% ~~received~~increase in ~~2011~~the coverage area of Heat Power’s operations.

We also received government subsidies of $2,840,288 in 2012 compared to $1,060,309 in 2011, to compensate for lower government regulated heat prices and market-driven costs of coal used in providing heat. This increase was mainly attributable to the fact that we had increased the coverage area of Heat Power’s operation by 5%.

The following table describes the type of customer and identifies the units of measurement that are associated with the revenues that are reported by Heat Power.

Heating Revenue

Unit Price ($/sq meter month)

Area (‘000 sq meter range)

Revenue ($)

User

~~2011~~2012

~~2010~~2011

~~2011~~2012

~~2010~~2011

~~2011~~2012

~~2010~~2011

Variance

Residential

0.40

0.3840

2,~~590~~690/~~2,133~~2884

2,~~018~~590/2,133

67,~~634~~993,~~294~~449

46,~~839~~634,~~224~~294

1,~~795~~359,~~070~~155

Non-residential

0.6778

0.6467

~~1,426~~1326/~~1,178~~1355

~~708~~1,426/1,178

65,~~795~~430,~~905~~656

26,~~858~~795,~~414~~905

3(1,~~937~~365,~~491~~249

)

Total

13,~~430~~424,~~199~~105

713,~~697~~430,~~638~~199

5(6,~~732,561~~094

)

- 32 -

The following table compares the quarterly revenue stream from the Electric Power Group and the units of measurement that are associated with the revenues for such periods.

Electricity Revenue

Unit Price ($/ k Wh)

~~Unit Price ($/ k Wh)~~

Units of power supplied (1000 k Wh)

~~Units of power supplied (1000 k Wh)~~

Revenue ($)

~~Revenue ($)~~

Period

2012

~~2011~~

2011

~~2010~~

2012

~~2011~~

2011

~~2010~~

2012

~~2011~~

2011

~~2010~~

Variance

~~Variance~~

0.04

~~0.03~~

0.03

~~0.03~~

33,083

~~35,139~~

35,139

~~30,600~~

1,287,675

~~1,174,129~~

1,174,129

~~988,074~~

~~186~~113,~~055~~546

0.04

~~0.04~~

0.03

~~0.03~~

25,526

~~36,962~~

36,962

~~36,170~~

1,038,893

~~1,263,767~~

1,263,767

~~1,158,751~~

~~105~~(224,~~016~~874

)

0.04

~~0.04~~

0.04

~~0.03~~

11,277

~~17,265~~

17,265

~~25,471~~

480,769

~~662,012~~

662,012

~~618,588~~

43(181,~~424~~243

)

0.04

~~0.04~~

0.04

~~0.03~~

35,685

~~25,422~~

25,422

~~28,421~~

1,430,930

~~1,238,191~~

1,238,191

~~1,119,179~~

~~119~~192,~~012~~739

Total

105,571

~~114,788~~

114,788

~~120,662~~

4,238,267

~~4,338,099~~

4,338,099

~~3,884,592~~

~~453~~(99,~~507~~832

)

Cost of Revenues

Details of the cost of revenues for the years ~~2011~~2012 and ~~2010~~2011 are as follows:

	2011		2010		Variance
	2012		2011		Variance
Coal and freight	$	90191,~~234~~015,~~807~~024	$	4390,~~668~~234,~~259~~807	$	46100,~~566~~780,~~548~~217
Depreciation and amortization		57,~~471~~216,~~679~~527		45,~~064~~471,~~506~~679		1,~~407~~744,~~173~~848
Heat resource rental		3,755,252		2,750,445		1,004,807
Operating supplies		605,663		1,661,594		(1,055,931	)
Operating supplies		1,661,594		912,705		748,889
Utilities		6,861,367		5,253,737		1,607,630
Utilities		1,498,485		920,603		577,882
Salaries and benefits		1,499,804		1,421,505		78,299
Salaries and benefits		1,421,505		1,214,218		207,287
Repairs		907,615		439,531		468,084
Repairs		439,531		304,333		135,198
Others		1,019,559		450,857		568,702
Others		450,857		283,050		167,807
Total	$	209,125,559	$	104,933,710	$	104,191,849
Total	$	104,933,710	$	54,118,119	$	50,815,591

Coal & freight: Our cost of coal increased principally as a result of increased coal purchases in connection with our trading business.

Depreciation & amortization: Increase in depreciation and amortization was in line with the expanded heat supply area. We constructed more pipelines to supply heat to these areas. Increase in depreciation & amortization was also attributable to the increase of production volume in our Laiyegou coal mine.

~~Heat resource rental: Our heat resource rental costs increased~~Operating tosupplies. ~~higher~~The ~~levels~~reduction ~~because~~in weoperating ~~purchased~~supplies ~~steam~~was ~~from~~primarily ~~other~~due ~~suppliers~~ to ~~ensure~~(i) athe ~~stable~~lower ~~and~~volume ~~reliable~~of ~~heat~~coal ~~supply~~produced asat ~~we expanded~~ our Laiyegou ~~service~~coal ~~coverage~~mine, ~~area.~~and ~~Our~~(ii) ~~service~~the ~~coverage~~longer ~~area~~breaking-down ~~has~~periods ~~been~~for ~~expanded~~repairs ~~from~~and ~~2.7~~maintenance ~~million~~of ~~square~~our ~~meters~~power inplant, ~~2009-2010~~during ~~heat~~which ~~season~~periods tothe ~~3.3~~need ~~million~~for ~~square~~operating ~~meters~~supplies inis ~~2010-2011~~substantially ~~heat~~or ~~season,~~completely ~~and to 4~~eliminated.0 ~~million square meters in 2011-2012 heat season.~~

Operating supplies. The increase in operating supplies resulted from the increase of the volume of limestone used in our heating supply business. We needed to mix raw coal with limestone to reduce sulfur emissions. The volume of limestone used in heating supply business was increased in line with the growing heating area.

Utilities. Utilities mainly represented the cost of electricity consumed by 32 heat transfer stations of Heat Power. Increase in utility costs was in line with the expanded heating supply area.

Salaries and benefits: Salaries increased as a result of the ~~hiring~~overall salaries of ~~new~~employees ~~personnel~~increased atin ~~Heat~~line ~~Power.~~with ~~Headcount~~the ofincrease ~~employees~~ of ~~Heat~~the ~~Power~~average ~~has~~salary ~~been~~in ~~increased~~the ~~from~~local ~~270 to 300~~area.

-33-

Selling expenses

-For 33the -year ended November 30, 2012, selling expenses increase by approximately $1,945,642 as compared to 2011. This was mainly due to the increase of transportation and storage costs as we purchased more coal from third parties. Selling expenses are expected to increase in line with trading volume.

For the year ended November 30, 2011, selling expenses increase by approximately $1,679,581 as compared to 2010. This was mainly due to the increase of transportation and storage costs as we expanded our proprietary coal trading business in 2011. Selling expenses are expected to increase in line with trading volume.

	2012		2011		Variance
Transportation & storage	$	4,732,730	$	4,366,273	$	366,457
Sales tax and other expenses		3,202,176		2,169,241		1,032,935
Office		512,551		388,307		124,244
Salaries and benefits		652,751		239,188		413,563
Depreciation		34,697		26,254		8,443

Total	$	9,134,905	$	7,189,263	$	1,945,642

	2011		2010		Variance
Transportation & storage		$4,366,273		$3,738,736		$627,537
Sales tax and other expenses		2,169,241		1,323,432		845,809
Office		388,307		259,538		128,769
Salaries and benefits		239,188		168,916		70,272
Depreciation		26,254		19,060		7,194
Total		$ 7,189,263		$5,509,682		$ 1,679,581

General and Administrative Expenses

Details of the general and administrative expenses of the years ~~2011~~2012 and ~~2010~~2011 are as follows:

	2011		2010			Variance
	2012		2011			Variance
Professional and other fees	$	1,~~195~~768,~~771~~564	$	12,~~039~~716,~~866~~528		$	~~155~~(947,~~905~~964	)
Salaries and welfares		1,~~054~~361,~~906~~780		~~797~~1,~~840~~054,906			~~257~~306,~~066~~874
Office		~~971~~1,~~734~~934,082		~~946~~953,~~378~~947			25980,~~356~~135
Depreciation		~~485~~763,~~609~~989		~~290~~485,~~822~~609			~~194~~278,~~787~~380
Travel		~~439~~527,~~086~~045		~~393~~439,~~775~~086			4587,~~311~~959
Tax		~~173~~444,~~493~~369		~~162~~173,~~913~~493			10270,~~580~~876
Repairs		~~125~~724,~~182~~718		89125,~~691~~182			35599,~~491~~536
Allowance for doubtful accounts		(45,199)		(67,800	)		22,601
Stock based compensation		4,857		42,621			(37,764	)
Stock based payment		1,563,117		99,202			1,463,915
Total Expenses	$	7,529,404	$	5,991,372		$	1,538,032
Other		27,673		63,774			(36,101)
Total Expenses	$	5,991,372	$	3,816,461		$	2,174,911

Professional and other fees. Fees were paid principally to various professionals, including financial advisors, attorneys and accountants. These expenses ~~increased~~decreased in the fiscal year ~~ended~~ ended November 30, ~~2011~~2012 because we ~~purchased~~did ~~D&O~~not purchase director and officer insurance for our directors and officers, which caused the increase in ~~this~~professional ~~year~~and other fees in 2011.

Salaries and benefits: ~~The~~At ~~increase in salaries and wages was mainly attributable to~~ the ~~facts that (i) employee social welfare expenses borne by Heat Power increased by 20% to meet the local government requirement from the~~ beginning of ~~2011;~~the ~~and~~fiscal ~~(ii) 24 months’ salary compensation was made to four employees at~~year, ~~Laiyegou~~we ~~coal~~had ~~mine~~an ~~for~~overall ~~termination~~increase of ~~their employment contracts in~~ the ~~second~~salaries ~~quarter~~ of ~~2011~~all employees.

~~Depreciation~~Repairs. ~~These~~ ~~expenses~~The ~~increased~~increase in ~~the~~ ~~fiscal~~repairs ~~year~~was ~~ended~~mainly ~~November~~due ~~30,~~to ~~2011~~the asmajor repairs to the ~~Company~~power ~~bought~~plant ~~new~~that ~~vehicles~~were carried out in June and ~~office~~July ~~equipment~~this toyear. ~~adapt~~The toplant ~~the~~is ~~expanded~~approximately ~~coal~~ten years old and is entering ~~trading~~into ~~business~~a period when major repairs are expected.

~~Stock-based payment~~Depreciation. These ~~The~~expenses ~~increase~~increased in ~~stock-based compensation~~the ~~was~~fiscal ~~mainly~~year ~~due~~ended toNovember ~~the transfer of 1~~30,~~800,000~~ ~~shares~~2012 ofas ~~common stock beneficially owned by Mr. Ding, Chairman of~~ the Company, ~~to Jessie~~bought ~~International~~new ~~for~~vehicles ~~certain consulting services rendered by Jessie~~ and ~~its~~office ~~affiliates~~equipment ~~(“Jessie”)~~ to ~~the~~adapt ~~Company, and the issuance of 60,000 shares of common stock~~ to ~~Hayden Communication International (“HCI”), for consulting service and investor relations service provided by them for~~ the ~~Company.~~expanded ~~Shares~~coal ~~transferred/issued to Jessie and HCI were valued at approximately~~trading $1business.~~4 million and $0.1 million, respectively. Such expenses were non-cash, share-based payments.~~

Stock-based compensation. The decrease in stock-based compensation was due to fewer options vesting in 2012 than 2011.

Non-Operating Income and Expenses

Non-operating income ~~increased~~decreased tofrom $1,669,~~053~~503 in 2011 ~~from~~to $1,~~056~~559,~~502~~574 in ~~2010~~2012 as a result of increase in ~~deferred~~other ~~revenue~~financial ~~recognized~~expense in ~~2011~~2012. ~~Deferred~~The ~~revenue~~company ~~relates~~paid $201,368 to the ~~construction~~bank ofas ~~pipeline, and~~a itfinancial ~~increased~~consulting fee in ~~line with the expansion of pipeline in recent years~~2012. Non-operating expenses increased slightly from $~~206~~281,~~387~~ 440 in ~~2010~~2011 to $~~281~~287,~~440~~018 in ~~2011~~2012.

- 34 -

Liquidity and Capital Resources

As of November 30, ~~2011~~2012 we had a working capital surplus of approximately $2340,~~522~~076,~~306~~446, compared with a working capital ~~deficit~~surplus of $21 23,~~723~~522,~~598~~306 as of November 30, ~~2010~~2011. The improvement of in liquidity was ~~mainly~~primarily due to ~~(i)~~ the ~~full~~growth ~~repayment~~in ofrevenues ~~notes~~and ~~receivable~~there ~~amounting to $14.7 million which~~ was ~~lent~~still ~~for~~no ~~strategic purposes~~stockholder ~~to related parties affiliated to the Company through family members of the Chairman; and (ii) net proceeds from short-term bank loans and finance obligation amounting to $25~~distribution.~~8 million.~~

On March 31, 2011, Heat Power entered into a Finance Leasing Contract (“Contract 1”) with a leasing company covering its thermoelectric plants, heat transfer stations, and machinery and equipment (“Transferred Assets 1”), having a gross value of ~~approximately~~ US$19,392,298.4 ~~million.~~ Pursuant to ~~the~~ Contract 1, Heat Power sold to the leasing company its Transferred Assets 1 used for its operations toin ~~the~~exchange ~~leasing company~~ for ~~RMB 60,000,000 (~~US $9,261,260) in cash. Under ~~the~~ Contract 1, Heat Power leased back the Transferred Assets ~~for~~1 with a quarterly installment payment of ~~approximately~~ US$~~0.5 million~~548,755 until April 2016, when ~~the~~ Contract 1 expires. ~~The~~ Contract 1 is guaranteed by Coal Group and an unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may ~~repurchase~~re-purchase the Transferred Assets ~~for~~1 at a purchase price of RMB 900,000, or or RMB 1 if Heat Power timely pays the quarterly installments. Upon the execution of ~~the~~ Contract 1, Heat Power paid ~~the leasing company~~ a ~~service~~servicing fee of ~~approximately~~ US$~~0.5~~502,337 ~~million~~ and a refundable deposit of US$1~~.4 million. The effective interest rate of this transaction is 6.70%. Interest expense related to the finance obligation amounted to $0.2 million and $0.5 million~~, ~~respectively for the three and twelve month periods ended November 30~~389,189 ~~2011. The refundable deposit is included in other long term assets in the consolidated balance sheets as of November 30, 2011. The costs related~~ to the ~~Contract~~leasing ~~of $0~~company.8 ~~million are being amortized by the interest method over the life of the lease.~~

WeOn ~~anticipate~~March ~~that~~28, 2012, Heat Power entered into another Finance Leasing Contract (“Contract 2”) with the ~~combination~~same ofleasing ~~our~~company ~~sales~~related to its thermoelectric plants, heat transfer stations, and ~~collection of~~machinery ~~accounts~~and ~~receivables~~equipment (“Transferred Assets 2”), with ~~our~~a ~~longer~~gross ~~accounts~~value ~~payable~~of ~~cycle~~US$8,211,468. ~~customer~~Pursuant ~~deposits~~to Contract 2, Heat Power sold to the leasing company its Transferred Assets 2 used for its operations in exchange for US$7,537,215 in cash. Under Contract 2, Heat Power leased back the ~~next~~Transferred ~~twelve~~Assets ~~months~~2 ~~and~~with ~~proceeds~~a ~~from~~quarterly installment payment of US$450,471 ~~bank~~until April 2017, when Contract 2 expires. Contract 2 is guaranteed by Coal Group and ~~shareholder~~an ~~loans~~unrelated third ~~will~~party. ~~generate~~Upon ~~sufficient~~the ~~cash~~repayment ~~flow~~of toall ~~sustain~~outstanding ~~our~~rental ~~working~~obligations, ~~capital~~Heat ~~needs~~Power ~~for~~may re-purchase the ~~next~~Transferred ~~twelve~~Assets ~~months~~2 at a purchase price of RMB 720,000, or RMB 1 if Heat Power timely pays the quarterly installments. Included in the amount borrowed is a servicing fee of US$379,897 and a refundable deposit of US$1,507,443.

We anticipate that the combination of our sales and collection of accounts receivables with our longer accounts payable cycle, customer deposits and proceeds from bank and shareholder loans will generate sufficient cash flow to sustain our working capital needs.

Sources of Capital

If additional capital is needed is in excess of our current capital resources, we will explore financing options such as shareholder loans. Shareholders loans have been granted from time to time as required to meet current working capital needs. We have no agreement that ensures that we will receive such loans and we cannot be certain that loans will be made available to us if or when required. We may exhaust this source of funding at any time. Existing shareholder loans are payable on demand and accrue interest of 57.3132% per annum. The outstanding balance of our shareholder loans as of November 30, ~~2011~~2012 was $910,~~452~~034,~~712~~579.

The outstanding balances and interest rate of short-term bank loans obtained by the Company at November 30, ~~2011~~2012, were as follows:

Bank name

~~From~~

ToFrom

~~Principal~~

~~Interest rate~~To

~~Security~~

Principal

Interest rate

Security

Agricultural Bank of China

~~January 18, 2011~~

~~January~~December 1715, ~~2012~~2011

~~$12,546,068 (1)~~

~~6.941%~~December 14, 2012

~~Secured~~

12,848,310

7.216

Secured

Agricultural Bank of China

~~January 18, 2011~~

January 1713, 2012

~~$8,782,247 (2)~~

~~6.941%~~January 12, 2013

~~Secured~~

9,636,232

7.21

Secured

Agricultural Bank of China

~~July 29, 2011~~

~~July~~October 2827, 2012

~~$7,809,927~~

~~7.216%~~October 26, 2013

~~Secured~~

24,090,581

6.6

Secured

~~(1) This bank loan was fully repaid in December 2011.~~-35-

(2) This bank loan was fully repaid in January 2012.

Cash Flows

Operating Activities:

-Our 35cash -flows provided by operating activities was $2,531,555 for the year ended November 30, 2012 as compared to $1,534,023 of cash flows used in operating activities for the year ended November 30, 2011. The following summarizes the inflow and outflow of cash for these periods:

Our cash flows used in operating activities was $1,534,023 for the year ended November 30, 2011 as compared to $17,713,296 of cash flows provided by operating activities for the year ended November 30, 2010. The following summarizes the inflow and outflow of cash for these periods:

	Year Ended November 30,
	2012			2011
Net income	$	12,303,316			27,635,227
Depreciation and amortization		8,496,470			6,318,473
(Increase) in restricted cash		(17,419	)		(27,494	)
(Increase) in accounts receivable		(1,891,298	)		(11,573,458	)
(Increase) decrease in other receivables		19,926,225			(20,470,669	)
(Increase) in prepaid expenses		(355,330	)		(323,072	)
(Increase) in advances to suppliers		(33,273,927	)		(22,156,375	)
(Increase) decrease in inventory		(3,922,277	)		(6,848,040	)
(Increase) in loan to related parties		(1,356,250	)		-
Increase in deferred income		5,430,246			1,642,466
Increase (decrease) in accounts payable		(2,544,812	)		6,915,326
Increase(decrease) in advance from customers		2,262,158			5,043,073
Increase(decrease) in accrued liabilities and other payables		(3,211,163	)		10,526,841
Others		685,616			1,783,679
Net cash (used in ) provided by operating activities	$	2,531,555			(1,534,023	)

	Year Ended November 30,
	2011			2010
Net income	$	27,635,227		$	17,595,160
Depreciation and amortization		6,318,473			4,488,539
(Increase) in restricted cash		(27,494	)		(396,150	)
(Increase) in accounts receivable		(11,573,458	)		(1,081,235	)
(Increase) decrease in other receivables		(20,470,669	)		355,405
(Increase) in prepaid expenses		(323,072	)		-
(Increase) in advances to suppliers		(22,156,375	)		(1,805,486	)
(Increase) decrease in inventory		(6,848,040	)		2,325,860
(Increase) in other long term assets		-			(190,735	)
Increase in deferred income		1,642,466			1,448,930
Increase (decrease) in accounts payable		6,915,326			(215,291	)
Increase(decrease) in advance from customers		5,043,073			(6,846,339	)
Increase in accrued liabilities and other payables		10,526,841			1,767,486
Others		1,783,679			267,152
Net cash (used in ) provided by operating activities	$	(1,534,023	)	$	17,713,296

Accounts receivable. For the year ended November 30, 2012 we increased our coal trading volume by selling 2,471,433 tons of coal, representing an 81% increase over the same period in 2011. Our operating assets, especially receivables due from customers, increased in line with the increase in our coal trading business during 2012. The increase in accounts receivable is also attributable to an increase in Heat Power’s user fees made on account and not from an extension of time for accounts receivable from prior periods. The current heating season is from October 15, 2012 to April 15, 2013; however, user fees will be collected after the end of the current heating season. Our heat service coverage area was increased from approximately 4.0 million square meters to 4.2 million square meters.

~~Accounts~~Other ~~receivable~~receivables. ~~For the year ended November 30, 2011, we increased our coal trading volume by selling 1,366,755 metric tons of coal, representing a 94% increase over the same period in 2010.~~ The ~~significant~~decrease ~~increase~~ in ~~volume~~other ofreceivables ~~coal produced and sold by Coal Group~~ was mainly due to the ~~permitted increase~~Company inreducing ~~the~~its ~~coal~~loans ~~which was allowed~~ to beits ~~produced~~suppliers and ~~sold~~other byassociated ~~the~~firms ~~Company. Coal Group was selected~~ by ~~the~~a ~~Inner~~significant ~~Mongolia Autonomous Region Coal Industry Bureau as one of the 44 major coal enterprises in the Inner Mongolia region to be promoted by the Inner Mongolia government~~amount. The Company believes that this decision to promote the Company is the reason behind the Company being permitted to produce and sell more coal than previously allowed. Our operating assets, especially receivables due from customers, increased in line with the increase in our coal trading business during 2011. The increase in accounts receivable is also attributable to an increase in Heat Power’s user fees made on account and not from an extension of time for accounts receivable from prior periods. The current heating season is from October 15, 2011 to April 15, 2012; however, user fees will be collected after the end of current heating season. Our heat service coverage area was increased from approximately 3.3 million square meters to 4.0 million square meters.

Other receivables. The increase in other receivables was mainly due to reimbursements due from various real estate development companies for the cost of constructing pipelines to connect to rural areas being developed. A substantial part of the balance outstanding at the financial year end 2011 has been collected as of February 29, 2012.

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

Inventory. Inventory mainly consists of coal for trading purposes. WeThe ~~have~~market ~~received~~price ~~more~~of ~~railway~~coal ~~transportation~~has ~~quota~~dropped ~~and~~dramatically ~~more~~since ~~support~~the ~~from~~third ~~local~~fiscal ~~government this year~~quarter. ~~Our~~The ~~coal~~Company ~~trading~~had ~~business volume was increased~~ to ~~1.4~~reduce ~~million~~the ~~metric~~trading ~~tons~~volume because ~~for~~the ~~2011~~market ~~from~~price ~~0.7~~of ~~million~~coal ~~metric~~was ~~tons~~dropped oftoo ~~2010.~~low ~~In order~~ to ~~assure~~meet the ~~stability of~~Company’s ~~the~~margin ~~coal~~threshold. ~~trading business~~Therefore, wethe ~~maintained~~inventory ~~a higher~~ level has ofincreased ~~inventory~~in ~~balance~~the assecond ~~compared~~half toof ~~the prior year~~2012.

Accounts payable. AsThe ~~discussed~~decrease ~~the~~in ~~above,~~accounts ~~our~~payable ~~operating~~was ~~assets,~~due ~~including~~to ~~outstanding~~the ~~balance~~Company ofpaying ~~accounts~~some ~~payable,~~of ~~rose~~its insuppliers ~~line~~before ~~with~~ the ~~expanding~~end ~~coal~~of ~~production~~the ~~and~~fiscal ~~trading~~year ~~business~~2012.

Deferred income. Deferred income relates to the construction of pipeline,. ~~and~~Deferred itincome increased in 2012 in line with the expansion of the pipeline in ~~2011~~2012.

-Advances 36from -customers. Advances on sales of coal represent the majority of customer advances received by the Company. Such advances are a normal business practice that ensures that the customer obtains Coal Group’s products at the market price determined on the date of purchase. Coal Group’s advances increased during 2012 as a result of more orders being received during the last several days of the fiscal year. The level of advances fluctuates depending partially upon how quickly Coal Group delivers coal to its customers.

Advances from customers. Advances on sales of coal represent the majority of customer advances received and it is a normal business practice that ensures that the customer obtains Coal Group’s products at the market price determined on the date of purchase. Coal Group’s advances increased during 2011 as a result of more orders as of the last several days of the year. The level of advances fluctuates depending upon how quickly Coal Group delivers coal to customers.-36-

Accrued liabilities and other payables. These amounts consist of, among others, accruals made for loan interest, repairs and maintenance of heating plants, labor union fees, social insurance and technical training for our employees. ~~Increase~~The decrease in ~~accrual~~accrued liabilities and other payables was mainly due to the ~~advances~~decreased ~~from~~balances ~~related~~of ~~parties~~account ~~affiliated~~payable tofrom ~~the~~our ~~Company~~customers ~~through~~which ~~family~~is ~~member~~offset ofby the ~~Company’s~~increase ~~Chairman~~in ofaccrued ~~$4.7~~liabilities ~~million~~mainly from our payroll, welfare expenses.

Investing Activities:

Our cash flows ~~provided~~used byin investing activities were $143,~~027~~207,~~476~~923 for the year ended November 30, ~~2011~~2012 as compared to cash flows ~~used~~provided inby investing activities were $131,~~957~~027,~~354~~476 for the year ended November 30, ~~2010~~2011.

As of the year ended November 30, 2011, notes receivable, which represented amounts lent for strategic purposes to related parties affiliated to the Company through family members of the Chairman, were fully repaid in cash.

Financing Activities:

Our cash flows provided by financing activities were $2519,~~840~~670,~~201~~633 for the year ended November 30, ~~2011~~2012 and cash flows ~~used~~provided inby financing activities were $425,~~281~~840,~~695~~201 for the year ended November 30, ~~2010~~ 2011.

A substantial portion of the cost of construction of the thermoelectric plant and of the costs of expansion projects at Heat Power and Coal Group was provided by shareholder loans. The loans are undocumented and payable on demand. ~~We expect to have these loans documented in the near future.~~ The outstanding balances and interest rate of shareholder loans at November 30, ~~2011~~ 2012, were as follows:

	Balance		Interest Rate
Hangzhou Dayuan Group, Ltd.	$	5,~~736~~903,~~898~~204		5.31 & 7.32	%
Inner Mongolia Duoyida Mining Co. Ltd.		2,~~013~~145,~~394~~131		5.31 & 7.32	%
Ordos City YiYuan Investment Co., Ltd.		1,~~702~~986,~~420~~244		5.31 & 7.32	%
Total	$	910,~~452~~034,~~712~~579		5.31 & 7.32	%

Material Commitments

We have commitments to ~~payment~~pay of bank loans and shareholder ~~loans~~ loans as mentioned above ~~and with respect to payment of mining rights which rights were fully paid off prior to the end of 2008~~. We have title to all our capital assets consisting of production equipment, automobiles, and office equipment. The total amount of ~~such~~ our material commitments is $38,590,954, which we anticipate to be funded by profits generated by our operations.

Summary of Significant Accounting Policies

The consolidated financial statements of the Company as of ~~November~~ November 30, ~~2011~~2012 and ~~2010~~2011 and for the years ended November 30, ~~2011~~2012 and ~~2010~~2011 have been prepared in accordance with generally accepted accounting principles ~~generally~~ ~~accepted~~ in the United States ~~of America~~ and the rules and regulations of the ~~Securities and Exchange Commission (the “~~SEC”).

Basis of Consolidation

The consolidated financial statements include the accounts of of the Company’s Wholly Owned Foreign Enterprise (WFOE) ~~and~~in China, Tehong Consulting, Coal Group and Heat Power since they are deemed variable interest entities and the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

- 37 -

Prior to the Company’s restructuring in 2010, Coal Group and Heat Power were subsidiaries of the Company whose accounts were included in the consolidated financial statements.

-37-

Foreign Currency Translations

Substantially all Company assets are located in China. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with ~~the Accounting~~SFAS ~~Standards~~No. ~~Codification~~52, “foreign currency translation,” as codified in ASC 830 ~~“Foreign~~foreign ~~Currency~~currency ~~Matters”~~matters. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statements of ~~income~~ operations amounts have been translated using the average exchange rate for the year. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

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

	November 30, 2011	November 30, 2010
			November 30, 2012	November 30, 2011
Balance sheet items, except for the common stock, additional paid-in capital, statutory reserve and retained earnings, as of year end	US$1=RMB6.3765	US$1=RMB 6.6670
Balance sheet items, except for the registered and paid-up capital, additional paid-in capital, statutory reserve and retained earnings, as of year end			US$1=RMB6.2265	US$1=RMB6.3765
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows for the year	US$1=RMB6.4882	US$1=RMB 6.7847
Amounts included in the statements of operations, statements of changes in stockholders’ equity and statements of cash flows for the year			S$1=RMB 6.3183	S$1=RMB 6.4882

For the years ended November 30, ~~2011~~2012 and ~~2010~~2011, foreign currency translation ~~adjustment~~adjustments of approximately $2,~~891~~205,~~182~~864 and $12,~~010~~891,~~025~~182, respectively, ~~was~~were reported as accumulated other comprehensive income in the consolidated statements of changes in stockholders’ equity and comprehensive income.

Although government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into US dollars at that rate or any other rate.

The value of RMB against the U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.

Cash and Cash equivalents

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

Accounts Receivable

Accounts receivable is stated at cost, net of an allowance ~~for~~ for doubtful accounts. The Company maintains anallowances ~~allowance~~ for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s ~~payment~~ payment history, its current credit-worthiness and current economic trends. ~~As of November 30, 2011 and 2010, the balance of the allowance for doubtful accounts was $11,251 and $54,747, respectively.~~ For the years presented, the Company did not write off any accounts receivable as bad debts.

- 38 -

Inventories

Inventories consisted of coal and operating supplies. Inventories are valued at the lower of cost or market, using the weighted average cost method . Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of market. The Company did not record any provisions for inventory valuation allowance for the years ended November 30, ~~2011~~2012 and ~~2010~~2011.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. Cost includes the prices paid to acquire or construct the assets, including capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extend the useful life of an existing asset. Depreciation is computed using the straight line method over the estimated useful lives of property, plant and equipment, which are approximately five years for electrical and office equipment, ten years for transportation equipment and pipelines, and 20 to 45 years for buildings. Leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the lease. Capitalized costs related to assets under construction are not depreciated until construction is complete and the asset is ready for its intended use. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

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

Investment Property

Investment property represents rental real estate purchased by the Company for investment purposes. Depreciation is computed using the straight line method over the estimated useful life of 45 years. The related rental income is included in non-operating income in the accompanying consolidated statements of operations.

Mining Right

~~All land in China belongs to the government.~~ To extract resources from land, the Company is required to obtain a mining right. The Company’s Coal Group acquired its mining right from the Provincial Bureau of National Land and Resource in November of 2005. The price of the mining right, which represents the acquisition cost of the mine, was assessed by the Bureau to be $3,656,731. The mine acquisition cost is which was payable in installments over a six year period from the date the mining right was granted~~. The~~ ~~mine~~has ~~acquisition~~been ~~cost is~~fully ~~amortized using the UOP method over the productive life of the mine based on proven and probable reserves~~paid.

Long-Term Investment

We had no long-term Investments in ~~2011~~2012 and ~~2010~~2011.

Restricted Cash

Long-term restricted cash represents the bank deposits placed as a guarantee for the future payments of rehabilitation costs as required by the PRC government. ~~The~~As long-term deposits, ~~earned~~the restricted cash earned an interest rate of 0.50% per annum in fiscal year ~~2011~~2012 and 0.3650% per annum in fiscal year ~~2010~~2011.

-39-

Advance from Customers

-Advance 39from -customers primarily consists of payments received from customers by the Coal Group and Heat Power prior to the delivery of goods and services.

Advances from customers primarily consist of payments received from customers by the Coal Group and Heat Power prior to the delivery of goods and services.

Deferred Income

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

Impairment of Long-lived Assets

The Company applies SFAS No. 144, ”Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), as codified in FASB ASC 360, “Property, Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. The Company may recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. No impairment of long-lived assets was recognized for the years ended November 30, ~~2011~~2012 and ~~2010~~2011.

Recognition of Revenue

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

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

Heat Power supplies heat to users directly and supplies electricity through a government controlled intermediary. Revenue from sales of heat and electricity represents the amount of tariffs billed for heat and electricity generated and transmitted to the users and government controlled intermediary, respectively.

Resource Compensation Fees

In accordance with the relevant regulations, a company that is engaged in coal production business is required to pay a fee to the Inner Mongolia National Land and Resources Administration Bureau as the compensation for the depletion of coal resources. Coal Group was required to pay resource compensation fees of $~~463~~467,~~947~~099 and $~~305~~463,~~198~~947 for the years ended November 30, ~~2011~~2012 and ~~2010~~2011, respectively, which is included in cost of goods sold in the statements of ~~income and other comprehensive income~~operations. Coal Group expenses such costs when incurred.

Environmental Costs

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

Fair Value of Financial Instruments

Financial instruments include accounts receivable, advances to suppliers and other current assets, short term bank loans, accounts payable, advance from customers, other current liabilities and shareholders’ loan. As of November ~~30, 2011 and 2010, the carrying values of these financial instruments approximated their fair values due to their short term nature.~~

-30, 402012 -and 2011, the carrying values of these financial instruments approximated their fair values.

-40-

Income Taxes

Coal Group and Heat Power generate their income in China where Value Added Tax, Income Tax, City Construction and Development Tax and Education Surcharge taxes are applicable. Coal Group and Heat Power do not conduct any operations in the U.S.; therefore, are not subject to U.S. taxes.

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” (“SFAS 109”), now codified as FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and ~~liabilities~~ liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Use of Estimates

The preparation of financial statements in conformity with ~~accounting~~ ~~principle,~~GAAP ~~generally accepted in the United States of America~~ requires management to make estimates and assumptions that affect certain reported amounts and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The application of ~~accounting~~GAAP ~~principles generally accepted in the United States of America~~ involves the exercise of varying degrees of judgment. The resulting accounting estimates will not always precisely equal the actual results. Management considers an accounting estimate to be critical if:

· assumptions are required to be made; and ~~· changes in estimates could have a material effect on our financial statements.~~

changes in estimates could have a material effect on our financial statements.

Net Income Per Share

The Company computes net income (loss) per common share in ~~accordance~~ accordance with SFAS No, 128 “Earnings Per Share” (“SFAS 128”), as codified in FASB ASC 260, “Earning Per Share” (“ASC 260”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of ASC 260 and SAB 98, basic and diluted net income per common share are computed by dividing the amount available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. Accordingly, the number of weighted average shares outstanding as well as the amount of net income per share are presented for basic and diluted per share calculations for all periods reflected in the accompanying consolidated financial statements.

Statutory Reserves

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

Surplus Reserve Fund: We are required to transfer 10% of our net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of our registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

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

- 41 -

Non-Surplus Reserve Fund (Safety and Maintenance): According to ruling No. 119 (2004) issued on May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of ~~Finance~~ Finance regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine ~~Maintenance~~ Maintenance and Improvement,” the Company is required to set aside to a safety fund of RMB 6 per ton of raw coal mined, for 2011 and 2010, respectively, and RMB 10.5 per ton for a maintenance fund. As defined under ~~accounting~~U.S. ~~principles generally accepted in the United States of America~~GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transactions. Therefore, for financial reporting purposes, this reserve has been recorded as an appropriation of retained earnings.

The statutory reserves consist of the following:

	November 30, 2011		November 30, 2010
	November 30, 2012		November 30, 2011
Statutory surplus reserve	$	2,447,598	$	2,447,598
Welfare fund		—		—
Safety and maintenance reserve	$	6,~~585~~847,~~257~~018		6,~~126~~585,~~038~~257
Total statutory reserves	$	9,~~032~~294,~~855~~616	$	89,~~573~~032,~~636~~855

Stock Options

Stock options are accounted for upon issuance at fair market value. Such value is determined at the date a commitment is made for issuance. The value of options is included in a separate part of stockholders’ equity. Upon exercise or cancellation, the value of such options is transferred to paid-in capital.

Asset Retirement Cost and Obligation

The Company has adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” (“SFAS 143”), now codified as FASB ASC 410, “Asset Retirement and Environmental Obligations” (“ASC 410”). ASC 410 generally requires that the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred at the time development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. The related asset is amortized using the UOP method over the productive life of the mine based on proven and probable reserves. The Company did not incur and does not anticipate incurring any material dismantlement, restoration and abandonment costs given the nature of its producing activities and the current PRC regulations surrounding such activities.

Vulnerability Due to Operations in PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

All of the Company’s businesses are transacted in RMB, which is not freely convertible. The People’s Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

- 42 -

Since the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.

All of the Company’s bank accounts are in banks located in PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

The Company’s mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company’s ability to develop and operate its mines.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Inflation

We experienced increased coal prices in our coal trading business and Heat Power business. We were also able to increase our selling price for coal. The increase in our coal purchase and sale prices may be due to inflation and/or other factors. The PRC government has adopted various measures to control inflation.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statement and the notes thereto begin on page F-1 of this Annual Report on Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer, who is the principal executive officer, and the Acting Chief Financial Officer, who is the principal financial officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, and solely as a result of the material weaknesses and significant deficiencies in internal control over financial reporting described below, the Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were ineffective.

-43-

Material Weaknesses and Significant Deficiencies in Internal Control Over Financial Reporting

-Management 43did -identify material weaknesses and significant deficiencies. A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. With respect to material weaknesses, we believe the Company must improve its internal accounting and bookkeeping personnel and procedures. With respect to significant deficiencies, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. To remediate this situation, we continue to seek to recruit experienced professionals to augment and upgrade our financial staff to improve our internal accounting and bookkeeping personnel and practices as well as improve our issues of timeliness and completeness in US GAAP financial reporting. We are continuing to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.

Management did identify material weaknesses and significant deficiencies. A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. With respect to material weaknesses, we believe the Company must improve its internal accounting and bookkeeping personnel and procedures. With respect to significant deficiencies, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. To remediate this situation, we continue to seek to recruit experienced professionals to augment and upgrade our financial staff to improve our internal accounting and bookkeeping personnel and practices as well as improve our issues of timeliness and completeness in US GAAP financial reporting. We are continuing to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically. We have already compiled a model internal control flow chart and are evaluating our procedures against this model.

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

Report on Internal Control Over Financial Reporting

Management recognizes its responsibility for establishing and maintaining adequate internal control over financial reporting and has designed internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related notes in accordance with ~~accounting principles~~ generally accepted accounting principles in the United States of America. Management assessed the effectiveness of its internal control over financial reporting as of November 30, ~~2011~~2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, our management concluded that solely as a result of the material weaknesses and significant deficiencies in internal control as described above, the Company did not maintain effective internal control over financial reporting as of November 30, ~~2011~~2012.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of ~~2011~~2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures. Our management, including our Chief Executive Officer and Acting Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B.

OTHER INFORMATION

None.

- 44 -

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors, Executive Officers and Certain Significant Employees

As of the date of this annual report, our directors, executive officers and significant employees are as follows:

Name	Age	Position
WenXiang Ding	56	Chief Executive Officer, President, Treasurer & Director; General Manager of Coal Group and Heat Power
Wenxiang Ding	57	Chief Executive Officer, President, Treasurer & Director; General Manager of Coal Group and Heat Power
YanHua Li	54	Vice General Manager of Coal Group, Director
Yanhua Li	55	Vice General Manager of Coal Group, Director
Fu Xu	4849	Acting Chief Financial Officer
Stephen Markscheid (1)(2)(3)	57	Director
Shiwen Zhou	48	Director
Paul Li(1)(2)(3)	60	Director
Tieming Ge(1)(2)(3)	66	Director

~~(1)~~Wenxiang ~~Audit~~Ding ~~Committee~~has ~~Member~~been our CEO, President, Director, and Treasurer since November 5, 2004. Wenxiang Ding is responsible for implementing our investment projects, financial budgets and forecasts, overseeing research and development and human resources and marketing. Wenxiang Ding is also responsible for our overall direction and various initiatives as needed from time to time in maintaining the health of the Company. Wenxiang Ding is currently overseeing our marketing and public relations efforts in maintaining current customers and attracting new customers and also initiating contracts with sectors of the Inner Mongolia government for expansion of electrical and heating networks. In August, 2000, Wenxiang Ding became the Executive Director and General Manager of Coal Group where he brought his experience in the coal industry from serving as the Chief Accountant and, Operations Director of Inner Mongolia Coal of the People’s Republic of China General Political Department. Wenxiang Ding also founded Heat Power in September 2003 where he served as the General Manager until November 2004. In 1993, Wenxiang Ding obtained training in coal mine management from the Beijing Coal Management Institute. During 2002, he obtained further training in coal mine production and public utility management from the Inner Mongolia Coal Industry Bureau and Urdos City Construction Bureau, respectively. Wenxiang Ding is the founder of the Company and has more than 10 years of experience in running the business operations of the Company. We believe that Wenxiang Ding brings essential knowledge of the coal and heat provision industries and Company operations to the Board of Directors.

~~(2)~~Yanhua ~~Compensation~~Li ~~Committee~~became ~~Member~~a director on November 5, 2004. She is employed as the Vice General Manager of the Coal Group, a position she has held since 2000. Her responsibilities include overseeing our finance and human resources departments. Ms. Li is also the General Manager of Inner Mongolia XiangRong Commercial and Trade Co., Ltd. where she oversees the finance department and is responsible for operations management and has been for the past 5 years. Ms. Li has more than 10 years of experience in running the business operations of the Company and we believe that she brings essential knowledge of our operations to the Board of Directors. Ms. Li is married to Wenxiang Ding.

~~(3)~~Fu ~~Nominating~~Xu became our Acting Chief Financial Officer on February 26, 2012. From February 2008 to December 2009, Mr. Xu served as Chief Financial Officer of the Company. Mr. Xu obtained his diploma in Financial Management from the Inner Mongolia Finance and ~~Corporate~~Economics ~~Governance~~Academy ~~Committee~~in 1989. Mr. Xu brings his experience in financial management and internal audit from his work from previous companies of which he was appointed CFO. From 1989 until 2000, Mr. Xu was the CFO of Inner Mongolia Foreign Trade Group Co., Ltd. From 2000 until 2007, Mr. Xu was the CFO of Inner Mongolia XiRiMu Dry Goods Co., Ltd.

~~WenXiang~~Shiwen ~~Ding~~Zhou ~~has~~joined ~~been~~the ~~our~~Company ~~CEO,~~as ~~President,~~a ~~Director, and~~director ~~Treasurer~~on ~~since November 5, 2004. WenXiang Ding is responsible for implementing our investment projects, financial budgets~~September ~~and forecasts~~21, ~~overseeing research and development and human resources and marketing~~2012. ~~WenXiang~~She ~~Ding~~was isappointed ~~also~~by ~~responsible~~the ~~for~~Company’s ~~our overall~~board ~~direction~~of ~~and~~directors ~~various~~to ~~initiatives~~serve as ~~needed~~a ~~from~~director ~~time~~for toa ~~time~~term inexpiring ~~maintaining~~at the ~~health~~next annual meeting of ~~the~~shareholders. ~~Company~~Ms. ~~WenXiang~~Zhou ~~Ding~~ is ~~currently~~ ~~overseeing~~an ~~our~~associate ~~marketing~~professor ~~and~~of ~~public~~law ~~relations~~at ~~efforts~~the inSchool ~~maintaining~~of ~~current~~Law ~~customers and attracting new customers and also initiating contracts with sectors~~ of ~~the~~South ~~Inner~~China ~~Mongolia~~University ~~government for expansion~~ of ~~electrical~~Technology located ~~and~~in ~~heating~~Guangzhou, ~~networks. In August~~China, ~~2000,~~ ~~WenXiang~~where ~~Ding~~she ~~became~~teaches ~~the~~Intellectual ~~Executive~~Property ~~Director~~Law and ~~General~~other ~~Manager~~commercial oflaw ~~Coal~~subjects. ~~Group~~Before ~~where~~she hebegan ~~brought his experience in the coal~~teaching ~~industry~~at ~~from serving as~~ the ~~Chief~~School ~~Accountant and, Operations Director~~ of ~~Inner~~Law ~~Mongolia~~in ~~Coal~~2004, ~~of the People’s Republic of China General Political Department~~Ms. ~~WenXiang~~Zhou ~~Ding~~was ~~also~~an ~~founded~~attorney ~~Heat~~at ~~Power~~a inGuangzhou ~~September~~law ~~2003~~firm where heshe ~~served~~handled asforeign ~~the~~economic, ~~General~~business, ~~Manager~~civil, ~~until~~maritime ~~November~~and ~~2004. In~~intellectual ~~1993,~~property ~~WenXiang~~law ~~Ding~~matters. ~~obtained~~Before ~~training~~her inprivate ~~coal~~practice, ~~mine management from the Beijing Coal Management Institute~~Ms. ~~During~~Zhou ~~2002,~~had hebeen ~~obtained~~a ~~further~~judge ~~training~~at ~~in coal mine production and public utility management from~~ the ~~Inner~~High ~~Mongolia~~People’s ~~Coal~~Court ~~Industry~~of ~~Bureau~~Guangdong ~~and~~Province ~~Urdos~~from ~~City~~1987 ~~Construction~~to ~~Bureau,~~2000. ~~respectively~~Ms. ~~WenXiang~~Zhou ~~Ding~~ is ~~the~~experienced ~~founder~~with ofcorporate ~~the~~governance, ~~Company~~general ~~and~~business ~~has~~affairs ~~more~~and ~~than~~foreign 10trade ~~years~~matters. ofShe ~~experience~~fills ina ~~running~~non-employee ~~the~~director ~~business~~vacancy ~~operations~~on of the ~~Company.~~Board ~~We believe~~ that ~~WenXiang~~was ~~Ding~~created ~~brings~~when ~~essential~~Mr. ~~knowledge of~~Tiening ~~the~~Ge ~~coal~~resigned ~~and~~as a ~~heat~~director ~~provision~~in ~~industries~~July ~~and Company operations to the Board of Directors~~2012.

YanHua Li became a director on November 5, 2004. She is employed as the Vice General Manager of the Coal Group, a position she has held since 2000. Her responsibilities include overseeing our finance and human resources departments. Ms. Li is also the General Manager of Inner Mongolia XiangRong Commercial and Trade Co., Ltd. where she oversees the finance department and is responsible for operations management and has been for the past 5 years. Ms. Li has more than 10 years of experience in running the business operations of the Company and we believe that she brings essential knowledge of our operations to the Board of Directors. Ms. Li is married to Wenxiang Ding.-45-

Mr. Fu Xu became our Acting Chief Financial Officer on February 26, 2012. From February 2008 to December 2009, Mr. Xu served as Chief Financial Officer of the Company. Mr. Xu obtained his diploma in Financial Management from the Inner Mongolia Finance and Economics Academy in 1989. Mr. Xu brings his experience in financial management and internal audit from his work from previous companies of which he was appointed CFO. From 1989 until 2000, Mr. Xu was the CFO of Inner Mongolia Foreign Trade Group Co., Ltd. From 2000 until 2007, Mr. Xu was the CFO of Inner Mongolia XiRiMu Dry Goods Co., Ltd.

- 45 -

Stephen Markscheid joined the Company as a director in June 2010. From October 2007 to present, Mr. Markscheid has served as the chief executive officer of SynergenzBioScience Inc., a Hong Kong-based genomics company. From June 2006 to October 2007, he served as the chief executive officer of HuaMei Capital Company, Inc., a boutique investment bank focused on asset management services provided to Chinese institutional investors, and direct investments both outbound to China and inbound from China. From March 2003 to March, 2006, Mr. Markscheid served as the Senior VP – Global Risk, of GE Healthcare Financial Services, where he managed risk related to merger and acquisition transactions. Mr. Markscheid serves on the board of directors of CNinsure, Inc. (Nasdaq: CISG). He received his B.A. from Princeton University in 1976, his M.A from Johns Hopkins University – SAIS, in 1980 and his MBA from Columbia University in 1991. Mr. Markscheid is fluent in Mandarin. We believe that Mr. Markscheid’s over twenty years as a finance professional in the US, Asia and Europe, and experience with M&A, strategic investments, joint ventures and new business development across industries in emerging markets bring valuable experience to the Board of Directors.

Paul Li joined the Company as a director in June 2010. Mr. Li was the CFO of Sen Yu International Holdings, Inc., a China based hog breeding and production company (CSWG.OB) from September 2010 to August 2011. From April 2010 to July 2010, Mr. Li was a partner at Xinglongie Investment Consulting, Co., Ltd. Prior to that, from April 2007 to January 2010, Mr. Li served as manager of Kelmar Associates, a company providing consulting and auditing services to the U.S. government and undertakes forensic audits in Fortune 100 companies. From July 2004 to April 2007, Mr. Li served as an Assistant Vice President at Countrywide Financial Company/Bank of the America, where he performed risk-assessments in various audit areas and planning, supervised auditors and co-sourcing personnel in the conduct of field audits and determined audit objectives and procedures to review and assess the adequacy and application of internal controls. He received his B.A. from St. Francis College, NY, NY in 1976 and a MBA in Risk Management from College of Insurance, NY, NY in 1984. Mr. Li is a licensed Certified Public Accountant in California and New Jersey. We believe that Mr. Li’s greater than twenty years of experience in risk management, auditing and accounting will bring valuable experience to the Board of Directors.

Mr. Ge joined the Company as a director in September 2011. Mr. Ge currently serves as Chief Advisor to China National Building Materials Group Corporation, the largest building materials group in China, a role in which he has served since November 2005. Since 2006 he has served as Independent Director of CITS Group Corporation, a state-owned enterprise in China integrated with travel service, communication and transportation, foreign trade, real estate development and management and e-commerce, as Outside Director of Pangang Group Steel Vanadium & Titanium Co. Ltd, one of the largest vanadium and titanium companies in China and Vice President of China Architectural and Industrial Glass Association. Previously, Mr. Ge served as Secretary of CPC Committee of China National Building Materials Group Corporation until November 2005. Mr. Ge graduated from Beijing Building Material Industry College in 1968, majoring Silicate Applications. We believe that Mr. Ge’s experience at senior levels of businesses in China brings an unique expertise to the Board of Directors.

Term of Office

All directors hold office until the next annual stockholders’ meeting or until their death, resignation, retirement, removal, disqualification or until their successors have been elected and qualified. All officers serve at the pleasure of the board of directors.

Family Relationships

Mr. WenXiang Ding, our CEO, President, Treasurer and director and General Manager of Coal Group and Heat Power, and Ms. ~~YanHua~~Yanhua Li, a director of our company and Vice General Manager of Coal Group, are married to each other. There are no other family relationships among our executive officers, directors and significant employees.

Legal Proceedings

- 46 -

To the best of our knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of our Company during the past ten years.

Corporate Governance

Board of Directors

In determining whether our directors are independent we comply with the rules of the NYSE Amex (formerly the American Stock Exchange LLC). The board of directors will also consult with counsel to ensure that the board of director’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of 2002 with respect to the independence of audit committee members. The NYSE Amex listing standards define an “independent director” generally as a person, other than an officer or employee of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment. ~~Three~~One of our directors, ~~Messrs~~Ms. ~~Markscheid~~Zhou, Liis ~~and Ge, are~~ “independent” as that term is defined by Section 803 of the NYSE Amex Company Guide~~; accordingly, we satisfy the “independent director” requirements of NYSE Amex, which requires that a majority of a company’s directors be independent~~. All actions of the board of directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.

Board Committees

Our board of directors has anappointed ~~audit~~Shiwen ~~committee~~Zhou, aour ~~nominating~~sole ~~and~~independent ~~corporate~~director, ~~governance~~to ~~committee~~serve ~~and~~as a ~~compensation~~Special ~~committee,~~Committee ~~each~~ of ~~which~~the ~~was~~Board ~~formed~~to onevaluate, ~~June~~review 3and approve, ~~2010. Charters~~if appropriate, various strategic ~~for~~alternatives ~~each~~to ~~committee~~take ~~may~~the beCompany ~~found~~private. onOur ~~our~~board ~~English~~of ~~website~~directors atdoes ~~www~~not currently have any other committees.~~ceccec.com/en.~~

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of our company to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons also are required to furnish our company with copies of all Section 16(a) forms they file. Based solely on our review of copies of such forms received by us, we believe that during the fiscal year ~~2011~~ 2012, the executive officers and directors of the Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange Act~~, except that each Messrs~~. Markscheid and Li did not timely file a Form 4 reflecting the issuance of 20,000 stock options, which occurred on September 5, 2011, and Mr. Ge did not timely file a Form 4 reflecting the issuance of 15,000 stock options, which occurred on September 15, 2011.

~~Audit Committee~~-46-

We have a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The audit committee members consist of Messrs. Markscheid, Li and Ge. Each of these members would be considered “independent” as defined by Section 803 of the NYSE Amex Company Guide, as determined by our board of directors. The audit committee recommends to the board of directors the annual engagement of a firm of independent accountants and reviews with the independent accountants the scope and results of audits, our internal accounting controls and audit practices and professional services rendered to us by our independent accountants. The audit committee operates under a written charter. Mr. Li is the chairman of our audit committee.

Our board of directors has determined that we have at least one “audit committee financial expert,” as defined by the rules and regulations of the SEC, serving on our audit committee, and that Mr. Li is the “audit committee financial expert.”

Nominating and Corporate Governance Committee

- 47 -

The purpose of the nominating and corporate governance committee is to assist our board of directors in identifying qualified individuals to become board members, in determining the composition of the board of directors and in monitoring the process to assess board effectiveness. Each of Messrs. Markscheid, Li and Ge are members of the nominating and corporate governance committee. The nominating and corporate governance committee operates under a written charter. Mr. Ge is the chairman of nominating and corporate governance committee.

Compensation Committee

The compensation committee is responsible for (a) reviewing and providing recommendations to the board of directors on matters relating to employee compensation and benefit plans, and (b) assisting the board in determining the compensation of the chief executive officer and making recommendations to the board with respect to the compensation of the chief financial officer, other executive officers of the company and independent directors. Each of Messrs. Markscheid, Li and Ge are members of the compensation committee. The compensation committee operates under a written charter. Mr. Markscheid is the chairman of compensation committee.

Code of Ethics

We adopted a Code of Business Conduct and Ethics in February 2010. The Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, constitutes our Code of Ethics for our principal executive officer, our principal financial and accounting officer and our other senior financial officers. The Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. A printed copy of the Code of Ethics may be obtained free of charge by writing to China Energy Corporation, No.57, Xinhua East Street, Hohhot City, Inner Mongolia. The Code of Ethics is available on our English internet website at: http://www.ceccec.com/en/InvestorView.aspx?ID=130.

ITEM 11.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

We strive to provide our named executive officers with a base salary that we believe is market-rate for comparable public companies based in our area of China, and which is in line with the executive’s roles and responsibilities. We believe that other peer companies in China which are listed on U.S. stock markets would be the most appropriate to use for salary comparison purposes. However, none of our direct competitors are public companies in the U.S. We believe that the compensation of our executive officers is appropriate.

It is not uncommon for companies with operations primarily in China to have base salaries and bonuses as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to similar positions within comparable peer companies and with consideration of the executive’s relative experience in his or her position. Based on an evaluation of available information with respect to the base salaries of executives of our competitors located in China, the base salary and bonus paid to our named executive officers is in line with our domestic competitors, such as Inner Mongolia Yitai Group Co., Ltd., Inner Mongolia Manshi Coal Group Co., Ltd., Inner Mongolia Yidong Coal Group Cp., Ltd. And Inner Mongolia Huineng Coal & Power Group Co., Ltd. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.

We will consider other elements of compensation, including without limitation, short-and long-term compensation, cash and non-cash, and other equity-based compensation. We believe our current compensation package is comparable to our peers in the industry and is aimed to retain and attract talented individuals.

Executive Compensation

The following table sets forth, for the years indicated, all compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by our chief executive officer, chief financial officer and all other executive officers who received or are entitled to receive remuneration in excess of $100,000 during the stated periods; the information contained below represents compensation paid to our officers for their work related to us and the Operating Companies. These officers are referred to herein as the “named executive officers.”

- 48 -

Summary Compensation Table

The table below summarizes all compensation awarded to, earned by, or paid to our executive officers by any person for all services rendered in all capacities to us for the fiscal years ended November 30, ~~2011~~2012 and ~~2010~~2011.

																					NonEquity				Nonqualified				All
Name and Principal Position	Year		Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)				NonEquity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compen- sation ($)				Total ($)
Name																					Incentive				Deferred				Other
Wenxiang Ding, President, CEO	2012			12,000																												12,000
and													Stock				Option				Plan				Compensation				Compen-
	2011			12,000				—				—				—				—				—				—				12,000
Principal					Salary				Bonus				Awards				Awards				Compensation				Earnings				sation				Total
Yanhua Li, Coal Group Vice General Manager	2012			11,200																												11,200
Position	Year				($)				($)				($)				($)				($)				($)				($)				($)
	2011			11,200				—				—				—				—				—				—				11,200
WenXiang Ding,
Fu Xu, Acting CFO(1)	2012			9,524																												9,524
President, CEO		2011				12,000				—				—				—				—				—				—				12,000
	2011			9,524				—				—				—				—				—				—				9,524
		2010				10,800				—				—				—				—				—				—				10,800
YanHua Li, Coal Group
Vice General Manager		2011				11,200				—				—				—				—				—				—				11,200
		2010				9,000				—				—				—				—				—				—				9,000
Alex (Yuan) Gong (1)		2011				55,500				—				—				—				—				—				—				55,500
		2010				53,060				—				—				—				—				—				—				53,060

~~______________~~(1) Mr. Xu became our Acting CFO on February 26, 2012.

~~(1) Mr. Gong resigned as CFO in December 2011.~~-47-

Employment Agreements

~~Yuan “Alex” Gong~~None. On December 14, 2009 we entered into a 24-month employment agreement with Jessie International, Inc., our financial advisor, pursuant to which Jessie International, Inc. agreed to provide its president, Alex Gong, to serve as our Chief Financial Officer, at a salary of RMB 30,000 (approximately $4,625) per month. The parties to the agreement agreed to cap damages arising from any claim for breach of the agreement to RMB 20,000 ($3,083). Disputes arising under the agreement are to be submitted to the China International Economics and Commerce Arbitration Committee for arbitration.

Outstanding Equity Awards at Fiscal Year-end

None.

Director Compensation

The following table provides summary information concerning compensation awarded to, earned by, or paid to any of our directors for all services rendered to us in all capacities for the ~~fiscal~~ fiscal year ended November 30, ~~2011~~2012.

										Change in
Name and	Fees Earned and Paid in		Stock		Option			Non-Equity Incentive Plan		Change in Pension Value and Non- qualified Compensation		All other
										Pension Value
Principal	Cash		Award(s)		Award(s)			Compensation		Earnings		Compensation		Total
								Non-Equity		and Non-
Position	($)		($)		($)			(#)		($)		($)		($)
	Fees Earned							Incentive		qualified
Stephen Markscheid (1)		6,600		-		1,766			-		-		-		8,366
	and Paid in		Stock		Option			Plan		Compensation		All other
Paul Li (1)		12,600		-		1,766			-		-		-		14,366
Name and	Cash		Award(s)		Award(s)			Compensation		Earnings		Compensation		Total
Tieming Ge (1)		4,000		-		1,325			-		-		-		5,325
Principal Position	($)		($)		($)			(#)		($)		($)		($)
Shiwen Zhou (2)		4,762		-					-		-		-		4,762
Brock Silvers (1)		12,300		-		8,702	(2)		-		-		-		21,002
Stephen Markscheid		12,300		-		14,855	(3)		-		-		-		27,155
Paul Li		22,500		-		14,855	(4)		-		-		-		37,355
TiemingGe		2,613		-		4,210	(5)		-		-		-		6,823

~~________________________________________~~ _________________________________

(1) MrMessrs. ~~Silvers~~Stephen Markschied, ~~our~~Paul Li and Teiming Ge, our former ~~director~~directors, resigned onin ~~September 2~~July, ~~2011~~2012.

(2) ~~20,000~~Ms. ofZhiwen ~~the~~Zhou ~~options~~was ~~granted~~appointed toa ~~Mr.~~director ~~Silvers~~by ~~reflects~~our ~~compensation~~board of ~~earned~~directors inon ~~2011~~September 21, 2012.

(3) 20,000 of the options granted to Mr. Markscheid reflects compensation earned in 2011.

(4) 20,000 of the options granted to Mr. Li reflects compensation earned in 2011.

(5) 15,000 of the options granted to Mr. Ge reflects compensation earned in 2011.

- 49 -

We do not pay compensation to our employee directors.

Pursuant to one year agreements effective as of May 31, 2010, ~~each of Messrs~~Mr. ~~Silvers and~~ Markscheid ~~are~~was entitled to a fee of $10,000 per year for the term of ~~their~~his ~~respective agreements~~agreement, while Mr. Li will receive an annual fee of $15,000 for the term of his agreement. Pursuant to their agreements, Messrs. ~~Silvers,~~ Markscheid and Li were each awarded (i) a 10-year option to purchase up to 20,000 shares of our common stock at an exercise price of $2.02 per share, such option vesting in equal, quarterly installments over the term of their respective agreements, commencing August 31, 2010, so long as each director is, respectively, serving as a member of the Board of Directors at each such time. We also agreed to (i) pay each such independent director $800 for each board or committee meeting attended by telephone, (ii) pay each such independent director $2,500 for each board or committee meeting attended in person and (iii) reimburse each such independent director for expenses related to his attending meetings of the board, meetings of committees of the board, executive sessions and stockholder meetings.

-48-

On September 15, 2011, the Company and Mr. Tieming Ge entered into a director agreement (the “Agreement”). The Agreement provides that Mr. Ge will receive cash compensation of $7,500 during the term of the Agreement, as well as an option to purchase up to 15,000 shares of the Company's common stock with an exercise price of $0.47 per share. Additionally, Mr. Ge will receive RMB800 for each board or committee meeting that he attends, and he will be reimbursed for his expenses incurred while attending such meetings. The option will vest in equal, quarterly installments on the last of the Company’s fiscal quarter during the term of the Agreement (beginning with the fiscal quarter ending November 30, 2011). The term of the Agreement is from September 1, 2011 to May 31, 2012.

Pursuant to one year agreements effective as of June 1, 2011, Messrs. Markscheid and Li were each awarded (i) a 10-year option to purchase up to 20,000 shares of our common stock at an exercise price of $0.39 per share, such option vesting in equal, quarterly installments over the term of their respective agreements, commencing August 31, 2011, so long as each director is, respectively, serving as a member of the Board of Directors at each such time. Mr. Li is entitled to a fee of $22,000 per year for the term of his agreement, while Mr. Markscheid will receive an annual fee of $10,000 for the term of his agreement. Pursuant to their agreements, we also agreed to (i) pay each such independent director $800 for each board or committee meeting attended by telephone, (ii) pay each such independent director $2,500 for each board or committee meeting attended in person and (iii) reimburse each such independent director for expenses related to his attending meetings of the board, meetings of committees of the board, executive sessions and stockholder meetings.

Ms. Zhou and the Company do not have a written agreement but the Company has agreed to pay Ms. Zhou $4,762 per year for her appointment as a director.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth as of ~~March~~February 1428, ~~2012~~2013 the ~~number~~ number of shares of our common stock beneficially owned by (i) each person who is known by us to be the beneficial owner of more ~~than~~ than five percent of our common stock; (ii) each director; (iii) each of the named executive officers in the Summary Compensation Table; and (iv) all directors and executive officers as a group. As of ~~March~~February 1428, ~~2012~~2013, we had 45,060,000 shares of common stock issued and outstanding.

Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Unless otherwise indicated, the stockholders listed in the table have sole voting and investment power with respect to the shares indicated. Unless otherwise noted, the principal address of each of the stockholders, directors and officers listed below is No. 57 Xinhua East Street, Hohhot, Inner Mongolia, People’s Republic of China, 010010.

-All 50share -ownership figures include shares of our common stock issuable upon securities convertible or exchangeable into shares of our common stock within sixty (60) days of February 28, 2013, which are deemed outstanding and beneficially owned by such person for purposes of computing his or her percentage ownership, but not for purposes of computing the percentage ownership of any other person.

All share ownership figures include shares of our common stock issuable upon securities convertible or exchangeable into shares of our common stock within sixty (60) days of March 14, 2012, which are deemed outstanding and beneficially owned by such person for purposes of computing his or her percentage ownership, but not for purposes of computing the percentage ownership of any other person.

Name and Address of Beneficial Owner and Office, if any	Amount and Nature of Beneficial Ownership (1)			Percent of Class (1)
Wenxiang Ding, CEO, President, Director, and Treasurer		26,989,107	(2)		60	%
Yanhua Li, Director		0			0
Fu Xu, Acting Chief Financial Officer		0			0
Shiwen Zhou, Director		0			0
Fortune Place Holdings Limited		26,989,107	(2)		60	%
Officers and Directors as a Group		26,989,107			60	%

Name and Address of Beneficial Owner and Office, if any	Amount and Nature of Beneficial Ownership (1)			Percent of Class (1)
WenXiang Ding, CEO, President, Director, and Treasurer		26,989,107	(2)		60	%
YanHua Li, Director		0			0
Fu Xu, Acting Chief Financial Officer		0			0
Paul Li, Director		35,000	(3)		*
Stephen Marksheid, Director		35,000	(3)		*
Tieming Ge, Director		10,000	(4)		*
Fortune Place Holdings Limited		26,989,107	(2)		60	%
Officers and Directors as a Group		27,079,107			60	%

Less than one percent.

~~______________~~-49-

*Less(1) Beneficial ownership ~~than~~is ~~one~~determined ~~percent~~in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to securities anticipated to be exercisable or convertible at or within 60 days of the date hereof, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. The indication herein that shares are anticipated to be beneficially owned is not an admission on the part of the listed stockholder that he, she or it is or will be a direct or indirect beneficial owner of those shares. The business address of each holder is the principal address of the Company.

(12)~~Beneficial~~ Mr. WenXing ~~ownership~~Ding, isour ~~determined~~CEO inand ~~accordance~~President, ~~with~~holds ~~the rules~~all of the ~~SEC~~shares ~~and~~through ~~generally~~Fortune ~~includes~~Place. ~~voting~~Pursuant ~~or investment power with respect~~ to ~~securities.~~the ~~Shares~~Share ofTransfer ~~Common Stock subject to~~Agreement, ~~securities~~as ~~anticipated to be exercisable or convertible at or within 60 days~~ of ~~the~~August ~~date~~8, ~~hereof~~2012, ~~are~~Wenxiang ~~deemed~~Ding ~~outstanding~~purchased ~~for~~100% ~~computing the percentage~~ of the ~~person~~equity ~~holding~~interests ~~such option or warrant but are not deemed outstanding for computing the percentage~~ of ~~any other~~Fortune ~~person.~~Place ~~The~~at ~~indication~~certain ~~herein~~prices that ~~shares~~vary ~~are~~depending upon ~~anticipated~~whether towe beachieved ~~beneficially~~certain ~~owned~~revenue istargets ~~not~~becoming ~~an admission on~~ the ~~part~~sole ofholder ~~the listed stockholder that he, she or it is or will be a direct or indirect beneficial owner~~ of ~~those shares. The business address of each holder is~~ the ~~principal~~equity ~~address~~interests of ~~the~~Fortune ~~Company~~Place.

(2)Ms. Ninghua Xu was the sole record holder of 100% of the equity interests of Fortune Place Holdings Limited. On November 30, 2010, Ms. Xu entered into an Entrustment Agreement with WenXiang Ding, our Chief Executive Officer, pursuant to which Ms. Xu granted WenXiang Ding the right to vote and dispose of the shares of the Company held by Fortune Place Holdings Limited. WenXiang Ding may be deemed to beneficially own all 26,989,107 shares of common stock of the Company held by Fortune Place Holdings Limited. In addition, Ms. Xu and Mr. Ding entered into a Share Transfer Agreement dated November 30, 2010, pursuant to which Mr. Ding has the right to purchase all of the shares of Fortune Place from Ms. Xu upon the achievement of certain performance targets by the Company over a period of 18 months. On August 22, 2011, Mr. Ding partially exercised his option and acquired 1/3 of the shares of Fortune Place held by Ms. Xu. After giving effect to such exercise, Mr. Ding may be deemed to have an indirect pecuniary interest in 8,996,369 shares of the Issuer held by Fortune Place.

(3)Includes a 10-year option to purchase up to 35,000 shares of common stock of the Company which is fully vested and exercisable.

(4)Includes a 10-year option to purchase up to 10,000 shares of common stock of the Company which is fully vested and exercisable.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Shareholder Loans to the Company

Our shareholders have advanced the following amounts to Heat Power for the purposes of satisfying working capital needs as of November 30, ~~2011~~2012 and ~~2010~~2011:

	2011		2010
	2012		2011
Hangzhou Dayuan Group, Ltd.	$	5,~~736~~903,~~898~~204	$	5,~~103~~736,~~245~~898
Inner Mongolia Duoyida Mining Co., Ltd.		2,~~013~~145,~~394~~131		12,~~925~~013,~~783~~393
Ordos City YiYuan Investment Co. Ltd.		1,~~702~~986,~~421~~244		1,~~743~~702,~~288~~421
Total	$	910,~~452~~034,~~713~~579	$	89,~~772~~452,~~316~~712

-During 51fiscal -2012, the largest aggregate amount of the shareholder loans at any given point in time was $5,903,204. These loans are payable upon demand and interest is charged at 5.31% and 7.32% per annum on balances owing. We have no formalized agreements with our shareholders guaranteeing that certain amounts of funds will be available to us in the future. We may exhaust this source of funding anytime.

During fiscal 2011, the largest aggregate amount of the shareholder loans at any given point in time was $9,452,713. These loans are payable upon demand and interest is charged at 5.31% per annum on balances owing. We have no formalized agreements with our shareholders guaranteeing that certain amounts of funds will be available to us in the future. We may exhaust this source of funding anytime.

Notes Receivable from Related Parties

The Company made certain loans for strategic purposes to entities affiliated with Wenxiang Ding, our Chairman and CEO. As of November 30, 2011 and 2010 the amounts outstanding to related parties were as follows:

	2011		2010
Inner MogoliaTehong Investment Co., Ltd. (no interest)	$	-	$	8,884,242
Inner Mongolia Tehong Coal Chemical Co., Ltd. (no interest)		-		3,275,836
Inner MogoliaTehong Glass Co., Ltd. (with interest at 11.16%)		-		477,319
Total	$	-	$	12,637,397

Notes Receivables were fully repaid in 2011.

We made advances in the amount of $752,380 to Zhunqi Hongsheng Brick Making Co., Ltd., an entity affiliated with us. Mr. Ding, our Chairman, who is a PRC record owner of Heat Power, together with three other PRC record owners of Heat Power own 100% of the equity interests in Zhunqi Hongsheng Brick Making Co., Ltd. We control Heat Power through VIE arrangements between Tehong Consulting and Heat Power and its PRC record holders. The advances are non-interest bearing and payable on demand. As of November 30, 2011, those advances had not been repaid.

Other Transactions with Control Persons

Share Option Agreement and Entrustment Agreement

On November 30, 2010, ~~WenXiang~~Wenxiang Ding and Ninghua Xu entered ~~into~~ ainto ~~share~~the ~~transfer~~Share ~~agreement~~Transfer Agreement pursuant to which ~~WenXiang~~Wenxiang Ding, in consideration of ~~the~~ his contributions to the Company and as an an incentive to him to continue his commitment to the Company and its affiliates, was granted anoptions ~~option~~ to purchase up to 100% of the common shares of Fortune Place from Ninghua Xu. ~~WenXiang~~ On ~~Ding~~August ~~may~~22, ~~only~~2011, ~~exercise~~March ~~the~~26, ~~option~~2012 ~~at a certain exercise price upon the fulfillment of certain performance targets set forth in the share transfer agreement. In the event that the Company~~ and ~~its~~August ~~affiliates do not achieve the aforesaid performance targets~~8, ~~then~~2012 Mr. Ding ~~may exercise the option~~exercised ateach anof ~~alternative~~his ~~exercise~~three ~~price~~options onrespectively ~~the date at which the option would have otherwise been exercisable had the performance targets been met. On August 22, 2011, Mr. Ding partially exercised his option~~ and purchased ~~1/3~~100% of the outstanding shares of Fortune Place Holdings Limited pursuant to such share transfer agreement.

On November 30, 2010, ~~WenXiang~~Wenxiang Ding and Ninghua Xu entered ~~into~~ into an entrustment agreement, pursuant to which ~~Ninghua~~NinghuaXu Xu entrusts ~~WenXiang~~Wenxiang Ding to manage Fortune Place, the Company and its ~~affiliates~~ affiliates as the exclusive agent of ~~Ninghua~~NinghuaXu Xu with respect to all matters concerning Ninghua Xu’s shareholding in Fortune Place, including attending shareholders’ meeting, exercising shareholder’s rights (including voting rights), and designating and appointing legal representatives and certain other senior officers. The term of aforesaid entrustment agreement is 10 years, during which, except as otherwise provided by applicable laws, this entrustment agreement shall not be rescinded or terminated by any party unless agreed upon mutually.

-50-

VIE Contractual Arrangements

- 52 -

On November 30, 2010, Tehong Consulting and each of the Operating Companies entered into exclusive business cooperation agreements, pursuant to which Tehong Consulting provides technical and consulting services related to the business operations of each of the Operating Companies. As consideration for such services, each of the Operating Companies has agreed to pay an annual service fee to Tehong Consulting in an amount equal to 100% of its net income for such year. The term of each of these agreements is 10 years from the date thereof. Tehong Consulting may terminate the agreements at any time upon giving 30 days’ prior written notice to each of the Operating Companies.

Tehong Consulting entered into option agreements on November 30, 2010 with each of the Operating Companies, and each of the Registered Owners of the Operating Companies, pursuant to which Tehong Consulting has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in each of the Operating Companies owned by each of the Registered Owners of the Operating Companies. To the extent permitted by the PRC laws, the purchase price for the entire equity interest will be RMB1.00 or the minimum price required by PRC law or government practice. Each of the exclusive option agreements has a 10 year term.

On November 30, 2010, each of the Registered Owners of the Operating Companies issued a power of attorney providing Tehong Consulting the power to act as his/her or its exclusive agent with respect to all matters related to his/her or its ownership interest in each of the Operating Companies, including the right to attend shareholders’ meetings of each of the Operating Companies and the right to exercise voting rights to which he/she or it is entitled under PRC law.

Tehong Consulting entered into equity interest pledge agreements on November 30, 2010 with each of the Operating Companies, and each of the Registered Owners of the Operating Companies, pursuant to which each of the Registered Owners of the Operating Companies pledged his/her or its equity interest in the Operating Companies to Tehong Consulting to secure the obligations of each of the Operating Companies under the exclusive business cooperation agreements as described above. In addition, the Registered Owners of the Operating Companies agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in the Operating Companies that would affect Tehong Consulting’s interests. Each of the equity interest pledge agreements will expire when each of the Operating Companies fully performs its obligations under the exclusive business cooperation agreements described above. All the equity interest pledges became effective on November 30, 2010 upon their registration with the competent administration of industry and commerce.

Review, Approval or Ratification of Transactions with Related Parties

Our audit committee, which iswas comprised of ~~our~~ three independent directors, iswas responsible for reviewing and approving any related party transactions under its charter. The audit committee approved our entering into the VIE contractual arrangements.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Below is the aggregate amount of fees billed for professional services rendered by our principal accountants with respect to the Company’s last two fiscal years:

	2011		2010
	2012		2011
Audit fees	$	~~170~~180,000	$	~~145~~170,000
Audit-related fees		-		-
Tax fees		~~7,000~~		-7,000
All other fees		-		-
Total	$	~~177~~180,000	$	~~145~~177,000

All of the professional services rendered by principal accountants for the audit of the our annual financial statements and quarterly reviews of financial statements that are normally provided by by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by ~~the~~ ~~Board~~our board of ~~Directors~~directors.

- 53 51-

Pre-Approval Process, Policies and Procedures

Our audit committee generally pre-approves all audit and permissible non-audit services performed by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services.

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(1)

Financial Statements: Consolidated Financial Statements start on page F-1.

(2)

Not applicable.

(3)

See exhibits referred to below.

(b)	The exhibits listed below are filed as part of this Annual Report.

(c)	Not applicable.

Exhibit Number	~~Description~~	Description
3.1	~~Restated Articles Of Incorporation (1)~~	Restated Articles Of Incorporation (2)
3.2	~~Bylaws of China Energy Corporation (1)~~	Bylaws of China Energy Corporation (2)
10.1	~~Employment Agreement dated December 14, 2009, by and between the Company and Jessie International Inc. (2)~~	Employment Agreement dated December 14, 2009, by and between the Company and Jessie International Inc. (3)
10.3	Independent Director Agreement with Brock Silvers dated May 31, 2010 (3)
10.4		Independent Director Agreement with Stephen Markscheid dated May 31, 2010 (3)
10.4	Independent Director Agreement with Stephen Markscheid dated May 31, 2010 (3)
10.5		Independent Director Agreement with Paul Li dated May 31, 2010 (3)
10.5	Independent Director Agreement with Paul Li dated May 31, 2010 (3)
10.6		Office Building Lease for the Company’s office space (2)
10.6	Office Building Lease for the Company’s office space (1)
10.7		Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and Inner Mongolia Tehong Coal Power Group Co., Ltd., dated November 30, 2010 (5)
10.7	Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and Inner Mongolia Tehong Coal Power Group Co., Ltd., dated November 30, 2010 (4)
10.8		Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (5)
10.8	Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of WenXiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (4)
10.9		Form of Equity Interest Pledge Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (5)
10.9	Form of Equity Interest Pledge Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Tehong Coal Power Group Co., Ltd. and each of WenXiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (4)
10.10		Form of Power of Attorney by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and each of Wenxiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (5)
10.10	Form of Power of Attorney by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and each of WenXiang Ding, Yanhua Li, Yi Ding and Biao Ding, dated November 30, 2010 (4)
10.11		Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and Inner Mongolia Zhunger Heat Power Co., Ltd., dated November 30, 2010 (4)
10.11	Exclusive Business Cooperation Agreement by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and Inner Mongolia Zhunger Heat Power Co., Ltd., dated November 30, 2010 (4)
10.12		Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., and Inner Mongolia Duoyida Mining Co., Ltd., dated November 30, 2010 (5)
10.12	Form of Exclusive Option Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., and Inner Mongolia Duoyida Mining Co., Ltd., dated November 30, 2010 (4)
10.13		Form of Equity Interest Pledge Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., Inner Mongolia Yiduoda Mining Co., Ltd., dated November 30, 2010 (5)
10.13	Form of Equity Interest Pledge Agreement by and among Beijing Tehong Energy Technology Consulting Co., Ltd., Inner Mongolia Zhunger Heat Power Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., Inner Mongolia Yiduoda Mining Co., Ltd., dated November 30, 2010 (4)
10.14		Form of Power of Attorney by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., Inner Mongolia Duoyida Mining Co., Ltd., dated November 30, 2010 (5)
10.15		Termination and Restructuring Agreement by and among the Company, Inner Mongolia Tehong Coal And Power Group Co., Ltd., Inner Mongolia Heat Power Co., Ltd., the Beijing Tehong Energy Technology Consulting Co., Ltd., Pacific Projects Inc. and the respective stockholders of Inner Mongolia Tehong Coal And Power Group Co., Ltd., and Inner Mongolia Heat Power Co., Ltd., dated November 30, 2010 (5)

- 54 52-

10.14	Form of Power of Attorney by and between Beijing Tehong Energy Technology Consulting Co., Ltd. and each of Ordos City YiYuan Investment Co., Ltd., Inner Mongolia Duoyida Mining Co., Ltd., dated November 30, 2010 (4)
10.16		Termination and Transfer Agreement by and between Georgia Pacific Investments Inc., Wenxiang Ding, Yanhua Li, Fortune Place Holdings Limited, and NinghuaXu dated November 30, 2010 (5)
10.15	Termination and Restructuring Agreement by and among the Company, Inner Mongolia Tehong Coal And Power Group Co., Ltd., Inner Mongolia Heat Power Co., Ltd., the Beijing Tehong Energy Technology Consulting Co., Ltd., Pacific Projects Inc. and the respective stockholders of Inner Mongolia Tehong Coal And Power Group Co., Ltd., and Inner Mongolia Heat Power Co., Ltd., dated November 30, 2010 (4)
10.17		Termination and Transfer Agreement among Axim Holdings Ltd., Yi Ding, Biao Ding, Fortune Place Holdings Limited, and NinghuaXu dated as of November 30, 2010 (5)
10.16	Termination and Transfer Agreement by and between Georgia Pacific Investments Inc., Wenxiang Ding, Yanhua Li, Fortune Place Holdings Limited, and Ninghua Xu dated November 30, 2010 (4)
10.18		Termination Agreement among the Company, Georgia Pacific Investments Inc. and Axim Holdings Ltd. dated as of November 30, 2010 (5)
10.17	Termination and Transfer Agreement among Axim Holdings Ltd., Yi Ding, Biao Ding, Fortune Place Holdings Limited, and Ninghua Xu dated as of November 30, 2010 (4)
10.19		Entrustment Agreement between Wenxiang Ding and NinghuaXu dated November 30, 2010 (5)
10.18	Termination Agreement among the Company, Georgia Pacific Investments Inc. and Axim Holdings Ltd. dated as of November 30, 2010 (4)
10.20		Share Option Agreement between Wenxiang Ding and NinghuaXu dated November 30, 2010 (5)
10.19	Entrustment Agreement between Wenxiang Ding and Ninghua Xu dated November 30, 2010 (4)
10.21		Independent Director Agreement by and between the Company and Tieming Ge dated September 15, 2011 (6)
10.20	Share Option Agreement between Wenxiang Ding and Ninghua Xu dated November 30, 2010 (4)
10.22		Independent Director Agreement with Stephen Markscheid dated September 5, 2011 (1)
10.21	Independent Director Agreement by and between the Company and Tieming Ge dated September 15, 2011 (5)
10.23		Independent Director Agreement with Paul Li dated September 5, 2011 (1)
10.22*	Independent Director Agreement with Stephen Markscheid dated September 5, 2011
21.1		Subsidiaries of China Energy Corporation (2)
10.23*	Independent Director Agreement with Paul Li dated September 5, 2011
31.1*		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
21.1	Subsidiaries of China Energy Corporation (1)
31.2*		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1*	Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief FinancialOfficer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of 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 Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith
(1)	Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 114, ~~2011~~2012.

(2) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 18, 2009.

(2)	Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 1, 2011.

(3)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 18, 2009.

(34) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 4, 2010.

(45) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 6, 2010.

(56) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 21, 2011.

~~(6) Incorporated by reference to our Annual Report on Form 10~~-~~K filed with the SEC on March 1, 2011.~~53-

-CHINA 55ENERGY -CORPORATION

~~CHINA ENERGY CORPORATION~~ AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, ~~2011~~ 2012 AND ~~2010~~2011

AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Stockholders of China Energy Corporation

We have audited the accompanying consolidated balance sheets of China Energy Corporation and subsidiaries (the “Company”) as of November 30, ~~2011~~2012 and ~~2010~~2011, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years ended November 30, ~~2011~~2012 and ~~2010~~2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the China Energy Corporation and subsidiaries as of November 30, ~~2011~~2012 and ~~2010~~2011, and the consolidated results of their operations and their cash flows for each of the two years ~~in the period~~ ended November 30, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Wei, Wei & Co., LLP

New York, New York

~~March~~April 145, ~~2012~~2013

F-1

CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	November 30,
	2011		2010
	2012		2011
	(U.S.$)		(U.S.$)
ASSETS
Current assets:
Cash and cash equivalents	$	3111,~~007~~815,~~269~~027	$	431,~~580~~007,~~540~~269
Accounts receivables, net of allowance for doubtful accounts of $11,251 and $54,747, respectively		17,364,962		5,748,007
Accounts receivables, net of allowance for doubtful accounts of $295,356 and $11,251, respectively		18,972,155		17,364,962
Other receivables		244,~~562~~636,~~536~~311		424,~~091~~562,~~867~~536
Inventories		10,096,645		3,248,605
Inventories, net of reserve for write down to market of $210,672 and $0, respectively		14,018,922		10,096,645
Prepaid expenses		~~323~~678,~~072~~402		-323,072
Advance to suppliers		2760,~~566~~837,~~516~~720		427,~~516~~566,~~324~~516
Total current assets		110,921,000		22,185,343
Loan to related party		37,590,281		-
Fixed assets, net		62,937,747		57,607,500
Total current assets		148,548,818		110,921,000
Fixed assets, net		67,758,295		62,937,747
Other assets:
Investment property, net of accumulated depreciation of $475,649 and $288,735, respectively		5,730,169		4,350,739
Investment property, net of accumulated depreciation of $662,496 and $475,649, respectively		5,612,099		5,730,169
Mining right, net of amortization of $1,635,072 and $1,133,133, respectively		3,091,565		3,387,551
Mining right, net of amortization of $2,060,999 and $1,635,072, respectively		2,779,505		3,091,565
Restricted cash		~~573~~590,~~542~~961		~~546~~573,~~048~~542
Other long term assets		36,~~889~~147,~~144~~833		~~560~~3,~~250~~889,144
Notes receivable		-		14,679,099
Total other assets		15,130,398		13,284,420
Total other assets		13,284,420		23,523,687
TOTAL ASSETS	$	231,437,511	$	187,143,167
TOTAL ASSETS	$	187,143,167	$	103,316,530
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term bank loans	$	2946,~~138~~575,~~242~~122	$	929,~~599~~138,~~520~~242
Accounts payable		2123,~~716~~455,~~148~~106		1621,~~000~~716,~~738~~148
Advances from customers		1012,~~321~~584,~~920~~079		510,~~278~~321,~~848~~920
Accrued liabilities		~~629~~1,~~016~~235,599		~~374~~629,~~530~~016
Other payables		139,~~111~~310,~~017~~598		213,~~838~~111,~~663~~017
Stockholder loans		910,~~452~~034,~~712~~579		89,~~772~~452,~~316~~712
Current portion of finance obligation		13,~~695~~237,~~944~~653		-1,695,944
Current portion of deferred income		12,~~333~~039,~~695~~636		1,~~044~~333,~~326~~695
Total current liabilities		87108,~~398~~472,~~694~~372		4387,~~908~~398,~~941~~694
Non-current liabilities:
Non-current liabilities
Finance obligation, net of current portion		610,~~906~~889,~~957~~281		-6,906,957
Deferred income, net of current portion		813,~~804~~528,~~664~~969		78,~~451~~804,~~567~~664
Total non-current liabilities		1524,~~711~~418,~~621~~250		715,~~451~~711,~~567~~621
Total liabilities		~~103~~132,~~110~~890,~~315~~622		51103,~~360~~110,~~508~~315
Commitments and contingencies		-		-
Stockholders’ equity:
Preferred stock: no par value; 5,000,000 shares and 0 shares authorized at November 30, 2011 and November 30, 2010, respectively; none issued and outstanding shares		-		-
Preferred stock: no par value; 5,000,000 shares authorized; none issued and outstanding shares		-		-
Common stock: $0.001 par value; 195,000,000 shares and 200,000,000 shares authorized at November 30, 2011 and November 30, 2010, respectively; 45,060,000 shares and 45,000,000 issued and outstanding at November 30, 2011 and November 30, 2010, respectively		45,060		45,000
Common stock: $0.001 par value; 195,000,000 shares authorized; 45,060,000 shares issued and outstanding at November 30, 2012 and 2011, respectively		45,060		45,060
Additional paid-in capital		10,~~620~~625,~~368~~225		910,~~070~~620,~~007~~368
Retained earnings		5668,~~818~~859,~~378~~933		2956,~~642~~818,~~370~~378
Statutory reserves		9,~~032~~294,~~855~~616		89,~~573~~032,~~636~~855
Accumulated other comprehensive income		79,~~516~~722,~~191~~055		47,~~625~~516,~~009~~191
Total stockholders’ equity		8498,~~032~~546,~~852~~889		5184,~~956~~032,~~022~~852
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	~~187~~231,~~143~~437,~~167~~511	$	~~103~~187,~~316~~143,~~530~~167

See notes to the consolidated financial statements.

F-21

CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF Income And OTHER comprehensive income

FOR THE YEARS ENDED NOVEMBER 30, ~~2011~~2012 AND ~~2010~~2011

	2011			2010
	2012			2011
	(U.S.$)			(U.S.$)
Revenues	$	~~157~~246,~~686~~062,~~054~~847		$	88157,~~045~~686,~~275~~054
Cost of revenues		(~~104~~209,~~933~~125,~~710~~559	)		(54104,~~118~~933,~~119~~710	)
Gross profit		5236,~~752~~937,~~344~~288			3352,~~927~~752,~~156~~344
Operating expenses:
Selling and marketing		79,~~189~~134,~~263~~905			57,~~509~~189,~~682~~263
General and administrative		57,~~991~~529,~~372~~404			35,~~816~~991,~~461~~372
Total operating expenses		1316,~~180~~664,~~635~~309			913,~~326~~180,~~143~~635
Income from operations		3920,~~571~~272,~~709~~979			2439,~~601~~571,~~013~~709
Other income and expenses:
Other income (expenses):
Finance expenses, net		(2,~~780~~795,~~628~~296	)		(12,~~619~~780,~~552~~628	)
Non-operating income		1,699,053			1,056,502
Government subsidies		756,501			-
Non-operating expenses		(281,440	)		(206,387	)
Non-operating income		1,559,574			1,699,053
Income before provision for income taxes		38,208,694			23,831,576
Non-operating expenses		(287,018	)		(281,440	)
Provision for income taxes		(10,573,467	)		(6,236,416	)
Income before provision for income taxes		19,506,740			38,208,694
Net income		27,635,227			17,595,160
Provision for income taxes		(7,203,424	)		(10,573,467	)
Net income		12,303,316			27,635,227
Other comprehensive income:
Foreign currency translation adjustment		2,~~891~~205,~~182~~864			12,~~010~~891,~~025~~182
Total comprehensive income	$	3014,~~526~~509,~~409~~180		$	1830,~~605~~526,~~185~~409
Net income per common share
Net (loss) income per common share
Basic and diluted	$	0.6127		$	0.3961
Weighted average common shares outstanding
Basic and diluted		45,060,000			45,~~000~~060,000

See notes to the consolidated financial statements.

F-32

CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the YEARs Ended NOVEMBER 30, ~~2011~~2012 AND ~~2010~~2011

					Additional							Accumulated Other		Total
	Common Stock				Additional Paid-in		Retained			Statutory		Accumulated Other Comprehensive		Total Stockholders’
	Common Stock				Paid-in					Statutory		Comprehensive		Stockholders’
	Shares		Amount		Capital		Earnings			Reserves		Income		Equity
	Shares		Amount		Capital		Retained Earnings			Reserves		Income		Equity
			(U.S.$)		(U.S.$)		(U.S.$)			(U.S.$)		(U.S.$)		(U.S.$)
Balance as of November 30, 2009		45,000,000	$	45,000	$	8,970,805	$	12,542,081		$	8,078,765	$	3,614,984	$	33,251,635
Balance as of November 30, 2010		45,000,000	$	45,000	$	9,070,007	$	29,642,370		$	8,573,636	$	4,625,009	$	51,956,022
Net income		-		-		-		17,595,160			-		-		17,595,160
Other comprehensive income		-		-		-		-			-		1,010,025		1,010,025
Stock-based compensation		-		-		99,202		-			-		-		99,202
Appropriation of statutory reserves		-		-		-		(494,871	)		494,871		-		-
Balance as of November 30, 2010		45,000,000		45,000		9,070,007		29,642,370			8,573,636		4,625,009		51,956,022
Net income		-		-		-		27,635,227			-		-		27,635,227
Other comprehensive income		-		-		-		-			-		2,891,182		2,891,182
Stock-based compensation – shares issues for consulting services		60,000		60		121,740		-			-		-		121,800
Stock-based compensation – shares transferred for consulting services		-		-		1,386,000		-			-		-		1,386,000
Stock-based compensation - option		-		-		42,621		-			-		-		42,621
Stock-based compensation		-		-		42,621		-			-		-		42,621
Appropriation of statutory reserves		-		-		-		(459,219	)		459,219		-		-
Balance as of November 30, 2011		45,060,000	$	45,060	$	10,620,368	$	56,818,378		$	9,032,855	$	7,516,191	$	84,032,852
Net income		-		-		-		12,303,316			-		-		12,303,316
Other comprehensive income		-		-		-		-			-		2,205,864		2,205,864
Stock-based compensation		-		-		4,857		-			-		-		4,857
Appropriation of statutory reserves		-		-		-		(261,761	)		261,761		-		-
Balance as of November 30, 2012		45,060,000	$	45,060	$	10,625,225	$	68,859,933		$	9,294,616	$	9,722,055	$	98,546,889

See notes to the consolidated financial statements.

F-43

CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED NOVEMBER 30, ~~2011~~2012 AND ~~2010~~ 2011

	2011			2010
	2012			2011
	(U.S.$)			(U.S.$)
Cash flows from operating activities:
Net income	$	2712,~~635~~303,~~227~~316		$	1727,~~595~~635,~~160~~227
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Decrease in allowance for doubtful accounts		(45,199	)		(67,800	)
Bad debt expenses		284,105			(45,199	)
Depreciation and amortization		68,~~318~~496,~~473~~470			46,~~488~~318,~~539~~473
Stock-based compensation		14,~~550,421~~857			991,~~202~~550,421
Interest accrued on shareholder loans		~~275~~396,~~916~~481			~~235~~275,~~750~~916
Loss on disposal of property, plant and equipment		~~2,541~~173			-2,541
Changes in operating assets and liabilities:
(Increase) in restricted cash		(2717,~~494~~419	)		(~~396~~27,~~150~~494	)
(Increase) in accounts receivables		(111,~~573~~891,~~458~~298	)		(111,~~081~~573,~~235~~458	)
(Increase) decrease in other receivables		(20,470,669	)		355,405
Decrease (increase) in other receivables		19,926,225			(20,470,669	)
(Increase) in prepaid expense		(~~323~~355,~~072~~330	)		-(323,072	)
(Increase) in advance to suppliers		(2233,~~156~~273,~~375~~927	)		(122,~~805~~156,~~486~~375	)
(Increase) decrease in inventories		(6,848,040	)		2,325,860
(Increase) in inventories		(3,922,277	)		(6,848,040	)
(Increase) in other long term assets		-			(190,735	)
(Increase) in loan to related party		(1,356,250	)		-
Increase in deferred income		15,~~642~~430,~~466~~246			1,~~448~~642,~~930~~466
Increase (decrease) in accounts payable		6,915,326			(215,291	)
(Decrease) increase in accounts payable		(2,544,812	)		6,915,326
Increase (decrease) in advances from customers		5,043,073			(6,846,339	)
Increase in advances from customers		2,262,158			5,043,073
Increase in accrued liabilities and other payables		10,526,841			1,767,486
(Decrease) increase in accrued liabilities and other payables		(3,211,163	)		10,526,841
Net cash (used in) provided by operating activities		(1,534,023	)		17,713,296
Net cash provided by (used in) operating activities		2,531,555			(1,534,023	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(125,~~858~~936,~~682~~892	)		(712,~~064~~858,~~961~~682	)
Increase in construction in progress		(~~798~~124,~~685~~261	)		(~~126~~798,~~394~~685	)
Proceeds from disposal of property, plant and equipment		~~5,744~~-			-5,744
Increase in notes receivable		-			(8,699,426	)
Payments made on other long term assets		(912,739	)		-
Payments received on notes receivable		14,679,099			1,933,427
Loan to related party		(36,234,031	)		-
Net cash provided by (used in) investing activities		1,027,476			(13,957,354	)
Collection of notes receivable		-			14,679,099
Net cash (used in) provided by investing activities		(43,207,923	)		1,027,476
Cash flows from financing activities:
Proceeds from short term bank loans		2845,~~636~~898,~~602~~422			3328,~~015~~636,~~461~~602
Principal payments made on short term bank loans		(929,~~864~~406,~~061~~644	)		(359,~~668~~864,~~489~~061	)
Proceeds from lease finance obligation		75,~~860~~583,~~423~~780			-7,860,423
Repayments of lease finance obligation		(792,763	)		-
Repayment of lease finance obligation		(2,357,444	)		(792,763	)
Repayment of stockholder loans		-(47,481	)		~~(1,628,667~~-	)
Net cash provided by (used in) financing activities		25,840,201			(4,281,695	)
Net cash provided by financing activities		19,670,633			25,840,201
Effect of exchange rate changes on cash		1,~~093~~813,~~075~~493			321,~~648~~093,075
Net change in cash and cash equivalents		26,426,729			(493,105	)
Net (decrease) increase in cash and cash equivalents		(19,192,242	)		26,426,729
Cash and cash equivalents, beginning of year		431,~~580~~007,~~540~~269			54,~~073~~580,~~645~~540
Cash and cash equivalents, end of year	$	3111,~~007~~815,~~269~~027		$	431,~~580~~007,~~540~~269
Supplemental disclosure of cash flow information
Cash paid for interest	$	2,~~040~~122,~~166~~808		$	12,~~919~~040,~~991~~166
Cash paid for income taxes	$	9,~~438~~091,~~235~~585		$	39,~~765~~438,~~433~~235
Supplemental disclosure of non-cash financing and investing activities:
Value of shares issued/transferred for consulting services	$	~~1,507,800~~-		$	-1,507,800
Service fee and refundable deposit borrowed under financing leases	$	1,887,340		$	1,891,526

See notes to the consolidated financial statements.

F-54

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, ~~2011~~2012 AND ~~2010~~2011

Organization and Business

Organization of the Company

China Energy Corporation (the “Company”) is a Nevada corporation, formed on October 11, 2002 under the name Omega Project Consultations, Inc. The name was changed to China Energy Corporation on November 3, 2004. On November 30, 2004, the Company entered into a share exchange agreement with Inner Mongolia Tehong Coal Group Co., Ltd. (“Coal Group”), and Inner Mongolia Zhunger Heat Power Co. Ltd. (“Heat Power”) and their respective shareholders. The transaction was accounted for as a reverse merger, a procedure that treats the transaction as though Coal Group had acquired the Company. Under the accounting for a reverse merger, the assets and liabilities of the Company, which were nil at the time, were recorded on the books of Coal Group, the continuing company, and the stockholders’ equity accounts of Coal Group were reorganized to reflect the shares issued in this transaction.

The share exchange agreement, which resulted in the Company’s acquisition of the Coal Group and Heat Power, was governed by and valid under Nevada law and was not perfected under the then People’s Republic of China (“PRC”) law. It was not until certain changes in ~~the~~ PRC law, which ~~became~~ became definitive in 2006, made clear that a series of procedures of governmental approvals ~~were necessary to obtain perfection~~ and certain additional corporate actions would be ~~conditions~~condition ~~precedent~~precedents to that perfection. The Company ~~achieved~~does not believe the lack of perfection ~~which~~impairs isits ~~discussed~~ability to exercise ~~below~~control over the Coal Group and Heat Power as it continues to exercise control over them, consistent with the intent of the original shareholders.

On July 13, 2009, the Company entered into a framework agreement which detailed the actions contemplated for the restructuring of the Company, Coal Group and Heat Power under a "variable interest entity" (“VIE”) structure to meet the current requirements of ~~the~~applicable PRC law.

On November 30, 2010, the Company entered into a series of contractual arrangements pursuant to which the control and the economic benefits and costs of ownership of its two operating companies: Coal Group and Heat Power (collectively, the “Operating Companies”) in the PRC would flow ~~directly~~ directly to Beijing Tehong Energy Technology Consulting Co., Ltd. (the “WFOE”), wholly owned through subsidiaries of the Company.

The Company first entered into a Termination And Restructuring Agreement with the Operating Companies, the WFOE, Pacific Projects Inc. (“PPI”) and the respective stockholders of the Operating Companies (collectively, the “PRC Shareholders”) dated November 30, 2010 pursuant to which the parties agreed (i) to terminate the Trust Agreement dated as of December 31, 2007 under which the PRC Shareholders agreed to hold their equity interests in the Operating Companies in trust for PPI, (ii) to the merger of PPI into the Company and (iii) to enter into Management and Control Agreements.

On November 30, 2010, the WFOE entered into (i) an Exclusive Business Cooperation Agreement with Coal Group, (ii) an Equity Interest Pledge Agreement and an Exclusive Option Agreement with Coal Group and the stockholders of Coal Group and (iii) a Power of Attorney, with each of the stockholders of the Coal Group. The WFOE also entered into (i) an Exclusive Business Cooperation Agreement with Heat Power, (ii) an Equity Interest Pledge Agreement and an Exclusive Option Agreement with Heat Power and the stockholders of Heat Power and (iii) a Power of Attorney with each of the stockholders of Heat Power. The foregoing agreements are herein collectively referred to as the “Management and Control Agreements.”

~~F-6~~The Management and Control Agreements described below allow the WFOE to exercise control over, and derive all economic benefits from Coal Group and Heat Power.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~F-5

~~NOTES~~Exclusive Business Cooperation Agreements: TOPursuant ~~THE~~to ~~CONSOLIDATED~~the ~~FINANCIAL~~Exclusive ~~STATEMENTS~~Business Cooperation Agreements, the WFOE provides technical and consulting services related to the business operations of Coal Group and Heat Power. In consideration for such services, Coal Group and Heat Power has agreed to pay an annual service fee to the WFOE in an amount equal 100% of Coal Group and Heat Power’s annual net income, respectively. Each Exclusive Business Cooperation Agreement has a term of 10 years, which automatically renews unless terminated by the WFOE. The WFOE may terminate the agreements at any time upon 30 days’ prior written notice to Coal Group or Heat Power, as the case may be.

~~FOR~~Exclusive Option Agreements: Pursuant ~~THE~~to ~~YEARS~~the ~~ENDED~~Exclusive ~~NOVEMBER~~Option 30Agreements, ~~2011~~the ~~AND~~WFOE ~~2010~~has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in the Coal Group and Heat Power held by the stockholders. To the extent permitted by the PRC laws, the purchase price for the entire equity interest is RMB1.00 or the minimum amount required by PRC law or government practice. Each of the exclusive option agreements has a term of 10 years, with renewal for an additional 10 years at the option of the WFOE.

~~The~~Powers ~~Management~~of Attorney: Each of the stockholders of the Coal Group and ~~Control~~Heat ~~Agreements~~Power, ~~as described~~executed ~~below~~a ~~allow~~Power of Attorney that provides the WFOE with the power to ~~exercise~~act ~~control~~as such ~~over,~~stockholder’s ~~and~~exclusive ~~derive~~agent with respect to all ~~economic~~matters ~~benefits~~related ~~from~~to such stockholder’s ownership interest in Coal Group and Heat Power., ~~Previously~~respectively, ~~the~~ ~~operating~~including ~~businesses~~the ~~were~~right ~~controlled pursuant~~ to aattend ~~trust~~stockholders’ ~~arrangement~~meetings ~~which~~and ~~was~~the ~~terminated~~right asto ~~part~~vote, ofdispose or ~~the~~pledge ~~restructuring~~such ~~described below~~shares.

~~Exclusive~~Equity ~~Business~~Interest ~~Cooperation~~Pledge Agreements: ~~Pursuant~~ Pursuant to ~~the~~such ~~Exclusive Business Cooperation Agreements~~agreements, ~~the~~each ~~WFOE~~of ~~provides technical and consulting services related to~~ the ~~business~~ ~~operations~~stockholders of Coal ~~Group~~ and the Heat Power. Inpledged ~~consideration~~their ~~for~~shares ~~such~~in ~~services, Coal Group and~~ Heat Power ~~have~~and ~~agreed~~Coal ~~to pay~~Group, ~~an annual service fee~~ to the WFOE, into ansecure ~~amount~~the ~~equal~~obligations ~~100%~~ of Coal Group’s and Heat Power’s ~~annual~~under ~~net~~the ~~income,~~Exclusive ~~respectively~~Business Cooperation Agreements. In ~~Each~~addition, ~~Exclusive~~the ~~Business~~stockholders ~~Cooperation~~of ~~Agreement~~Coal ~~has~~Group aand ~~term~~the ofHeat 10Power ~~years~~agreed not to transfer, ~~which~~sell, ~~automatically~~pledge, ~~renews~~dispose ~~unless~~of ~~terminated~~or bycreate ~~the~~any ~~WFOE.~~encumbrance ~~The~~on ~~WFOE~~any ~~may~~equity ~~terminate~~interests ~~the~~that ~~agreements~~would ataffect ~~any~~the ~~time~~WFOE’s ~~upon~~interests. 30The ~~days’~~Equity ~~prior~~Interest ~~written~~Pledge ~~notice~~Agreement toexpires when Coal Group and or Heat Power, asfully perform their obligations under the ~~case~~ ~~may~~Exclusive beBusiness Cooperation Agreements.

~~Exclusive~~Termination ~~Option~~of ~~Agreements~~Trust Arrangements: ~~Pursuant~~Prior to ~~the~~entering ~~Exclusive~~into ~~Option Agreements,~~ the ~~WFOE~~Management ~~has~~and anControl ~~exclusive option to purchase~~Agreements, ~~or to designate another qualified person to purchase, to~~ the ~~extent~~Company ~~permitted~~controlled byCoal ~~the~~Group ~~PRC law~~ and ~~foreign~~Heat ~~investment~~Power ~~policies,~~through ~~part~~a orseries ~~all~~ of ~~the equity interests in each of the Coal~~trust ~~Group~~agreements ~~and~~which ~~Heat~~were ~~Power~~terminated ~~held~~contemporaneously bywith the ~~stockholders~~execution of ~~Coal~~the ~~Group~~Management and ~~the~~Control ~~stockholders of Heat Power, respectively~~Agreements. In Toconnection with the ~~extent~~termination ~~permitted by~~of ~~the~~such ~~PRC~~trust ~~laws~~arrangements, ~~the~~ownership ~~purchase~~of ~~price~~68% ~~for~~of the ~~entire~~shares ~~equity~~of ~~interest is RMB1.00 or~~ the ~~minimum~~Company ~~amount~~previously ~~required~~held by ~~the~~Georgia ~~PRC law or~~Pacific ~~government~~Investments ~~practice~~Inc. ~~Each~~and ofAxim ~~the~~Holdings ~~exclusive~~Ltd. ~~option~~was ~~agreements~~transferred ~~has~~to aFortune ~~term~~Place ofHoldings 10Ltd. ~~years,~~(“Fortune ~~with renewal for an additional 10 years at the option of the WFOE~~Place”).

~~Powers~~Entrustment ofAgreement ~~Attorney~~and Share Option Agreement: ~~Each~~Ninghua Xu, owner of ~~the stockholders~~100% equity interests of ~~the~~Fortune ~~Coal~~Place, ~~Group~~entered ~~and~~into ~~Heat~~an ~~Power~~entrustment agreement with Wenxiang Ding, ~~respectively~~the Chief Executive Officer, ~~executed~~pursuant ato ~~Power~~which ofMr. ~~Attorney~~Ding ~~that~~was ~~provides~~entrusted to manage the ~~WFOE~~Operating ~~with~~Companies ~~the~~and ~~power~~related entities toas ~~act~~provided in the agreement as ~~such~~the ~~stockholder’s~~agent of Mr. Xu. The agreement also appoints Mr. Ding as the exclusive agent with respect to all matters ~~related~~concerning to100% ~~such~~of ~~stockholder~~Mr. Xu’s ~~ownership~~equity interest in ~~each~~Fortune ofPlace. ~~Coal~~In ~~Group~~addition, orMr. ~~Heat~~Xu ~~Power,~~and ~~including~~Mr. ~~the~~Ding entered ~~right~~into a share option agreement pursuant to ~~attend~~which ~~stockholders’~~Mr. ~~meetings~~Ding ~~and~~has the ~~right~~option to ~~vote,~~purchase ~~dispose or~~all ~~pledge~~of ~~such~~the shares of Fortune Place from Mr. Xu upon the achievement of certain performance targets by the Operating Companies and related entities.

Equity Interest Pledge Agreements: Pursuant to such agreements, each of the stockholders of Coal Group and Heat Power pledged their shares in Heat Power and Coal Group, respectively, to the WFOE, to secure their obligations under the Exclusive Business Cooperation Agreements. In addition, the stockholders of Coal Group and Heat Power agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Coal Group or Heat Power that would affect the WFOE’s interests. The Equity Interest Pledge Agreement expires when Coal Group and Heat Power, respectively, fully perform their obligations under the Exclusive Business Cooperation Agreements.

Termination of Trust Arrangements: Prior to entering into the Management and Control Agreements, the Company controlled Coal Group and Heat Power through a series of trust agreements which were terminated contemporaneously with the execution of the Management and Control Agreements. In connection with the termination of such trust arrangements, ownership of 68% of the shares of the Company previously held by Georgia Pacific Investments Inc. and Axim Holdings Ltd. were transferred to Fortune Place Holdings Ltd. (“Fortune Place”).

F-7

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Entrustment Agreement and Share Option Agreement: Ninghua Xu, owner of 100% equity interests of Fortune Place, entered into an entrustment agreement with WenXiang Ding, the Chief Executive Officer, pursuant to which Mr. Ding was entrusted to manage the Operating Companies and related entities as provided in the agreement as the agent of Mr. Xu. The agreement also appoints Mr. Ding as the exclusive agent with respect to all matters concerning 100% of Mr. Xu’s equity interest in Fortune Place. In addition, Mr. Xu and Mr. Ding entered into a share option agreement pursuant to which Mr. Ding has the option to purchase all of the shares of Fortune Place from Mr. Xu upon the achievement of certain performance targets by the Operating Companies and related entities.

Revised Corporate Structure: As a result of the entry into the foregoing agreements, and the termination of the trust arrangements, the Company has a revised corporate structure which is set forth below:

F-86

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Business

The Company’s business is made up of ~~two~~three segments: Coal ~~Group~~Production, Coal Trading and Heat Power.

Coal ~~Group~~Production: Coal ~~Group was organized~~Production ~~in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia Tehong Coal & Power Group Co. Ltd. Coal Group~~ has mining rights to a coal mine in the Inner Mongolia District from which it mines coal. ItCoal ~~also~~Production ~~buys,~~supplies ~~sells,~~the ~~and~~majority of ~~transports~~its coal, ~~serving~~to the ~~Inner~~Coal ~~Mongolia~~Trading ~~District~~segment.

Coal Trading: Coal Trading was organized in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia Tehong Coal & Power Group Co. Ltd. It also buys, sells, and transports coal, serving the Inner Mongolia District.

Heat Power: During 2003, Heat Power was granted a license, to supply heating to the entire XueJiaWan area. To provide for this requirement, construction began in 2004 on a thermoelectric plant, which was completed in September 2006. Heat Power supplies heating directly to users and supplies electricity within the XueJiaWan area through a government controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd. (“Electric Power Group”).

The Coal ~~Group~~Production ~~does~~and Coal Trading segments do not sell any coal to Heat Power.

F-7

Summary of Significant Accounting Policies

Basis of Accounting and Presentation

The consolidated financial statements of the Company as of November 30, ~~2011~~2012 and ~~2010~~2011 and for the years ended November 30, ~~2011~~2012 and ~~2010~~2011 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (the “SEC”). All consolidated financial statements and notes to the consolidated financial statements are presented in U.S. dollars.

Basis of Consolidation

Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Company is required to include in its consolidated financial statements, the financial statements of variable interest entities. ASC Topic 810 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities are those entities in which the Company, through contractual arrangements, bear the risk of, and ~~enjoy~~enjoys the rewards normally associated with ownership of the entity, and therefore the Company is the primary beneficiary of the entity.

The consolidated financial statements include the accounts of the Company’s WFOE, Coal Group and Heat Power since they are deemed variable interest entities and the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

F-9

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Prior to the Company’s restructuring in 2010, Coal Group and Heat Power were subsidiaries of Company whose accounts were included in the consolidated financial statements. A subsidiary, as defined, is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast majority of votes at a meeting of the board of directors or shareholders or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

Recently Issued Accounting Standards

In ~~December~~May ~~2009~~2011, the FASB issued ~~Accounting Standards Update (“~~ASU”) No. ~~2009~~2011-1704, “~~Consolidations~~Amendments ~~(Topic~~to ~~810)~~Achieve –Common ~~Improvements~~Fair toValue ~~Financial~~Measurement ~~Reporting by~~and ~~Enterprises~~Disclosure ~~Involved~~Requirements ~~with~~in ~~Variable~~U.S.GAAP ~~Interest~~and ~~Entities~~IFRSs” (“ASU No. ~~2009~~2011-1704”). The Company adopted ASU 2009-17, which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that ~~has~~provides ~~(1)~~clarification ~~the~~about ~~power to direct~~ the ~~activities~~application of aexisting ~~VIE~~fair ~~that~~value ~~most~~measurements ~~significantly~~and ~~impact~~disclosure ~~the entity’s economic performance~~requirements and ~~(2)~~expands ~~the~~certain ~~obligation~~other todisclosure ~~absorb~~requirements. ~~losses~~ASU ofNo. ~~the~~2011-04 ~~entity~~amends ~~that~~U.S. ~~could~~GAAP ~~potentially be significant~~ to ~~the~~provide ~~VIE~~common orfair ~~the~~value ~~right~~measurements ~~to receive~~and ~~benefits~~disclosure ~~from~~requirements ~~the~~with ~~entity~~International ~~that~~Financial ~~could~~Reporting ~~potentially be significant to the VIE~~Standards. InThe ~~addition,~~amendments ~~the~~in ~~required~~this ~~changes~~ASU ~~provide~~are ~~guidance~~effective onprospectively ~~shared~~for ~~power~~interim and ~~joint~~annual ~~venture~~periods ~~relationships,~~beginning ~~remove~~after ~~the~~December ~~scope exemption for qualified special purpose entities~~15, ~~revise the definition of a VIE~~2011, ~~and~~with ~~require~~no ~~additional~~early ~~disclosures~~adoption permitted. The ~~Company~~adoption ~~has~~of ~~assessed~~this ~~the terms contained in the Management and Control Agreements~~standard ~~between~~did ~~the~~not ~~Company~~have ~~and~~a ~~Coal~~material ~~Group~~impact ~~and~~on ~~Heat Power and determined that Coal Group and Heat Power are VIEs, and accordingly, are~~ consolidated ~~in these~~ financial statements.

In ~~January~~June ~~2010~~2011, the FASB issued Accounting Standards Update No. ~~2010~~2011-605, “~~Improving~~Presentation ~~Disclosures~~of ~~about~~Comprehensive ~~Fair Value Measurements~~Income” (“ASU ~~No. 2010~~2011-0605”)~~. ASU~~, ~~No.~~which ~~2010-06~~improves the ~~amends~~comparability, ~~ASC~~consistency, ~~Topic~~and ~~820,~~transparency ~~“Fair~~of ~~Value~~financial ~~Measurements~~reporting and ~~Disclosures,”~~increases tothe ~~require~~prominence ~~additional~~of ~~information to~~items bereported ~~disclosed~~in ~~principally~~other comprehensive ~~regarding~~income ~~Level~~(“OCI”) 3by ~~measurements~~eliminating ~~and~~the ~~transfers~~option to ~~and~~present ~~from~~components ~~Level~~of 1OCI ~~and~~as 2.part Inof ~~addition,~~the ~~enhanced~~statement ~~disclosure~~of changes isin ~~required~~stockholders’ ~~concerning~~equity. ~~inputs~~The ~~and~~amendments ~~valuation~~in ~~techniques~~this ~~used~~standard torequire ~~determine~~that ~~Level~~all 2nonowner ~~and~~changes ~~Level~~in 3stockholders’ ~~measurements.~~equity be ~~This~~presented ~~guidance~~either isin ~~generally effective~~a ~~for~~single ~~interim~~continuous ~~and~~statement ~~annual~~of ~~reporting~~comprehensive ~~periods~~income ~~beginning~~or ~~after~~in two separate but consecutive statements. Subsequently in December 152011, ~~2009;~~the ~~however,~~FASB ~~requirements~~issued toAccounting ~~disclose~~Standards ~~separately purchases,~~Update ~~sales,~~No. ~~issuances~~2011-12, ~~and~~“Deferral ~~settlements~~of inthe Effective Date for Amendments to the ~~Level~~Presentation 3of ~~reconciliation~~Reclassifications ~~are~~of ~~effective~~Items ~~for~~Out ~~fiscal~~of ~~years~~Accumulated ~~beginning~~Other ~~after~~Comprehensive ~~December 15~~Income” (“ASU 2011-12”), which ~~2010~~indefinitely ~~(and~~defers ~~for~~the ~~interim~~requirement ~~periods~~in ~~within~~ASU ~~such~~2011-05 ~~years).~~to ~~The~~present ~~update~~on ~~will~~the ~~not~~face ~~have~~of athe ~~material~~financial ~~impact~~statements onreclassification adjustments for items that are reclassified from OCI to net income (loss) in the ~~Company’~~statement(s) ~~consolidated results~~where the components of ~~operations~~net orincome ~~financial~~(loss) ~~position~~and the components of OCI are presented.

InThe ~~March~~amendments ~~2010,~~in ~~the~~these ~~FASB~~standards ~~issued~~do ~~new accounting~~not ~~guidance,~~change ~~under~~the ~~ASC~~items ~~Topic 605 on “Revenue Recognition.” This standard provides~~ that ~~the~~must milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be ~~achieved.~~reported ~~Determining~~in ~~whether~~OCI, awhen ~~milestone~~an isitem ~~substantive~~of ~~requires judgment~~OCI ~~that~~must ~~should~~ be ~~made~~reclassified atto ~~the~~net ~~inception~~income of(loss), ~~the~~or ~~arrangement.~~change ~~To meet~~ the ~~definition of a substantive milestone, the consideration~~option ~~earned~~for byan ~~achieving~~entity ~~the milestone (1) would have~~ to bepresent ~~commensurate~~components ~~with either the level~~ of ~~effort~~OCI ~~required~~gross ~~to achieve the milestone~~ or ~~the~~net ~~enhancement~~of in the ~~value~~effect of ~~the~~income ~~item~~taxes. ~~delivered,~~The ~~(2)~~amendments ~~would~~in ~~have~~ASU to2011-05 ~~relate~~and ~~solely~~ASU to2011-12 are ~~past~~effective ~~performance,~~for interim and ~~(3)~~annual ~~should~~periods bebeginning ~~reasonable relative~~after toDecember ~~all~~15, ~~deliverables~~2011 and ~~payment~~are ~~terms~~to inbe ~~the~~applied ~~arrangement~~retrospectively. NoThe ~~bifurcation~~ adoption of anASU ~~individual~~2011-05 ~~milestone is allowed~~ and ~~there can~~ASU be2011-12 ~~more than one milestone in an arrangement. The standard is effective~~ did not have a material ~~effect~~impact on the Company’s consolidated financial statements.

FIn December 2011, the FASB issued ASU No. 2011-1011, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU No. 2011-11 is not expected to have a significant impact on the consolidated financial statements.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~F-8

~~NOTES~~In July 2012, the FASB issued an authoritative TOpronouncement ~~THE~~related ~~CONSOLIDATED~~to ~~FINANCIAL~~testing ~~STATEMENTS~~indefinite-lived intangible assets, other than goodwill, for impairment. Under the pronouncement, entities testing indefinite-lived intangible assets for impairment would have the option of performing a qualitative assessment before calculating the fair value of the asset. If an entity determines, on the basis of qualitative factors, that the indefinite-lived intangible asset is not more likely than not impaired, a quantitative fair value calculation would not be needed. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement does not have a significant impact on the Company’s consolidated financial condition or results from operations.

~~FOR THE~~Foreign ~~YEARS~~Currency ~~ENDED NOVEMBER 30, 2011 AND 2010~~Translation

InSubstantially ~~April~~all ~~2010,~~Company ~~the~~assets ~~FASB~~are ~~issued~~located in ~~ASU No~~China. ~~2010-13, “Effect~~ ofThe ~~Denominating~~functional ~~the~~currency ~~Exercise~~for ~~Price of a Share-Based Payment Award in~~ the ~~Currency~~majority of the ~~Market~~Company’s inoperations ~~Which~~is the ~~Underlying Equity~~Renminbi ~~Security Trades”~~ (“~~ASU No. 2010-13~~RMB”). ~~ASU~~The ~~No.~~Company uses ~~2010-13 addresses~~ the ~~classification~~United ofStates adollar ~~share-based payment~~(“US ~~award~~Dollar” ~~with~~or an“US$” ~~exercise~~or ~~price~~“$”) ~~denominated~~for infinancial ~~the~~reporting ~~currency of a market in which the underlying equity security trades~~purposes. ~~FASB~~ ~~ASC~~The ~~Topic~~financial ~~718~~statements ~~was~~of ~~amended~~the toCompany’s ~~clarify~~foreign ~~that~~subsidiaries ahave ~~share-based~~been ~~payment~~translated ~~award~~into ~~with~~US andollars ~~exercise price denominated~~ in ~~the~~accordance ~~currency~~with ~~of a market~~FASB inASC ~~which~~830, a“Foreign ~~substantial~~Currency ~~portion~~Matters.” ofAll ~~the~~asset ~~entity’s~~and ~~equity~~liability ~~securities~~accounts ~~trade~~have ~~shall~~been ~~not~~translated beusing ~~considered~~the ~~to contain a market, performance~~exchange orrate ~~service~~in ~~condition.~~effect ~~Therefore,~~at ~~such~~the anbalance ~~award~~sheet isdate. ~~not~~Equity toaccounts behave ~~classified~~been astranslated aat ~~liability~~their ifhistorical itexchange ~~otherwise~~rates ~~qualifies~~when ~~for~~the ~~equity classification.~~capital ~~The~~transaction ~~amendments in ASU No~~occurred. ~~2010-13~~Consolidated ~~are~~statements ~~effective~~of ~~for~~operations ~~fiscal years,~~ and ~~interim~~comprehensive ~~periods~~income ~~within~~(loss) ~~those~~amounts ~~fiscal~~have ~~years,~~been ~~beginning~~translated ~~on or~~using ~~after~~the ~~December 15,~~average ~~2010,~~exchange ~~with~~rate ~~early~~for ~~application~~the ~~permitted~~periods presented. ~~The~~Adjustments ~~adoption~~resulting offrom ~~this~~the ~~standard~~translation ~~will~~of ~~not have a material impact on~~ the Company’s ~~consolidated~~ financial statements ~~position~~are ~~and~~recorded ~~results~~as ofother ~~operations~~comprehensive income.

In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU No. 2010-28”). ASU No. 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This eliminates an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. ASU No. 2010-28 is effective for fiscal and interim periods beginning after December 15, 2010. The adoption of this standard will not have a material impact on its consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU No. 2010-29”). ASU No. 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU No. 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this standard will not have a material impact on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs” (“ASU No. 2011-04”) that provides clarification about the application of existing fair value measurements and disclosure requirements and expands certain other disclosure requirements. ASU No. 2011-04 amends U.S. GAAP to provide common fair value measurements and disclosure requirements with International Financial Reporting Standards. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The Company does not believe that the adoption of this standard will have any material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU No. 2011-05”) that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both methods, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the component of net income and the components of other comprehensive income are presented. ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial statements.

F-11

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”) that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the required annual goodwill impairment test. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU No. 2011-11 will have a significant, if any, impact on its consolidated financial statements.

Foreign Currency Translations

Substantially all Company assets are located in China. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.” All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statements of operations amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income.

F-12

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

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

	November 30, 2011		November 30, 2010
		November 30, 2012		November 30, 2011
Balance sheet items, except for common stock, additional paid-in capital, statutory reserves, and retained earnings, as of year end	~~US$1=RMB 6.3765~~	US$1=RMB 6.2265	~~US$1=RMB 6.6670~~	US$1=RMB 6.3765
Amounts included in the statements of income and other comprehensive income, statements of changes in stockholders’ equity and statements of cash flows for the year	~~US$1=RMB 6.4882~~	US$1=RMB 6.3183	~~US$1=RMB 6.7847~~	US$1=RMB 6.4882

For the years ended November 30, ~~2011~~2012 and ~~2010~~2011, foreign currency translation adjustments of $2,~~891~~205,~~182~~864 and $12,~~010~~891,~~025~~182, respectively, have been reported as other comprehensive income ~~in the consolidated statements of changes in stockholders’ equity~~.

Although government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

The value of RMB against the US ~~dollars~~dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

Cash and Cash equivalents

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

Accounts Receivable

Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and provides an allowance where there is doubt as to the ~~collectibility~~collectability of individual balances. In evaluating the ~~collectibility~~collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of November 30, ~~2011~~2012 and ~~2010~~2011, the balance of the allowance for doubtful ~~accounts~~ ~~were~~accounts was $11295,~~251~~356 and $5411,~~747,~~251 respectively. For the years presented, the Company did not write off any accounts receivable as bad debts.

F-9

Accounts receivable include amounts due from an entity affiliated with the Company through a family member of the Company’s Chairman of $0 and $1,712,113 as of November 30, 2012 and 2011, respectively.

Inventories

Inventories consist of coal and operating supplies. Inventories are valued at the lower of cost or market, using the weighted average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of market. ~~The~~As ~~Company~~of ~~did~~November ~~not~~30, 2012 ~~make~~and ~~any~~2011, ~~inventory~~the ~~provision~~reserve for ~~the~~write ~~years~~down ~~ended~~to ~~November~~market 30was $210,672 ~~2011~~ and ~~2010~~$0, respectively.

F-13

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Fixed Assets

Fixed ~~Assets~~assets are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including capitalized interest during the construction period, and any ~~expenditures~~expenditure that substantially increase the ~~assets~~asset’s value or extend the useful life of an ~~existing~~ existing asset. Depreciation is computed using the straight line method over the estimated useful lives of ~~fixed~~property, ~~assets~~plant and equipment, which are approximately five years for electrical and office equipment, ten years for transportation equipment and pipelines, and 20 to 45 years for buildings. Leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the lease. Capitalized costs related to assets under construction are not depreciated until construction is complete and the asset is ready for its intended use. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

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

Investment Property

Investment property represents rental real estate purchased or constructed by the Company for investment purposes. Depreciation is computed using the straight line method over the estimated useful life of 45 years. The related rental income and expenses are included in non-operating income and expenses in the accompanying consolidated statements of ~~income~~operations and other comprehensive income (loss).

Mining Right

All land in China belongs to the government. To extract resources from the land, the Company iswas required to obtain a mining right. The Company’s Coal Group acquired its mining right from the Provincial Bureau of National Land and Resource in November of 2005. The price of the mining right, which ~~represents~~ represents the acquisition cost of the mine, was assessed in 2005 by the Bureau to be $3,656,731. The mine acquisition cost is was payable in ~~installments~~ instalments over a six year period from the date the mining right was granted. The mine acquisition cost is amortized using the UOP method over the productive life of the mine based on proven ~~and~~being probable reserves.

F-10

Restricted Cash

Long-term restricted cash represents the bank deposits held as a guarantee for the future payments of rehabilitation costs as required by the PRC government. The long-term deposits earn an interest rate of 0.50% per annum ~~in the 2011 fiscal year and 0.36% per annum in the 2010 fiscal year~~, which ~~rate~~ is determined by the PRC government.

F-14

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Advances from Customers

Advances from customers primarily consist of payments received from customers by the Coal Group and Heat Power prior to the delivery of goods and services.

Deferred Income

Impairment of Long-lived Assets

The Company utilizes FASB ASC 360, “Property, Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. The Company may recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. No impairment of long-lived assets was recognized for the years ended November 30, ~~2011~~2012 and ~~2010~~2011.

Revenue Recognition

Resource Compensation Fees

In accordance with the relevant regulations in the PRC, a company that is engaged in coal production is required to pay a fee to the Inner Mongolia National Land and Resources Administration Bureau as compensation for the depletion of coal resources. Coal Group was required to pay the resource compensation fees of $~~463~~467,~~947~~099 and $~~305~~463,~~198~~947 for the years ended November 30, ~~2011~~ 2012 and ~~2010~~2011, respectively, which is included in cost of revenues in the consolidated statements of ~~income~~ operations and other comprehensive income (loss).

Environmental Costs

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

F-1511

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Fair Value of Financial Instruments

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

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

Level 2 Inputs – Inputs other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The ~~following~~ ~~is a description of the valuation methodologies used for assets measured at fair value at November 30, 2010. The~~ Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis at November 30, 2012 and 2011.

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

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

Income Taxes

Coal ~~Group~~Production, Coal Trading and Heat Power generate their income in China where a Value Added Tax, Income Tax, City Construction and Development Tax and Education Surcharge taxes are applicable. The Company, Coal Group and Heat Power do not conduct any operations in the U.S. and therefore, are not subject to U.S. taxes.

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

F-16

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Use of Estimates

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

Net Income (Loss) Per Share

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

F-12

Statutory Reserves

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

Surplus Reserve Fund: The Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing ~~shareholders~~stockholders in proportion to their ~~shareholding~~stockholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issuance is not less than 25% of the registered capital.

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

F-17

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

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

The statutory reserves consist of the following:

	November 30, 2011		November 30, 2010
	November 30, 2012		November 30, 2011
Statutory surplus reserve and welfare fund	$	2,447,598	$	2,447,598
Safety and maintenance reserve		6,585,257		6,126,038
Safety and maintenance reserve fund		6,847,018		6,585,257
Total statutory reserves	$	9,~~032~~294,~~855~~616	$	89,~~573~~032,~~636~~855

Stock Based Compensation

The Company records stock based compensation in accordance with FASB ASC 718, “Compensation – Stock Based Compensation,” which requires the measurement and recognition of compensation expense based on the estimated fair values for all stock-based awards made to employees and directors, including stock options. FASB ASC 718 requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected stock option exercise behaviours. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the statements of income and other comprehensive income over the requisite service period.

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

F-13

Asset Retirement Cost and Obligation

The Company has adopted FASB ASC 410, “Asset Retirement and Environmental Obligations” (“ASC 410”). ASC 410 generally requires that the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred at the time development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. The related asset is amortized using the UOP method over the productive life of the mine based on proven and probable reserves. The Company did not incur and does not anticipate incurring any material dismantlement, restoration ~~and~~or abandonment costs given the nature of its mining activities and the current PRC regulations surrounding such activities.

F-18

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Vulnerability Due to Operations in the PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent, effective or continue.

All of the Company’s ~~businesses~~operations are transacted in RMB, which is not freely convertible to US Dollars. The People’s Bank of China orand other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Since the Company has its primary operations in the PRC, its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any ~~dividend~~dividends ~~payments~~ to its shareholders outside of China is ~~will be~~ limited.

All of the Company’s bank accounts are in banks located in the PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

The Company's mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.

Reclassifications

Certain ~~reclassifications~~accounts ~~have~~in ~~been~~the ~~made~~prior period’s tofinancial ~~balances~~statements inhave ~~the~~been ~~prior~~reclassified ~~year~~for ~~consolidated~~comparative ~~financial~~purposes ~~statements~~ to conform to the presentation in the current ~~year~~period’s financial ~~presentation~~statements. ~~The~~ These reclassifications ~~have~~ had no effect on previously reported ~~total assets, liabilities, stockholders’ equity or net income~~earnings.

3. Segment Reporting

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

Except for the loans made to Heat Power by Coal Group in the principal amount of RMB 84 million (equivalent to U.S. $13.1 million) and RMB 99 million (equivalent to U.S. $15 million) as of November 30, 2011 and 2010, respectively, during the periods reported herein, there were no other transactions between the two segments. There also were no differences between the measurements used to report operations of the segments and those used to report the consolidated operations of the Company. In addition, there were no differences between the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheets.F-14

~~F-19~~Except for the loans made to Heat Power by Coal Group in the principal amount of RMB 85.2 million (equivalent to U.S. $13.7 million) and RMB 84 million (equivalent to U.S. $13.1 million) as of November 30, 2012 and 2011, respectively, during the periods reported herein, there were no other transactions between Coal Group and Heat Power. There also were no differences between the measurements used to report operations of the segments and those used to report the consolidated operations of the Company. In addition, there were no differences between the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheets.

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	For the Years Ended November 30,

	2012											2011
	Heat			Coal			Coal					Heat		Coal		Coal
	Power			Trading			Production			Total		Power		Trading		Production			Total

Sales to external customers	$	17,662,372		$	184,177,101		$	41,383,086		$	243,222,559	$	17,768,298	$	106,181,593	$	32,675,854		$	156,625,745
Sales – government subsidies		2,840,288			-			-			2,840,288		1,060,309		-		-			1,060,309
Other income – government subsidies		-			-			756,501			756,501		-		-		-			-
Interest expenses, net		1,558,938			1,250,662			(14,304	)		2,795,296		1,262,645		1,525,485		(7,502	)		2,780,628
Depreciation and amortization		6,064,994			235,499			2,195,977			8,496,470		4,132,969		164,977		2,020,527			6,318,473
Segment profit (loss)		(2,589,359	)		(5,133,753	)		20,633,495			12,910,383		783,982		18,706,533		10,281,644			29,772,159

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

	November 30, 2012								November 30, 2011
	Heat		Coal		Coal				Heat		Coal		Coal
	Power		Trading		Production		Total		Power		Trading		Production		Total

Segment assets	$	74,308,658	$	135,348,126	$	21,780,727	$	231,437,511	$	71,566,508	$	92,834,880	$	22,741,779	$	187,143,167
Construction in progress		2,956,470		-		18,469		2,974,939		2,801,159		-		18,035		2,819,194
Investment property, net		3,638,296		1,973,803		-		5,612,099		3,754,281		1,975,888		-		5,730,169

~~FOR~~Reconciliation of the total segment profit ~~THE~~(loss) ~~YEARS~~to ~~ENDED~~net ~~NOVEMBER~~income ~~30,~~(loss) ~~2011~~included ~~AND~~in ~~2010~~the consolidated financial statements is as follows:

	For the Years Ended November 30,
	2011								2010
	2012			2011
	Heat			Coal					Heat		Coal
Total segment profit (loss)	$	12,910,383		$	29,772,159
	Power			Group			Total		Power		Group		Total
Unallocated corporate expenses		(607,067	)		(2,136,932	)
Sales to external customers	$	17,768,298		$	138,857,447		$	156,625,745	$	11,582,230	$	70,951,123	$	82,533,353
Net income (loss)	$	12,303,316		$	27,635,227
Sales – government subsidies		1,060,309			-			1,060,309		5,511,922		-		5,511,922
Interest expenses, net		1,262,645			1,517,983			2,780,628		456,236		1,163,316		1,619,552
Depreciation and amortization		4,132,969			2,185,504			6,318,473		2,941,852		1,546,687		4,488,539
Segment income		783,982			28,988,177			29,772,159		2,436,202		15,844,225		18,280,427

	November 30, 2011						November 30, 2010
	Heat		Coal				Heat		Coal
	Power		Group		Total		Power		Group		Total
Segment assets	$	71,566,508	$	115,576,659	$	187,143,167	$	58,768,527	$	44,548,003	$	103,316,530
Construction in progress		2,801,159		18,035		2,819,194		1,880,691		38,398		1,919,089
Investment property, net		3,754,281		1,975,888		5,730,169		2,414,541		1,936,198		4,350,739

F-15

Reconciliation of the total segment income to net income included in the consolidated financial statements is as follows:

	For the Years Ended November 30,
	2011			2010
Total segment income	$	29,772,159		$	18,280,427
Unallocated corporate expenses		(2,136,932	)		(685,267	)
Net income	$	27,635,227		$	17,595,160

4. Stockholder Loans

Substantial portions of the cost of construction of the thermoelectric plant and of the costs of expansion projects at Heat Power and the coal mine were provided by ~~the~~ loans from stockholders of Heat Power. Balances are as below:

	November 30, 2011		November 30, 2010
	November 30, 2012		November 30, 2011
Ordos City YiYuan Investment Co., Ltd.	$	1,~~702~~986,~~421~~244	$	1,~~743~~702,~~288~~421
Hangzhou Dayuan Group, Ltd.		5,~~736~~903,~~898~~204		5,~~103~~736,~~245~~898
Inner Mongolia Duoyida Mining Co. Ltd. (a)		2,013,393		1,925,783
Inner Mongolia Duoyida Mining Co. Ltd.		2,145,131		2,013,393
Total	$	910,~~452~~034,~~712~~579	$	89,~~772~~452,~~316~~712

(a) On September 28, 2010, Xinghe County Haifu Coal Transportation & Sales Co., Ltd. transferred all its ownership interest in Heat Power to Inner Mongolia Duoyida Mining Co. Ltd.

F-20

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

The stockholder loans are due on demand with interest as follow:

	November 30, 2011					November 30, 2010
	November 30, 2012					November 30, 2011
	Balance		Interest rate			Balance		Interest rate
Stockholder loans – interest bearing	$	6,931,702		5.31	%	$	6,629,669		5.31	%
			5.31% and
Interest payable		2,521,010					2,142,647
Stockholder loans – interest bearing	$	7,098,691		7.32	%	$	6,931,702		5.31	%
Total	$	9,452,712				$	8,772,316
Interest payable		2,935,888					2,521,010
Total	$	10,034,579				$	9,452,712

5. Lease Obligation

The Company leases office space under an operating lease expiring December 31, ~~2011~~2015. The minimum future annual rent payments under the lease as of November 30, ~~2011~~2012 are as follows:

Year Ending	Annual
November 30,	Amount
2012	$	8,495
2013	$	104,393
Total	$	8,495
2014		104,393
2015		104,393
2016		8,699
Total	$	321,878

Rent ~~expenses~~ expense charged to operations for the years ended November 30, ~~2011~~ 2012 and ~~2010~~2011 ~~were~~was $~~118~~104,~~908~~393 and $95118,~~804~~908, respectively.

6. Other ~~payables~~Payables

~~Included~~Other ~~in other~~ payables ~~are~~ included advances from ~~related~~the Company’s ~~parties~~Chairman and entities affiliated to the Company through a family ~~members~~member of the Company’s Chairman of totalling $46,~~704~~424,~~775~~155 and $~~749~~4,~~963~~704,775 as of November 30, ~~2011~~2012 and ~~2010~~ 2011, respectively. ~~Those~~These advances are non-interest bearing and payable on demand. At November 30, ~~2011~~ 2012 and ~~2010~~2011, other payables amounted to $139,~~111~~310,~~017~~598 and $213,~~838~~111,~~663~~017, respectively.

7. Advances to Suppliers

As is customary in China, the Company has made advances to its suppliers for coal purchases, utility payments and other purchases. At November 30, ~~2011~~2012 and ~~2010~~2011, advances amounted to $2760,~~566~~837,~~516~~720 and $427,566,516,~~324,~~ respectively. There is no interest due on these advances and they are offset against billings as they are made by the suppliers.

F-16

8. Other Receivables

Other receivables consist of the following:

	November 30, 2011		November 30, 2010
	November 30, 2012		November 30, 2011
Loans to suppliers, customers, and other associated firms	$	20,499,415	$	939,569
Loans to suppliers and other associated firms	$	895,364	$	20,499,415
Employee expense advances		~~739~~305,~~596~~489		~~373~~739,~~502~~596
Government subsidies receivable		21,~~368~~818,~~440~~497		2,~~614~~368,~~087~~440
Heat network access fee receivable		~~955~~1,~~085~~616,961		~~164~~955,~~709~~085
Total	$	244,~~562~~636,~~536~~311	$	424,~~091~~562,~~867~~536

FIncluded in loans to suppliers and other associated firms are advances to an entity affiliated to the Company through the Company’s Chairman and shareholders of Heat Power of $775,201 and $752,380 as of November 30, 2012 and 2011, respectively. In addition, included in loans to suppliers and other associated firms are advances to Heat Power’s Vice President and family members of the Company’s Chairman of $0 and $39,923 as of November 30, 2012 and 2011, respectively. Those advances are non-21interest bearing.

~~CHINA~~On ~~ENERGY~~a ~~CORPORATION~~periodic ~~AND~~basis, management reviews ~~SUBSIDIARIES~~the other receivable balances and establishes allowances where there is doubt as to the collectability of the individual balances. In evaluating collectability of the individual balances, the Company considers factors such as the age of the balance, payment history, and credit-worthiness of the creditor. The Company considers all these other receivables at November 30, 2012 and 2011 to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Included in loans to suppliers and other associated firms are advances to an entity affiliated to the Company through the Company’s Chairman and shareholders of Heat Power of $752,380 and $722,751 as of November 30, 2011 and 2010, respectively. Those advances are non-interest bearing.

On a periodic basis, management reviews the other receivable balances and establishes allowances where there is doubt as to the collectability of the individual balances. In evaluating collectability of the individual balances, the Company considers factors such as the age of the balance, payment history, and credit-worthiness of the creditor. The Company considers all other receivables at November 30, 2011 and 2010 to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts.

9. Fixed Assets

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

	November 30, 2011			November 30, 2010
	November 30, 2012			November 30, 2011
Buildings	$	1012,~~777~~220,~~208~~763		$	10,~~191~~777,~~194~~208
Machinery & equipment		4345,~~845~~247,~~438~~105			5443,~~791~~845,~~726~~438
Transferred assets (a)		1928,~~702~~576,~~907~~167			-19,702,907
Automotive equipment		12,~~953~~450,~~696~~577			1,~~139~~953,~~645~~696
Office Equipment		1,~~379~~470,~~812~~972			1,~~228~~379,~~767~~812
Construction in progress		2,~~819~~974,~~194~~939			12,~~919~~819,~~089~~194
		80,478,255			69,270,421
		92,940,523			80,478,255
Accumulated depreciation		(1725,~~540~~182,~~508~~228	)		(1117,~~662~~540,~~921~~508	)
Fixed assets, net	$	6267,~~937~~758,~~747~~295		$	5762,~~607~~937,~~500~~747

~~Depreciation expense~~(a) ~~charged~~Real toestate ~~operations~~with ~~for~~equipment subject to the ~~years~~lease ~~ended~~finance ~~November~~obligation ~~30, 2011~~as ~~and~~described ~~2010~~in ~~were~~Note ~~$5,264,229~~10 ~~and~~under ~~$3,957,804,~~“Finance ~~respectively~~Obligation”.

~~Land use rights of $245,318 and $234,607 at November 30, 2011 and 2010, respectively, are included in buildings and are depreciated over the useful lives along with the related buildings.~~ F-17

~~(a)~~Depreciation ~~The~~expense ~~real~~charged ~~estate~~to ~~with~~operations for ~~equipment~~the ~~subject~~years toended aNovember ~~lease~~30, ~~finance~~2012 ~~obligation~~and as2011 ~~described~~was in$7,150,312 ~~Note~~and 12$5,264,229, ~~under “Finance Obligation”~~respectively.

~~F-22~~Land use rights of $251,228 and $245,318 at November 30, 2012 and 2011, respectively, are included in buildings and are depreciated over the useful lives along with the related buildings.

~~CHINA~~10. ~~ENERGY~~Short ~~CORPORATION~~Term ~~AND SUBSIDIARIES~~Bank Loans

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

10. Notes Receivable

Certain loans were made for strategic purposes. Notes receivable, which were non-interest bearing, except as noted below, consisted of the following:

	November 30, 2011		November 30, 2010
Inner Mongolia Tehong Investment Co., Ltd. (a)	$	-	$	8,884,242
Inner Mongolia Tehong Coal Chemical Co., Ltd. (a)		-		3,275,836
QuanYing Coal Mine		-		361,786
Inner Mongolia XinKe Kaolin Fabrication Plant		-		1,679,916
Inner Mongolia Tehong Glass Co., Ltd with interest at 11.16% (a)		-		477,319
Total notes receivable	$	-	$	14,679,099

(a) Related parties affiliated to the Company through family members of the Company’s Chairman.

11. Short Term Bank Loans

The Company has bank loans collateralized by mining rights and the real estate properties and guaranteed by the Company’s CEO and a stockholder. Relevant terms of these bank loans are as follows:

	November 30, 2011		November 30, 2010
	November 30, 2012		November 30, 2011
Bank loan due 4/22/11, with interest at 6.90% (a)	$	-	$	2,999,850
Bank loan due 1/17/12, with interest at 6.94% (a)	$	-	$	12,546,068
Bank loan due 7/27/11, with interest at 5.84% (b)		-		6,599,670
Bank loan due 1/17/12, with interest at 6.94% (b)		-		8,782,247
Bank loan due 1/17/12, with interest at 6.94% (b)		12,546,068		-
Bank loan due 7/28/12, with interest at 7.22% (a)		-		7,809,927
Bank loan due 1/17/12, with interest at 6.94% (c)		8,782,247		-
Bank loan due 12/14/12, with interest at 7.22% (b)		12,848,310		-
Bank loan due 7/28/12, with interest at 7.22% (b)		7,809,927		-
Bank loan due 1/12/13, with interest at 7.22% (b)		9,636,232		-
Total	$	29,138,242	$	9,599,520
Bank loan due 10/26/13, with interest at 6.60% (c)		24,090,580		-
Total	$	46,575,122	$	29,138,242

At(a) ~~November~~Loan ~~30,~~to ~~2011~~Coal ~~and 2010~~Group, ~~the~~collateralized ~~Company~~by ~~had~~mining arights ~~letter~~and ~~of intent with a bank to provide~~ the ~~Company~~real anestate ~~additional~~properties ~~line~~ of ~~credit~~Coal ~~in the amount of RMB 14~~Group.~~2 million (US$2,226,927) and RMB 156 million (US$23,398,830), respectively (b).~~

(ab) Loan to ~~Heat~~Coal ~~Power~~Group, ~~guaranteed~~ collateralized by ~~Coal~~mining ~~Group~~rights ~~and~~of ~~the~~Coal ~~Company’s CEO and a stockholder~~Group.

(bc) Loan to Coal Group, ~~collateralized~~guaranteed by ~~mining~~Inner Mongolia ~~rights~~Shengli ~~and~~Resource ~~the~~Group ~~real~~Co. ~~estate properties of Coal Group~~Ltd.

~~(c)~~Interest ~~Loan~~expense related to ~~Coal~~the ~~Group~~above bank loans amounted to $2,163,265 ~~collateralized~~and by$1,060,893 ~~mining~~for ~~rights~~the ofyears ~~Coal~~ended ~~Group~~November 30, 2012 and 2011, respectively.

1211. Finance ~~Obligation~~Obligations

On March 31, 2011, Heat Power entered into a Finance Leasing Contract (“Contract 1”) with a leasing company covering its thermoelectric plants, heat transfer stations, and ~~related~~ machinery and equipment (“Transferred Assets 1”), having a gross value of RMB 125,635,589 (US$19,392,~~398~~298). Pursuant to ~~the~~ Contract 1, Heat Power sold to the leasing company its Transferred Assets 1 used for its operations toin ~~the~~exchange ~~leasing company~~ for RMB 60,000,000 (US$9,261,260) in cash. Under ~~the~~ Contract 1, Heat Power leased back the Transferred Assets 1 with a quarterly installment ~~payment~~ payment of RMB 3,555,163 (US$548,755) until April 2016, when ~~the~~ Contract 1 expires. ~~The~~ Contract 1 is guaranteed by Coal Group and an unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-purchase the Transferred Assets 1 at a purchase price of RMB 900,000, or RMB 1 if Heat Power timely pays the quarterly installments. Upon the execution of ~~the~~ Contract 1, Heat Power paid a servicing fee of RMB 3,300,000 (US$502,337) and a refundable deposit of RMB 9,000,000 (US$1,389,189). to the leasing company.

FOn March 28, 2012, Heat Power entered into another Finance Leasing Contract (“Contract 2”) with the same leasing company related to its thermoelectric plants, heat transfer stations, and machinery and equipment (“Transferred Assets 2”), with a gross value of RMB 52,293,912 (US$8,211,468). Pursuant to Contract 2, Heat Power sold to the leasing company its Transferred Assets 2 used for its operations in exchange for RMB 48,000,000 (US$7,537,215) in cash. Under Contract 2, Heat Power leased back the Transferred Assets 2 with a quarterly installment payment of RMB 2,868,777 (US$450,471) until April 2017, when Contract 2 expires. Contract 2 is guaranteed by Coal Group and an unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-23purchase the Transferred Assets 2 at a purchase price of RMB 720,000, or RMB 1 if Heat Power timely pays the quarterly installments. Included in the amount borrowed is a servicing fee of RMB 2,400,000 (US$379,897) and a refundable deposit of RMB 9,600,000 (US$1,507,443).

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~F-18

~~NOTES~~Since Heat Power has the option to repurchase TOits ~~THE~~Transferred ~~CONSOLIDATED~~Assets, ~~FINANCIAL~~Heat ~~STATEMENTS~~Power is considered to have “continuing involvement” pursuant to ASC 840-40, “Sales-Leaseback Transactions” (ASC 840-40). Accordingly, the lease did not qualify as a normal sale-leaseback transaction and is being accounted for under the financing method in which Heat Power reports the sales proceeds as a finance obligation, continues to report the Transferred Assets as its assets, and continues to depreciate the Transferred Assets. The lease payments are being recognized under the interest method. The effective interest rate of this transaction is 6.70% and 7.05% for Contract 1 and Contract 2, respectively.

~~FOR THE~~Future ~~YEARS~~payments ~~ENDED~~of ~~NOVEMBER~~the finance obligation as of November 30, ~~2011~~2012 ~~AND~~are ~~2010~~as follows:

Since Heat Power has an option to repurchase its Transferred Assets, Heat Power is considered to have “continuing involvement” pursuant to ASC 840-40, “Sales-Leaseback Transactions” (ASC 840-40). Accordingly, the lease did not qualify as a normal sale-leaseback transaction and is being accounted for under the financing method in which Heat Power reports the sales proceeds as a finance obligation, continues to report the Transferred Assets as its assets, and continues to depreciate the Transferred Assets. In addition, the lease payment, exclusive of the interest portion, decrease Heat Power’s liability with a portion of the lease payments being recognized under the interest method. The effective interest rate of this transaction is 6.70%.

Year Ending	Annual
November 30,	Amount

2013	$	4,126,362
2014		4,126,838
2015		4,126,838
2016		2,984,893
Thereafter		921,474

		16,286,405
Less: amount representing interest		2,159,471

Finance obligation		14,126,934
Less: current portion of finance obligation		3,237,653

Finance obligation, net of current portion	$	10,889,281

~~Future~~Interest expense for these finance obligations ~~payments~~amounted ofto US$1,167,378 and $523,810 for the ~~finance~~years ~~obligation~~ended November 30, 2012 and 2011, respectively. The refundable deposits are included in other long term assets in the consolidated balance sheet as of November 30, 2012 and 2011. The costs related to these Contracts of RMB 7,920,000 (US$1,271,983) are asbeing ~~follows:~~amortized by the interest method over the life of the leases.

Year Ending	Annual
November 30,	Amount
2012	$	2,226,867
2013		2,230,166
2014		2,230,166
2015		2,230,166
Thereafter		1,115,083
		10,032,448
Less: amount representing interest		1,429,547
Finance obligation		8,602,901
Less: current portion of finance obligation		1,695,944
Finance obligation, net of current portion	$	6,906,957

12. Cost of Revenues and Expenses

~~Interest expense~~Details ~~related~~of to the ~~finance~~cost ~~obligation~~of ~~amounted~~revenues ~~to US$523,810 and $0~~ for the years ended November 30, ~~2010~~2012 and 2011, ~~respectively. The~~are ~~refundable deposit is included in other long term assets in the consolidated balance sheet~~ as ~~of November 30, 2011. The costs related to the Contract of RMB 4,800,000 (US$752,764) are being amortized by the interest method over the life of the lease.~~follows:

13. Fair Value Measurements

	2012		2011

Salaries and wages	$	1,499,804	$	1,421,505
Operating supplies		605,663		1,661,594
Depreciation and amortization		7,216,527		5,471,679
Repairs		907,615		439,531
Coal and freight		191,015,024		90,234,807
Utilities		6,861,367		5,253,737
Other		1,019,559		450,857
Total	$	209,125,559	$	104,933,710

~~The~~Details ~~Company~~of ~~did~~the ~~not~~selling ~~have~~expenses ~~any~~for ~~applicable assets~~the ~~measured~~years atended ~~fair value at~~ November 30, 2012 and 2011. are as follows:

The following table presents the Company’s assets and related valuation inputs within the fair value hierarchy utilized to measure fair value on a recurring basis as of November 30, 2010:

	2012		2011

Transportation and storage	$	4,732,730	$	4,366,273
Sales tax and other expenses		3,202,176		2,169,241
Office		512,551		388,307
Salaries and welfare		652,751		239,188
Depreciation		34,697		26,254

Total	$	9,134,905	$	7,189,263

	Level 1		Level 2		Level 3		Total
Notes receivable	$	-	$	-	$	14,679,099	$	14,679,099
Total	$	-	$	-	$	14,679,099	$	14,679,099

F-19

~~F-24~~Details of the general and administrative expenses for the years ended November 30, 2012 and 2011 are as follows:

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	2012		2011

Professional and other fees	$	1,768,564	$	2,716,528
Office and other		1,934,082		953,947
Salaries and welfare		1,361,780		1,054,906
Travel		527,045		439,086
Depreciation		763,989		485,609
Repairs		724,718		125,182
Tax fee		444,369		173,493
Stock-based compensation		4,857		42,621
Total	$	7,529,404	$	5,991,372

~~NOTES TO~~13. ~~THE~~Rental ~~CONSOLIDATED FINANCIAL STATEMENTS~~Income

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

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

	Notes Receivable
Balance, December 1, 2009	$	7,913,100
Purchases, sales, issuance and settlements (net)		6,765,999
Balance, November 30, 2010		14,679,099
Settlements		(14,679,099	)
Balance, November 30, 2011	$	-

14. Cost of Revenue and Expenses

Details of the cost of revenues for the years ended November 30, 2011 and 2010 are as follows:

	2011		2010
Salaries and wages	$	1,421,505	$	1,214,218
Operating supplies		1,661,594		578,377
Depreciation and amortization		5,471,679		4,064,506
Repairs		439,531		304,333
Coal and freight		90,234,807		43,668,259
Utilities		5,253,737		3,671,047
Other		450,857		617,379
Total	$	104,933,710	$	54,118,119

Details of the selling expenses for the years ended November 30, 2011 and 2010 are as follows:

	2011		2010
Transportation and storage	$	4,366,273	$	3,738,736
Sales tax and other expenses		2,169,241		1,323,432
Office		388,307		259,538
Salaries and welfares		239,188		168,916
Depreciation		26,254		19,060
Total	$	7,189,263	$	5,509,682

Details of the general and administrative expenses for the years ended November 30, 2011 and 2010 are as follows:

	2011		2010
Professional and other fees	$	2,716,528	$	1,039,866
Office and other		953,947		942,352
Salaries and welfare		1,054,906		797,840
Travel		439,086		393,775
Depreciation		485,609		290,822
Repairs		125,182		89,691
Tax fee		173,493		162,913
Stock-based compensation		42,621		99,202
Total	$	5,991,372	$	3,816,461

F-25

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

15. Government Subsidies

Government subsidies are primarily comprised of financial support provided by the local government to Heat Power to ensure supply of heat to the XueJiaWan area as the price for heat charged is regulated and approved by the government. The financial support includes revenue subsidies to compensate for lower government regulated prices charged for heat and cost subsidies for the purchase of coal used in providing heat. Government subsidies are intended to be an incentive for Heat Power to supply heat at the government regulated prices. Government subsidies amounted to $1,060,309 and $5,511,922 for the years ended November 30, 2011 and 2010, respectively. All the government subsidies are included in revenues in the consolidated statements of income and other comprehensive income.

16. Rental Income

The Company entered into rental agreements with four unrelated parties to lease commercial space in its building under operating leases expiring through 2015.

Future minimum rental income as of November 30, 2012 is as follows:

Year Ending	~~Annual~~
November 30,	Amount
2012	$	210,277
2013	$	61,039
2013		196,032
2014		208,714
2014		196,032
2015		196,900
2015		12,938
2016		36,886
	$	~~615~~503,~~279~~539

Rental income, under operating leases, included in non-operating income in the consolidated statements of ~~income~~operations and other comprehensive income (loss) for ~~the~~ years ended ~~November~~ November 30, ~~2011~~2012 and ~~2010~~2011 was $~~366~~306,~~628~~717 and $~~250~~366,~~122~~628, respectively.

1714. ~~Income~~Government ~~Taxes~~Subsidies

~~The~~Government ~~Company~~subsidies isare ~~required~~primarily comprised of financial support provided by the local government to ~~file~~Heat ~~income tax~~Power ~~returns~~to inensure ~~both~~supply of heat to the ~~United~~XueJiaWan ~~States~~area ~~and~~as the ~~PRC.~~price for ~~Its~~heat ~~operations~~charged inis regulated and approved by the ~~United~~government. ~~States~~The ~~have~~financial ~~been~~support ~~insignificant~~includes ~~and~~revenue ~~income~~subsidies ~~taxes~~to compensate for ~~have~~lower ~~not~~government ~~been~~regulated ~~accrued.~~prices Incharged ~~the~~for ~~PRC,~~heat and cost subsidies for the ~~Company~~purchase ~~files~~of ~~tax~~coal ~~returns~~used in providing heat. Government subsidies are intended to be an incentive for Heat Power ~~and~~to ~~Coal~~supply ~~Group~~heat ~~and,~~at ~~although~~the itgovernment isregulated ~~part~~prices. ofGovernment ~~Coal~~subsidies ~~Group,~~to aHeat ~~separate~~Power ~~tax~~amounted ~~return~~to is$2,840,288 ~~required~~and $1,060,309 for the ~~operations~~years ofended ~~the~~November ~~coal~~30, ~~mine.~~2012 ~~The~~and ~~laws~~2011, ofrespectively. ~~the~~Coal ~~PRC~~Mine ~~permit~~received subsidies from the ~~carryforward~~government of ~~net operating~~$756,501 ~~losses~~and $0 for athe ~~period of five~~ years. Atended November 30, 2012 and 2011, ~~the~~respectively. ~~PRC~~All ~~entities~~the ~~had~~government subsidies noare ~~net~~included ~~operating~~in ~~losses~~revenues ~~available~~in ~~for~~the ~~future use~~consolidated asstatements ~~confirmed~~of byincome ~~the~~and ~~local~~other ~~taxing~~comprehensive ~~authority~~income.

F-2620

~~CHINA~~15. ~~ENERGY~~Income ~~CORPORATION AND SUBSIDIARIES~~Taxes

~~NOTES~~The Company is required to file income TOtax ~~THE~~returns ~~CONSOLIDATED~~in ~~FINANCIAL~~both ~~STATEMENTS~~the United States and the PRC. Its operations in the United States have been insignificant and income taxes have not been accrued. In the PRC, the Company files tax returns for Heat Power and Coal Group and, although it is part of Coal Group, a separate tax return is required for the operations of the coal mine. The laws of the PRC permit the carryforward of net operating losses for a period of five years. At November 30, 2012, the PRC entities had no net operating losses available for future use as confirmed by the local taxing authority.

~~FOR~~Under ASC 740, recognition of deferred ~~THE~~tax ~~YEARS~~assets ~~ENDED~~is ~~NOVEMBER~~permitted unless it is more likely than not that the assets will not be realized. Deferred tax assets consist primarily of future tax benefits of net operating losses recognized for Heat Power. A full valuation allowance has been established for the year ended November 30, ~~2011~~2012 ~~AND~~since ~~2010~~the Company is unable to determine if and when those benefits will be realized. There are no deferred tax assets or liabilities as of November 30, 2012 and 2011.

Under ASC 740, recognition of deferred tax assets is permitted unless it is more likely than not that the assets will not be realized. Deferred tax assets consist primarily of future tax benefits of net operating losses recognized for Heat Power. A full valuation allowance has been established for the year ended November 30, 2009 since the Company is unable to determine if and when those benefits will be realized. There are no deferred tax assets or liabilities as of November 30, 2011 and 2010.

The following is a reconciliation of the statutory rate with the effective income tax rate for the periods presented:

2012	Tax Provision			Rate of Tax
Tax at statutory rate	$	4,876,685			25.00	%
Tax effect of loss of subsidiaries		2,687,598			13.78	%
Non deductible expenses		1,214			0.01	%
Tax effect of eliminated intercompany profit		(362,073	)		(1.86	)%

Tax at effective tax rate	$	7,203,424			36.93	%

2011	Tax Provision		Rate of Tax
Tax at statutory rate	$	9,552,173		25.00	%
Tax effect of loss of subsidiaries		40,270		0.11	%
Non deductible expenses		390,779		1.02	%
Tax effect of eliminated intercompany profit		590,245		1.54	%

Tax at effective tax rate	$	10,573,467		27.67	%

2010	Tax Provision		Rate of Tax
Tax at statutory rate	$	5,957,894		25.00	%
Non deductible expenses		24,801		0.10	%
Tax effect of eliminated intercompany profit		253,721		1.07	%
Tax at effective tax rate	$	6,236,416		26.17	%

The Company follows ASC 740, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS 109.” ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. At November 30, 2012, the Company is not aware of any uncertain tax positions.

The Company has adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS 109.” (“FIN 48”), as codified in ASC 740. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on deF-~~recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions.~~21

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

~~F-27~~In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it has any U.S. federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through November 30, 2012. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. federal income taxes, interest and penalties. The tax years ended November 30, 2002 to 2011 remain open to examination by tax authorities.

~~CHINA~~16. ~~ENERGY~~Stock-Based ~~CORPORATION~~Compensation ~~AND SUBSIDIARIES~~

~~NOTES~~On May 31, 2010, the Company granted to TOeach ~~THE~~of ~~CONSOLIDATED~~its ~~FINANCIAL~~three ~~STATEMENTS~~independent directors an option to purchase 20,000 shares of common stock at an exercise price of US$2.02 per share. The options vested over one year in equal, quarterly instalments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2010, subject to their continued service as a director. The Compensation Committee of the Board of Directors has determined the performance conditions have been met.

~~FOR~~On September 5, 2011, the Company granted ~~THE~~another ~~YEARS~~option ~~ENDED~~to ~~NOVEMBER~~two 30of its three independent directors to purchase 20,000 shares of common stock and one of its three independent directors to purchase 15,000 shares of common stock at an exercise price of US$0.39 per share. The options vested over one year in equal, quarterly instalments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2011, ~~AND~~subject ~~2010~~to their continued service as a director. The Compensation Committee of the Board of Directors has determined the performance conditions have been met.

InThe ~~addition,~~fair ~~because~~value of the ~~Company~~options ~~did~~was ~~not~~estimated ~~generate~~using ~~any income in~~ the ~~United~~Black-Scholes ~~States~~option orpricing ~~otherwise have any U~~model.S. ~~taxable~~Expected ~~income,~~volatility ~~the~~is ~~Company~~based ~~does~~on ~~not~~historical ~~believe~~volatility ~~that~~data itof ~~has~~the ~~any~~Company’s Ustock.S. ~~federal~~The ~~income~~expected ~~tax~~term ~~liabilities~~of instock ~~respect~~options togranted ~~any~~is ~~transactions~~based ~~that~~on ~~the~~historical ~~Company~~data orand ~~any~~represents ofthe ~~its~~period ~~subsidiaries~~of ~~may~~time ~~have~~that ~~engaged~~stock options inare ~~through~~expected ~~November~~to ~~30,~~be ~~2011~~outstanding. ~~However,~~The ~~there~~risk-free ~~can~~interest berate nois ~~assurance~~based ~~that~~on ~~the~~a ~~IRS~~zero-coupon ~~will~~United ~~agree~~States ~~with~~Treasury ~~this~~bond ~~position,~~whose ~~and~~maturity period ~~therefore~~equals the ~~Company~~ ~~ultimately~~expected ~~could~~term beof ~~liable~~the ~~for~~our Uoptions.S. ~~federal~~The ~~income~~weighted ~~taxes,~~average ~~interest~~estimated ~~and~~grant ~~penalties.~~date ~~The~~fair ~~tax~~value ~~years~~for ~~ended~~options ~~November~~granted ~~30, 2002~~ to the ~~2010~~independent ~~remain~~directors ~~open~~was toUS$1.24 ~~examination~~per ~~by tax authorities~~share.

~~18.~~Weighted ~~Stock-Based~~average ~~Compensation~~assumptions used to estimate the fair values of stock options on the date of grants are as follows:

In 2008, the Company granted to its officers, directors and independent consultants options to purchase 4,500,000 shares of common stock with exercise price at US$0.50. In 2010, the options were either expired or cancelled.

On May 31, 2010, the Company granted to each of its three independent directors an option to purchase 20,000 shares of common stock at an exercise price of US$2.02 per share. The options vested over one year in equal, quarterly installments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2010, subject to their continued service as a director.

On September 5, 2011, the Company granted another option to two of its three independent directors to purchase 20,000 shares of common stock and one of its three independent directors to purchase 15,000 shares of common stock at an exercise price of US$0.39 per share. The options vest over one year in equal, quarterly instalments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2011, subject to their continued service as a director. The Compensation Committee of the Board of Directors has determined the performance conditions have been met.

The fair value of the options is estimated using the Black-Scholes option pricing model. Expected volatility is based on historical volatility data of the Company’s stock. The expected term of stock options granted is based on historical data and represents the period of time that stock options are expected to be outstanding. The risk-free interest rate is based on a zero-coupon United States Treasury bond whose maturity period equals the expected term of the our options. The weighted average estimated grant date fair value for options granted to the independent directors was US$1.24 per share.

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

	September 5, 2011
Expected dividend yield		-
Expected stock price volatility		182.07	%
Risk free interest rate		2.00	%
Expected life (years)		10 years

F-28

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

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

The stock-based compensation, included in general and administrative expenses in the accompanying consolidated statements of ~~income~~operations and other comprehensive income (loss), ~~was~~is $424,~~621~~857 and $9942,~~202~~621 for the year ended November 30, ~~2011~~2012 and ~~2010~~2011, respectively.

F-22

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

	Shares		Weighted Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at November 30, 2010		60,000	$	2.02		109.5 years		-
Granted		55,000		0.39		10.0 years		-
Exercised		-		-		-		-
Cancelled and expired		-		-		-		-
Forfeited		-		-		-		-
Outstanding at November 30, 2011		115,000	$	1.24		10 years		-
Outstanding at November 30, 2012		115,000	$	1.24		8.1 years		-
Vested and expected to vest at November 30, 2011		85,000	$	1.54		10 years		-
Vested and expected to vest at November 30, 2012		115,000	$	1.24		8.1 years		-
Exercisable at November 30, 2011		85,000	$	1.54		10 years		-
Exercisable at November 30, 2012		115,000	$	1.24		8.1 years		-

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. There were no options that were exercised during the years ended November 30, ~~2011~~2012 and ~~2010~~2011.

AsThere ofis ~~November~~no ~~30, 2011, $4,857 of total~~ unrecognized compensation costs related to ~~non~~these ~~vested~~ options ~~were~~as ~~scheduled~~of toNovember ~~be recognized through May 31~~30, 2012.

FThe Company entered into a Terms of Services and Release Agreement with the Company’s CEO, a consulting firm, and Fortune Place Holdings Limited (“Fortune Place”), a British Virgin Islands corporation. The Company’s CEO is the sole director of Fortune Place. Pursuant to the terms of the agreement, the consulting firm would be entitled to receive equity consideration of 1,800,000 restricted shares of the Company held by Fortune Place for consulting services rendered to the Company, contingent upon the completion of all of the consulting services enumerated in the agreement. The filing of the Company’s Form 10-29Q for the quarter ended February 28, 2011 represented the final item of the consulting services that the consulting firm was required to complete (“Completion Date”). As of the Completion Date, the fair value of shares transferred for the services rendered to the Company were valued at $1,386,000.

~~CHINA~~The ~~ENERGY~~Company ~~CORPORATION~~issued ~~AND~~an aggregate of 60,000 ~~SUBSIDIARIES~~share of common stock to an investor relations firm in consideration for consulting services rendered through the period ended on March 14, 2011. The fair value of the stock was $121,800.

~~NOTES TO~~17. ~~THE CONSOLIDATED FINANCIAL STATEMENTS~~Contingencies

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

The Company entered into a Terms of Services and Release Agreement with the Company’s CEO, a consulting firm, and Fortune Place Holdings Limited (“Fortune Place”), a British Virgin Islands corporation. The Company’s CEO is the sole director of Fortune Place. Pursuant to the terms of the agreement, the consulting firm would be entitled to receive equity consideration of 1,800,000 restricted shares of the Company held by Fortune Place for consulting services rendered to the Company, contingent upon the completion of all of the consulting services enumerated in the agreement. The filing of the Company’s Form 10-Q for the quarter ended February 28, 2011 represented the final item of the consulting services that the consulting firm was required to complete (“Completion Date”). As of the Completion Date, the fair value of shares transferred for the services rendered to the Company were valued at $1,386,000 and recorded as general and administrative expenses in the accompanying consolidated statements of income and other comprehensive income for the year ended November 30, 2011. The fair value of the transferred shares has been shown as an increase to additional paid-in capital for the year ended November 30, 2011 in the accompanying consolidated statements of changes in stockholders’ equity.

The Company issued an aggregate of 60,000 share of common stock to an investor relations firm in consideration for consulting services rendered through the period ended on March 14, 2011. The fair value of the stock was $121,800, which has been included in general and administrative expenses in the accompanying consolidated statements of income and other comprehensive income for the year ended November 30, 2011.

19. Contingencies

As is customary in the PRC, except for auto coverage, Coal Group and Heat Power do not carry sufficient insurance. As a result, the Company is effectively self-insuring risk of potential accidents or loss that may occur in the workplace. Given the nature of the industry, the Company may be exposed to risks that could have a material adverse impact on its consolidated financial statements.

The PRC has enacted legislation which appears to restrict the ability of entities considered foreign, like the Company, to have ownership interest in operating companies located in the PRC. The Company has taken steps to avoid any potential adverse impact of this legislation. (See Note 1)F-23

The ~~Company~~PRC ~~did~~has ~~not~~enacted ~~file~~legislation ~~its~~which ~~U.S. federal~~appears ~~income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons With Respect~~ to ~~Certain~~restrict ~~Foreign Corporations” for~~ the ~~years~~ability ~~ended~~of ~~November 30,~~entities ~~2002~~considered ~~through 2005. The Company was also late in filing for the years ended November 30, 2007 and 2008. Failure to furnish any information with respect to any~~ foreign ~~business entity required~~, ~~within~~like the ~~time prescribed by the IRS, subjects the~~ Company ~~to certain civil penalties. The Company filed the delinquent returns and sought waivers of any penalties under the IRS 2011 Offshore Voluntary Disclosure Initiative. Under the Initiative~~, ~~the IRS has indicated that it will not impose a penalty for the failure~~ to ~~file~~have ~~delinquent~~ownership ~~information~~interest ~~returns~~in ~~(Form~~operating ~~5471)~~companies ~~if there are no underreported tax~~located ~~liabilities~~in ~~and~~ the ~~information returns are filed by August 31, 2011~~PRC. The Company is ~~unable~~has totaken ~~determine~~steps ~~the~~to ~~amount~~avoid of any ~~additional~~potential ~~penalties~~adverse ~~that~~impact ~~may~~of ~~be assessed at~~ this ~~time~~legislation. ~~Management~~(See isNote of1). However, the ~~opinion that~~enacted ~~additional~~legislation ~~penalties,~~can ~~if any, that may~~ be ~~assessed~~affected ~~would~~due ~~not~~to bethe ~~material~~PRC’s topolitical, ~~the~~social ~~consolidated~~and ~~financial~~economic ~~statements~~conditions.

~~The~~ As disclosed in note 14, the Company was delinquent ~~late~~ in filing ~~the~~certain ~~information~~tax ~~reports~~returns ~~for~~with the ~~years~~U.S. ~~ended~~Internal ~~November~~Revenue ~~30,~~Service. ~~2004~~The ~~through~~Company ~~2008~~filed ~~concerning~~the ~~its~~delinquent ~~interest~~returns inand sought ~~foreign~~waivers ~~bank~~of ~~accounts~~any onpenalties ~~TDF~~under ~~90-22.1,~~the ~~“Report~~IRS of2011 ~~Foreign~~Offshore ~~Bank~~Voluntary ~~and~~Disclosure ~~Financial~~Initiative. ~~Accounts”~~Under ~~(“FBARs”).~~the program, the IRS has indicated ~~For~~that it will not ~~complying~~impose ~~with~~a ~~the~~penalty ~~FBAR~~for ~~reporting~~the ~~and~~failure ~~recordkeeping~~to ~~requirements,~~file ~~the~~delinquent ~~Company~~information isreturns ~~subject~~(Form to5471) ~~civil~~if ~~penalties~~there upare tono ~~$10,000~~underreported ~~for~~tax ~~each~~liabilities ofand ~~its~~the ~~foreign~~information ~~bank~~returns ~~accounts~~are filed by August 31, 2011. The Company is unable to determine the amount of ~~any~~ penalties, if any, that may be assessed at this time. ~~and~~Management ~~believes~~is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

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

~~CHINA~~18. ~~ENERGY~~Preferred ~~CORPORATION AND SUBSIDIARIES~~stock

~~NOTES~~On October 21, 2010, the Board of Directors TOof ~~THE~~the ~~CONSOLIDATED~~Company ~~FINANCIAL~~adopted ~~STATEMENTS~~resolutions authorizing 5,000,000 shares of preferred stock. As a result, the Company’s authorized shares of common stock was reduced from 200,000,000 shares to 195,000,000 shares with the creation of a new class of 5,000,000 shares of preferred stock upon filing of the Certificate of Amendment to the Company’s Articles of Incorporation with the Nevada Secretary of State on January 11, 2011. The total number of shares the Company is authorized to issue did not change. No share of preferred stock is outstanding as of November 30, 2012.

~~FOR THE~~19. ~~YEARS~~Condensed ~~ENDED~~Financial ~~NOVEMBER~~Information of ~~30,~~Registrant ~~2011 AND 2010~~

~~20.~~The following condensed financial information ~~Preferred~~of ~~stock~~the US parent company only balance sheets as of November 30, 2012 and 2011, and the US parent company only statements of operations, and cash flows for the years ended November 30, 2012 and 2011:

On October 21, 2010, the Board of Directors of the Company adopted resolutions authorizing 5,000,000 shares of preferred stock. As a result, the Company’s authorized shares of common stock was reduced from 200,000,000 shares to 195,000,000 shares with the creation of a new class of 5,000,000 shares of preferred stock upon filing of the Certificate of Amendment to the Company’s Articles of Incorporation with the Nevada Secretary of State on January 11, 2011. The total number of shares the Company is authorized to issue did not change.

21. Condensed Financial Information of Registrant

The following condensed financial information of the US parent company only balance sheets as of November 30, 2011 and 2010, and the US parent company only statements of operations, and cash flows for the years ended November 30, 2011 and 2010:

Balance Sheets

	November 30,
	2011		2010
	2012		2011
ASSETS
Other assets:
Investment in subsidiaries and VIEs	$	8498,~~222~~731,~~258~~695	$	5284,~~542~~222,~~087~~258
Total other assets		8498,~~222~~731,~~258~~695		5284,~~542~~222,~~087~~258
TOTAL ASSETS	$	8498,~~222~~731,~~258~~695	$	5284,~~542~~222,~~087~~258
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Other liabilities	$	~~189~~184,~~406~~806	$	~~586~~189,~~065~~406
Total current liabilities		~~189~~184,~~406~~806		~~586~~189,~~065~~406
Stockholders’ equity:
Preferred stock: no par value; 5,000,000 shares and 0 shares authorized at November 30, 2011 and November 30, 2010, respectively; none issued and outstanding shares		-		-
Common stock: authorized 200,000,000 shares of $0.001 par value; 45,000,000 shares issued and outstanding		45,060		45,060
Common stock: $0.001 par value; 195,000,000 shares and 200,000,000 shares authorized at November 30, 2011 and November 30, 2010, respectively; 45,060,000 shares and 45,000,000 issued and outstanding at November 30, 2011 and November 30, 2010, respectively		45,060		45,000
Additional paid-in capital		10,163,545		10,163,545
Additional paid-in capital		10,163,545		8,970,805
Paid in capital – stock options		461,680		456,823
Paid in capital – stock options		456,823		99,202
Retained earnings		87,876,604		73,367,424
Retained earnings		73,367,424		42,841,015
Total stockholders’ equity		98,546,889		84,032,852
Total stockholders’ equity		84,032,852		51,956,022
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	98,731,695	$	84,222,258
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	84,222,258	$	52,542,087

F-24

Statements of Operations

	For the Years Ended November 30,
	2011		2010
	2012		2011
Revenues:
Share of earnings from investment in subsidiaries and VIEs	$	3215,~~663~~116,~~341~~247	$	1932,~~290~~663,~~452~~341
Total revenues		3215,~~663~~116,~~341~~247		1932,~~290~~663,~~452~~341
Operating expenses:
General and administrative		2607,~~136,932~~067		~~685~~2,~~267~~136,932
Total operating expenses		2607,~~136,932~~067		~~685~~2,~~267~~136,932
Net income	$	3014,~~526~~509,~~409~~180	$	1830,~~605~~526,~~185~~409

F-31

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Statements of Cash Flows

	For the Years Ended November 30,
	2011			2010
	2012			2011
Cash flows from operating activities:
Net income	$	3014,~~526~~509,~~409~~180		$	1830,~~605~~526,~~185~~409
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Share of earnings from investment in subsidiaries		(3215,~~663~~116,~~341~~247	)-		(1932,~~290~~663,~~452~~341	)
Stock-based compensation		14,~~550,421~~857			991,~~202~~550,421
Changes in operating assets and liabilities:
(Decrease) increase in accrued liabilities and other payables		(~~396~~4,~~659~~601	)		~~466~~(396,~~065~~659	)
Net cash (used in) operating activities		(~~983~~606,~~170~~811	)		(~~120~~983,~~000~~170	)
Cash flows from financing activities:
Advance from shareholders		~~983~~606,~~170~~811			~~120~~983,~~000~~170
Net cash provided by financing activities		~~983~~606,~~170~~811			~~120~~983,~~000~~170
Net increase in cash and cash equivalents		-			-
Cash and cash equivalents, beginning of year		-			-
Cash and cash equivalents, end of year	$	-		$	-

~~Basis of Presentation~~F-25

20. Basis of Presentation

The Company records its investment in its subsidiaries and VIEs under the equity method of accounting. Such investment is presented as “Investment in subsidiaries and VIEs” on the balance sheets and shares of the subsidiaries and VIEs’ profits are presented as “Equity in profits of subsidiaries and VIEs” in the statements of income.

Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. The parent-only financial information has been derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements.

The US parent company has no assets other than investments in its subsidiaries and VIEs. ~~There were no cash transactions in the parent company during the years ended November 30, 2011 and 2010.~~

21. Restricted Net Assets

Under the PRC laws and regulations, the Company’s PRC subsidiaries and VIEs are restricted in their ability to transfer certain of ~~its~~ their net assets to the Company in the form of dividend payments, loans or advances. The restrictions include paid-up capital and statutory reserves of the Company’s PRC subsidiary and the net assets of the VIEs, totalling $8498,~~032~~546,~~852~~ 889 and $5184,~~956~~032,~~022~~852 as of November 30, ~~2011~~2012 and ~~2010~~2011.

In addition, the Company’s operations and revenues are conducted and generated in the PRC, all of the Company’s revenues being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

FSchedule I of Article 5-3204 of Regulation S-X requires the condensed financial information of the Company to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiaries and VIEs exceed 25% of the consolidated net assets of the Company.

CHINA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2011 AND 2010

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the registrant to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiaries and VIEs exceed 25% of the consolidated net assets of the Company.

22. Concentration of Credit Risk

Substantially all of the Company’s bank accounts are in banks located in The People’s Republic of China and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

F-26

23. Major Customers

The following table shows each of the customers who account for sales of approximately 10% or greater of Coal Group:

	2012

Zhonghai Jiaye International Trading (Tianjin) Co., Ltd.		18	%
Shenhua International Transportation & Selling Co., Ltd.		15	%

	2011

Zhejiang Coal Development Co., Ltd.		17	%
Huadian Coal Group Trading Co., Ltd.		13	%

	2010
Qinhuangdao Minfeng Coal Trading Co., Ltd.		16	%
Zhangjiagang Xindongming Coal Trading Co., Ltd.		10	%

24. Subsequent Event

FThe Company will effect a share combination or “reverse stock split” of common stock whereby each 12,000,000 outstanding shares of common stock will be converted into one whole share, and in lieu of the Company’s issuing fractional shares to stockholders owning less than one whole share of common stock after effectiveness of the share combination, the Company will pay cash equal to $0.14 multiplied by the number of pre-33split shares held by a stockholder who owns fewer than 12,000,000 shares immediately prior to the split. Stockholders with fewer than 12,000,000 shares immediately prior to the reverse stock split will have no further equity interest in the Company and will become entitled only to a cash payment equal to $0.14 times the number of pre-split shares.

The reverse stock split is considered a “going private” transaction as defined in Rule 13e-3 promulgated under the Exchange Act because it is intended to, and, if completed, will enable the Company to terminate the registration of common stock under Section 15(d) of the Exchange Act and terminate our duty to file periodic reports with the Securities and Exchange Commission (“SEC”).

The Company intends to effect the reverse stock split as soon as practicable after all filing requirements have been satisfied. The Company proposes to consummate the reverse stock split no earlier than the 20th day after the date on which we first mail the Notice of Internet Availability of Information Statement to our stockholders. The effective date of the reverse stock split will be the date the Company files a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State.

F-27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this ~~14th~~5th day of ~~March~~April, ~~2012~~2013.

CHINA ENERGY CORPORATION By: /s/ ~~WenXiang~~Wenxiang Ding Name: ~~WenXiang~~Wenxiang Ding Title: President, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this ~~amended~~ report has been signed below by the following persons on behalf of the Company and in the capacities indicated ~~below~~ below and on the dates indicated.

Signature	Title	Date
/s/ WenXiang Ding	Chairman, Chief Executive Officer, President, Secretary, Treasurer and Director
/s/ Wenxiang Ding	Chairman, Chief Executive Officer, President, Secretary, Treasurer and Director
WenXiang Ding	(Principal Executive Officer)	March 14, 2012
Wenxiang Ding	(Principal Executive Officer)	April 5, 2013
/s/ Fu Xu	Acting Chief Financial Officer
Fu Xu	(Principal Financial and Accounting Officer)	~~March~~April 145, ~~2012~~2013
/s/ YanHua Li
/s/ Yanhua Li
YanHua Li	Director	March 14, 2012
Yanhua Li	Director	April 5, 2013
/s/ Stephen Markscheid
/s/ Shiwen Zhou
Stephen Markscheid	Director	March 14, 2012
Shiwen Zhou	Director	April 5, 2013
/s/ Paul Li
Paul Li	Director	March 14, 2012
/s/ Tieming Ge
Tieming Ge	Director	March 14, 2012

Plan category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a)

Weighted-average
exercise price of
outstanding options,
warrants and rights (b)

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a) (c))

Equity compensation plans approved by security holders

Equity compensation plans not approved by security holders 1