Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.Financial_Report.xls
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R5.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R3.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R1.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R8.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R4.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R9.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R6.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R7.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R2.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R14.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R13.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R20.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R23.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R24.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R15.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R10.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R18.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R25.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R17.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R21.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R19.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R12.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R16.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R22.htm
XML - IDEA: XBRL DOCUMENT - SGB International Holdings Inc.R11.htm
EX-31.1 - CERTIFICATION OF THE CEO - SGB International Holdings Inc.exhibit31-1.htm
EX-32.1 - CERTIFICATION OF THE CEO - SGB International Holdings Inc.exhibit32-1.htm
EX-31.2 - CERTIFICATION OF THE CFO - SGB International Holdings Inc.exhibit31-2.htm
EX-32.2 - CERTIFICATION OF THE CFO - SGB International Holdings Inc.exhibit32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2011
or

[   ] 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: 000-53490

SGB INTERNATIONAL HOLDINGS INC.
(Exact name of registrant as specified in its charter)

British Columbia N/A
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

No. 25 Jia He Road, Xinjing Centre, Unit C2606
Siming District, Xiamen City, Fujian Province
PRC China 362300
(Address of principal executive offices and Zip Code)

Registrant's telephone number, including area code: 86-13611930299

N/A
(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class Name of each Exchange on which registered
Nil N/A

Securities registered pursuant to Section 12(g) of the Act

Common Stock, no par value
(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 [   ]     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 [   ]     No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [   ]     No [X]


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 [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, 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. [   ]

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

Large accelerated filer [   ]   Accelerated filer                 [   ]
Non-accelerated filer   [   ] (Do not check if a smaller reporting company) Smaller reporting company [X]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

44,349,426 shares of common stock at a price of $0.01 per share for an aggregate market value of $443,494.1

1 The aggregate market value of the voting stock held by non-affiliates is computed by reference to the price of shares of common stock sold on April 13, 2012.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
373,793,578 shares of common stock are issued and outstanding as of April 13, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable

ii


TABLE OF CONTENTS

PART I 1
  ITEM 1. BUSINESS 1
  ITEM 1A. RISK FACTORS 20
  ITEM 1B. UNRESOLVED STAFF COMMENTS 30
  ITEM 2. PROPERTIES 30
  ITEM 3. LEGAL PROCEEDINGS 38
  ITEM 4. Mine Safety Disclosures 39
     
PART II 39
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 39
  ITEM 6. SELECTED FINANCIAL DATA 40
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 40
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL MATTERS 45
  ITEM 9A. CONTROLS AND PROCEDURES 45
  ITEM 9B. OTHER INFORMATION 46
     
PART III 47
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 47
  ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 52
  ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. 53
     
PART IV 53
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. 53
     
SIGNATURES 55

iii


PART I

ITEM 1. BUSINESS

Forward-Looking Statements

This report contains forward-looking statements. Forward-looking statements are statements that relate to future events or future financial performance. In some cases, you can identify forward-looking statements by the use of terminology such as “may”, “should”, “intend”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “project”, “predict”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements speak only as of the date of this report. Examples of forward-looking statements made in this annual report include statements pertaining to, among other things:

  • our future development programs and results;
  • our future capital expenditures;
  • our future investments in and acquisitions of mineral properties;
  • our financial and operating performance;
  • the estimation of mineral reserves and the realization of mineral reserve estimates;
  • operating expenditures;
  • governmental regulation of mining operations; and
  • our need for, and our ability to raise, capital.

The material assumptions supporting these forward-looking statements include, among other things:

  • our ability to obtain any necessary financing on acceptable terms, if and when needed;
  • timing and amount of capital expenditures;
  • our ability to obtain necessary drilling and related equipments in a timely and cost-effective manner to carry out operating activities;
  • retention of skilled personnel;
  • the timely receipt of required regulatory approvals;
  • continuation of current tax and regulatory regime;
  • current exchange rate and interest rates; and
  • general economic and financial market conditions.

Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

These forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, including:

  • risks and uncertainties relating to the interpretation of sampling results, the geology, grade and continuity of mineral deposits;
  • statements respecting anticipated business activities;
  • planned expenditures;
  • corporate strategies;
  • proposed acquisitions and dispositions of assets;
  • anticipated capital expenditures;
  • future production;
  • expected mine life;
  • future exploration and expenditures on our company’s properties;
  • estimates of future Chinese demand for coal;
  • risks and uncertainties that results of initial sampling and mapping will not be consistent with our expectations;
  • mining and development risks, including risks related to accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in production;
  • the potential for delays in exploration, development, or production activities;
  • risks related to the inherent uncertainty of cost estimates and the potential for unexpected costs and expenses;

1


  • risks related to commodity price fluctuations;
  • risks related to failure to obtain adequate financing on a timely basis and on acceptable terms for our operations;
  • risks related to environmental regulation and liability;
  • risks that the amounts reserved or allocated for environmental compliance, reclamation, post-closure control measures, monitoring and on-going maintenance may not be sufficient to cover such costs;
  • risks related to tax assessments;
  • political and regulatory risks associated with mining development and exploration; and
  • the risks in the section entitled “Risk Factors”.

These risks, as well as risks that we cannot currently anticipate, could cause our company’s or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

In this report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock. “RMB” or “Renminbi” refers to the legal currency of China and “$” or “US$” refers to the legal currency of the United States. “China” or “PRC” refers to the People’s Republic of China.

As used in this report, the terms “we”, “us”, and “ our” refer to SGB International Holdings Inc. and its newly acquired subsidiaries, Dragon International Resources Group Co., Limited, a Hong Kong corporation, and Fujian Huilong Coal Mine Co., Ltd. (formerly Yongding County Shangzhai Coal Mine Co., Ltd.), a People’s Republic of China corporation, unless the context clear indicates otherwise. As used in this report, the terms “Dragon International” and “Fujian Huilong” refer to Dragon International Resources Group Co., Limited and Fujian Huilong Coal Mine Co., Ltd., respectively.

Foreign Private Issuer Status

We are a foreign private issuer as defined under Rule 3b-4 promulgated under the Securities Exchange Act of 1934, but voluntarily file our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

We have elected to voluntarily file our annual, quarterly, and current reports on U.S. domestic forms because we have used such forms ever since we began filing the reports under the Securities Exchange Act of 1934. Going forward, we intend to continue to comply with our reporting requirements under Section 13 of the Securities Exchange Act of 1934 using the Forms 10-K, 10-Q, and 8-K.

As a foreign private issuer, we are not required to use the U.S. domestic forms to comply with our reporting requirements under Section 13 of the Securities Exchange Act of 1934. Instead, we can file an annual report on Form 20-F each year with the Securities and Exchange Commission and file our interim financial statements and management’s discussion and analysis and reports about material changes to our company, in the forms required by Canadian securities legislation, with the Securities and Exchange Commission on Form 6-K.

Corporate History

We were incorporated on November 6, 1997 in the province of British Columbia, Canada under the name “Slocan Valley Minerals Ltd.” with an authorized share capital of 10,000,000 common shares without par value. Following our incorporation we were not actively engaged in any business activities. On June 1, 2004 we increased our authorized share capital from 10,000,000 common shares without par value to an unlimited number of common shares without par value. On June 11, 2004 we changed our name to “Orca International Language Schools Inc.”

2


Effective March 3, 2009, we changed our name from “Orca International Language Schools Inc.” to “SGB International Holdings Inc.” and we created a new class of preferred shares. As a result, our authorized capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. We have not issued any preferred shares. Effective March 4, 2009, we effected a 4.5 for one forward split of our issued and outstanding common shares.

Our goal originally was to provide management services to schools in the international education industry based on the principles of: improving their administrative, operational, marketing, sales and human resources functions; building links with other schools worldwide to foster student exchange; and repositioning the schools to concentrate their curriculum on preparing students for one of the three major English proficiency tests. We have been searching for a school as the initial client but we have not been successful in finding any such school. Since we have incurred losses since November 6, 1997, in March 2009, our board of directors has decided to explore the possibility of adopting a different business plan to protect our shareholders’ value.

Prior to the date of our reverse acquisition, discussed below, we were considered as a “shell company” under the Rule 405 promulgated under the Securities Act of 1933 and Rule 12b-2 promulgated under the Securities Exchange Act of 1934 because we had nominal operations and nominal assets.

As described above, on April 12, 2011, we entered into the share exchange agreement with Dragon International Resources Group Co., Limited, its shareholders and Fujian Huilong Coal Mine Co., Ltd. (formerly known as Yongding Shangzhai Coal Mine Co., Ltd.) and as a result of the closing of this agreement on May 11, 2011, we adopted the business of Fujian Huilong Coal Mine Co., Ltd. and abandoned our prior business.

Reverse Acquisition of Dragon International Resources Group Co., Limited

On May 11, 2011, we completed a reverse acquisition transaction with the shareholders of Dragon International Resources Group Co., Limited pursuant to which we acquired 100% of the issued and outstanding capital stock of Dragon International Resources Group Co. in exchange for an aggregate of 220,522,000 common shares of our company, which constituted 90% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition.

Dragon International was incorporated in the Hong Kong on October 5, 2010, and is a holding company for Fujian Huilong. Fujian Huilong was incorporated in the People’s Republic of China on August 4, 2005.

There was no material relationship that existed between our company, our former principal shareholders, and the shareholders of Dragon International prior to the time of the reverse acquisition other than in respect of the reverse acquisition. No third parties played a material role in arranging or facilitating the transactions and no third parties received benefits from arranging or facilitating the transaction between our company and the former shareholders of Dragon International.

Because we did not have any active business operations prior to the reverse take over of Dragon International and were considered a “shell company”, our previous management, including Mr. Xin Li, actively pursued opportunities for us to acquire an operating business to enhance shareholders value. Mr. Li met representatives of Fujian Huilong Coal Mine Co., Ltd. in a business meeting and learned that Fujian Huilong is contemplating going public in North America through its holding company in Hong Kong, Dragon International. The parties started negotiating the terms of the transaction and subsequently agreed to terms of the share exchange agreement entered into between our company and shareholders of Dragon International. Other than Mr. Li and principals of Dragon International, no third parties played a material role in arranging or facilitating the transactions. Mr. Li is considered a promoter of our company and he did not receive anything of value from our company for these transactions.

As a result of the reverse acquisition, we have assumed the business and operations of Fujian Huilong Coal Mine Co., Ltd., a wholly-owned subsidiary of Dragon International Resources Group Co., Limited. Fujian Huilong Coal Mine Co., Ltd. is a company engaged in coal production and sales by exploring, developing and mining coal properties. Fujian Huilong Coal Mine Co., Ltd. owns and operates a coal mine, located at Shangzhai Village, Yongding County, Longyan City of Fujian Province, People’s Republic of China, which has coal reserves of an estimated 1,354,000 t as of December 31, 2009, including 416,000 t proven coal reserve, and 938,000 t probable coal reserve. Because most of the annual production of 150,000 t in year 2010 was produced outside of the 5.7 km2

3


area covered by our mining permit (permit number: 3500000620055), the remaining coal reserve as of December 31, 2010 remained at approximately 1,354,000 t. The coal production in 2011 was conducted within the parameter stated in the mining permit. The remaining coal reserve as of December 31, 2011 is still pending for the geological report to be issued from an independent and qualified Canada based geologist company, Wardrop Engineering Inc. (the “Wardrop”). Because the scope of Wardrop’s work on its May 2011 NI-43-101 technical report covered 5.7 km2 area of the mining permit numbered 3500000620055, which provides for an annual production rate of 90,000 t/a and is in good standing until April 2016, but Wardrop noted that Fujian Huilong production was over 200,000 t in year 2009 , over 150,000 t in year 2010 and over 130,000 in 2011, and that portions of Fujian Huilong’s mine development were situated outside the boundaries of the 5.7 km2 mining permit, accordingly, it was Wardrop’s opinion that Shangzhai should renew the mining permit as soon as possible to verify the legality and safety of the mine. Because of the unique geological structure and coal deposits in the Fujian Province, coal productions require a higher level of human input together with machinery to achieve a desirable rate of return, which is unlike coal deposits in Northwestern China that are more suitable for larger production using mostly large machinery. Accordingly, when a new coal mining operation applies for a permit in the Fujian Province, the typical annual production rate granted would be in the range of 60,000 t/a to 90,000 t/a. This initial annual production rate, which may be considered as a trial period production rate, may be adjusted and increases can be applied for subsequently, depending on the development of a particular mine. We initially applied for an annual production rate of 90,000 t/a for our mining permit number 3500000620055 because of this practice in the Fujian Province. We are in the process of applying to increase our annual production rate to up to 300,000 t/a. As of May 13, 2011, Shangzhai has obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit, which also allows it to mine at different mining levels. With respect to the estimated 1,354,000 t reserves in the valid 5.7 km2 mining area, Shangzhai has confirmed that about 70% coal reserves have been assigned to the current mine shaft and mining equipment, while the rest 30% coal reserves will require sustaining capital for coal production.

The run of mine coal from underground are sold without further processing. The major application of the coal is used as solid fuel to produce heat and electricity. The coal product has a typical calorific value of around 7,000 kcal/kg, as received. The total sulfur contained in the product is typically about 0.6%, dry basis. The total moisture in the coal product is about 4.4% .

Corporate Structure

As a result of the consummation of the transactions contemplated under the share exchange agreement:

  • Dragon International Resources Group Co., Limited became our wholly-owned subsidiary and Fujian Huilong Coal Mine Co., Ltd., the wholly-owned subsidiary of Dragon International Resources Group Co., Limited became our wholly-owned subsidiary;

  • We issued an aggregate of 220,522,000 common shares of our company, representing approximately 90% of our issued and outstanding common shares on a fully diluted basis, in exchange for all of outstanding capital stock of Dragon International.

The organization and ownership structure of our company subsequent to the consummation of the reverse acquisition as summarized in the paragraphs above is as follows:

4


Fujian Huilong Coal Mine Co., Ltd. (formerly known as Yongding Shanzahi Coal Ming Co., Ltd.) is a wholly foreign-owned limited liability company operating in China and is wholly owned by the foreign investor (Dragon International in our case). Dragon International was incorporated on October 5, 2010 in Hong Kong to acquire all of the equity interest in Fujian Huilong Coal Mine Co., Ltd. from its previous owners, Mr. Chuanzhen Lin, Mr. Wensi Lin, and Mr. Qingdong Shi, and to change the status of Fujian Huilong into a wholly foreign-owned subsidiary. Dragon International was also created to facilitate the share exchange between SGB International Holdings, Inc. and the shareholders of Dragon International as Chinese laws do not allow SGB International Holdings, Inc. to effect share exchanges directly with any owners of Fujian Huilong.

On November 1, 2010, Dragon International entered into a share transfer agreement with Mr. Chuanzhen Lin, Mr. Wensi Lin, and Mr. Qingdong Shi, under which Dragon International acquired all of the outstanding equity shares of Fujian Huilong. On February 21, 2011, Fujian Huilong received its new business license and became a WFOE under the People’s Republic of China (“PRC”) laws. Mr. Longwen Lin, a key management member of Fujian Huilong, subsequently acquired 90% of the Dragon International. At that time, Mr. Longwen Lin did not have other relationship with Dragon International, Fujian Huilong or these entities’ shareholders in connection with the reverse merger. Mr. Peifeng Huang was also a key management member of Fujian Huilong before its acquisition by Dragon International, but he did not have other relationship with Dragon International, Fujian Huilong or these entities’ shareholders in connection with the reverse merger. Mr. Thomas Tze Khern Yeo did not have other relationship with Dragon International, Fujian Huilong or these entities’ shareholders in connection with the reverse merger.

We anticipate that we will rely principally on dividends from our PRC subsidiary, Fujian Huilong, for our cash requirements outside of PRC, including servicing any debt we may incur outside of PRC and obtaining the funds necessary to pay dividends and other cash distributions to our shareholders and pay our operating expenses outside of PRC.

Under the PRC law, as a WFOE, the PRC subsidiary, Fujian Huilong, may pay dividends only out of its accumulated retained earnings determined in accordance with the PRC accounting standards and regulations and tax laws, which will subject to a withholding tax of 10%. Pursuant to a special arrangement between Hong Kong and the PRC government, known as the Arrangement between the Mainland and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, effective August 21, 2006 (the “Arrangement”), Dragon International may qualify for a lower rate of 5% for any dividends remitted from Fujian Huilong in Mainland China to Dragon International in Hong Kong. In October 2009, the State Administration of Taxation of China, or the SAT, further issued the Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Agreements, or Circular 601. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy the preferential tax rate under the Arrangement. “Beneficial owners” are individuals, enterprises or other organizations that are normally engaged in substantive operations. These rules also set forth certain adverse factors to the recognition of a “beneficial owner.” Specifically, they expressly exclude a “conduit company,” or any company established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in actual operations such as

5


manufacturing, sales or management, from being a “beneficial owner.” As a result, although Fujian Huilong is a wholly owned subsidiary of Dragon International, Dragon International may not be able to enjoy the preferential withholding tax rate under the Arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by Fujian Huilong.

In accordance to the Article 167 of the PRC Company Law, the PRC subsidiary, Fujian Huilong, is required to set aside at least 10% of its after-tax profit based on PRC accounting standards to its statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of its respective registered capital. These reserves are not distributable as cash dividends. The board of directors of a WFOE has the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds. After the allocation of relevant welfare and funds, the equity owners can distribute the remaining net after-tax profits after deducting the accumulated losses in the previous fiscal year. According to the PRC Company Law, companies may subject to a fine up to RMB5,000 for non-compliance with the above rules.

The registered capital of Fujian Huilong was RMB1 million as at December 31, 2010 and has been increased to RMB13.73 million as at December 31, 2011. Fujian Huilong will set aside at least 10% of its after-tax profit until it reached the minimum 50% of its respective registered capital requirement.

After paying the withholding taxes applicable to Fujian Huilong, making appropriations for its statutory reserve funds and retaining any profits from accumulated profits, the remaining net profits of Fujian Huilong would be available for distribution to its sole shareholder, Dragon International, our wholly owned subsidiary in Hong Kong, and from Dragon International to us. Dragon International is subject to the uniform tax rate of 16.5% in Hong Kong. Under the Hong Kong tax laws, Dragon International is exempted from the Hong Kong income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

Our Business

As a result of the reverse acquisition, we are mainly engaged in coal production in the province of Fujian in the People’s Republic of China. Through our wholly owned subsidiary, Fujian Huilong Coal Minde Co., Ltd., we manage and operate the Shangzhai coal mine, which is located at Yongding County, Fujian Province, People’s Republic of China. The Shangzhai coal mine currently sells unprocessed coal.

Our Products

All of our coal is classified as anthracite. The coloring of this coal is dark gray to slightly silver-gray. The coal is of sufficient quality to be used for power generation, production of cement, as raw material for ammonia production, and for domestic uses.

Because the capacity of the screen system for coal processing is too small to be used, we sell the coal unprocessed. In addition, sale contractors are responsible for hauling coal from the mine site to customers. Therefore, there are no processing or hauling costs.

Our Customers

We sell our coal directly to local sale contractors, and are responsible only for loading contractors’ trucks at the mine site. Subsequently, sale contractors haul coal from the mine site to consumers. For the year ended December 31, 2011 and December 31, 2010, the Company had four (2011) and four (2010) customers accounted for more than 10% of total sales representing 80% (2011) and 54% (2010) of total sales, respectively:

Name % of the sales in FY2011 % of the sales in FY2010
Mr Ling Tianyun 30% 17%
Mr Yan Dechang 21% Below 10%
Mr Huang Jingyang 17% 14%

6



Mr Tai Jinsheng 12% Below 10%
Mr Ye Guixing Below 10% 11%
Mr Zhong Guoliang Below 10% 12%

As coal is currently a scarce commodity in Fujian province and demand is significantly higher than supply, we sell our coal on a per ton basis directly to our customers on cash basis or wire transfer payment. Our coal is generally sold to a few major individual customers and also on-site sales to other smaller customers on cash basis only. As a result, we carry a small balance of accounts receivable as at December 31, 2011. There was a significant increase of sales in 2007 through 2011 mainly driven by market demands and also due to the improvement on our productivity. Our sales personnel conduct routine customer visits and customer satisfaction surveys. We have established long-term business relationships since 2010 with three of our major customers listed above (Mr. Ling Tianyun, Mr. Huang Jingyang, and Mr. Tai Jinsheng), and our management believes that these relationships are stable. We typically enter into contracts with our customers on an yearly basis, which contracts are renewable annually. These contracts do not provide for minimum purchase amount requirements. Once our coal is mined, it is typically picked up immediately by, or loaded immediately for delivery to, customers so we do not currently maintain an inventory of the mined coal.

Product Pricing

Coal prices are generally determined by market price or are based on contractual terms. The price for certain thermal coal used for power generation is determined among coal suppliers and power plant buyers in accordance with the pricing guideline published by the PRC Government. However, we are not required to abide by the government pricing guideline as our customer do not comprise of power plant buyers. In addition, we do not believe we will be required to abide by the government pricing guidelines because we are not obligated to determine to whom our customers will sell the coal they purchased from us and as such the government pricing guidelines do not apply to the purchase and sale of coal between our company and our customers.

We set pricing by taking into account: (i) prices in the relevant local coal markets; (ii) grade and quality of the coal; and (iii) relationships with customers. Transportation costs are normally borne by the customers. The average price for raw coal from the Shangzhai coal mine in 2011 was about US$107 per ton, which is $20 or 23% higher than the average price of about US$87 per ton in 2010.

Sources and Availability of Raw Materials and the Principal Suppliers

We purchase certain materials in connection with our coal mining operations, including: (i) mining equipment and vehicles; (ii) lift cylinders; and (iii) iron boards, etc. Because these materials are readily available, we do not purchase them exclusively from any one supplier for our operation.

The price of these materials is set at market rates or determined through negotiations. We believe we have established stable cooperative relationships with the suppliers that we deal with to ensure a reliable supply of the materials required for our mining operations.

Research and Development

We had no research and development expenses in 2011 and in 2010. We currently have no plans for any research and development activities and do not anticipate any material research and development costs.

Intellectual Properties and Licenses

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

Competition

In the area where we operate the Shangzhai coal mine, there are no other coal mine operating in the Shangzhai district but there are about 4 other licensed coal mines within the Yongding County which directly compete with us:

7


Yongding County Dakedu coal mine, Yongding County Dawanke coal mine, Yongding County Huangyoukeng coal mine and Yongding County Jiaozhi coal mine. Yongding County Dakedu coal mine has an annual production capacity of about 90,000 tons/a and the remaining competitors have an annual production capacity of about 60,000 tons/a However, because demand for coal currently outpaces supply, we do not face any meaningful competition for the sale of our coal from the Shangzhai coal mine.

The Coal Industry Policy, issued by the National Development and Reform Commission (NDRC) in November 2007, stipulates that new coal mines and expansions of existing coal mines in Fujian Province must have a minimum output of 90,000 t/a. The approved production capacity of the Shangzhai coal mine is 90,000 t/a, which is in accordance with this policy. According to the Circular on Assigning the Plan for Closing Small Scale Coal Mines in the Last Three Years of the ‘Eleventh Five Year’ Period issued by the NDRC, National Energy Bureau, State Administration of Work Safety, and the State Administration of Coal Mine Safety in October 2008, Chinese coal mines with an annual production capacity of less than 300,000 t/a are considered to be small-scale coal mines and will be closed, merged, or limited; the number of small-scale coal mines in Fujian Province was planned to be reduced from 312 in 2008 to 272 at the end of 2010. According to an officer of the Yongding County Coal Industry Management Bureau (contacted by telephone on December 8, 2010), the Shangzhai coal mine will not be closed, merged, or limited by the end of 2010. We are currently conducting normal operations.

Yongding County Coal Industry Management Bureau is the direct government agency responsible for implementing the “Circular on Assigning the Plan for Closing Small Scale Coal Mines in the Last Three Years of the ‘Eleventh Five Year’ Period’” in Yongding County and the officer with whom we had a conversion regarding effect of the Circular on our company was the deputy chief and he has the overall decision making power of this bureau. He indicated to us that because Fujian Province does not have sufficient coal production for use by local industries and relies heavily on import from other provinces, and because our mine has consistently demonstrated excellent safety records, we will not be one of the small-scale mines affected by the Circular. However, we have not received any written assurance regarding the applicability of the “Circular on Assigning the Plan for Closing Small Scale Coal Mines in the Last Three Years of the ‘Eleventh Five Year’ Period’” to our mine operations and it is possible that decisions regarding the Circular on the local level could be overruled at the national level. Our past coal production outside of the areas covered by our mining permit may not be considered in determining whether we have a coal production capacity of at least 300,000 t/a. However, after receiving the new mining permit covering additional 6.8 km2, we intend to conduct our mining operations only within the areas covered by our valid mining permits and our coal production in the future will be considered whether we have a coal production capacity of at least 300,000 t/a.

According to the Opinions of the NDRC on Expediting the Merger and Reorganization of Coal Mines, issued by the General Office of the State Council in October 2010, large-scale coal mining companies are encouraged to merge with or acquire small-scale coal mines in order to reduce the overall number of coal mining enterprises.

Regulatory Overview

Coal Law

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

According to the Coal Law, entities seeking to establish mining enterprises must apply to the relevant government office and obtain all necessary approvals. Upon obtaining such approvals, the entities concerned will be granted a mining permit from the Ministry of Land and Resources. Thereafter, an entity must obtain a coal production permit and a coal operation permit and other related quality permits in order to commence coal production and sell coal products in the PRC. We have applied for and received a mining permit valid until 2016 and a coal production permit valid until 2031. Our management believes that we have complied with the relevant provisions of the Coal Law. We will be forced to terminate our business if we do not have the necessary approvals from the relevant government offices. The PRC Government is in the process of amending the Coal Law, in response to concerns over

8


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 to 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. Our management believes that we are in compliance with the Mineral Resources Law in this respect because we have applied for and obtained the mining permit and coal production permit.

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

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

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

  • the Ministry of Commerce of China (“MOFCOM”) and/or its local counterpart, which regulates foreign investment in China, such as review and approval of foreign invested companies in China and mergers and acquisitions of Chinese domestic enterprises by foreign investors;

  • the Ministry of Land and Resources of China (“MLR”) and/or its local counterpart, which has the authority to grant land use licenses and mining right permits, approves transfer and lease of mining rights, and reviews mining rights premium and reserve valuation;

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

  • the Ministry of Environmental Protection of China (“MEP”) and/or its local counterpart, which supervises and controls environmental protection and monitors China’s environmental system;

  • the Ministry of Construction of China (“MOC”) and/or its local counterpart, which is responsible for the management of survey and design of construction projects, including but not limited to the survey and design of coal mines;

  • the National and State Tax Bureaus and/or their local counterparts, which are responsible for the federal and local income, VAT and other taxes;

  • the State Administration of Foreign Exchange of China (“SAFE”) and/or its local counterpart, which is responsible for the convertibility of RMB into foreign currencies, registration of foreign debt or loans of

9


    Chinese companies and, in certain cases, the remittance of currency out of the PRC, such as repayment of bank loans or dividends denominated in foreign currencies; and
  • the State Administration for Industry and Commerce of China (“SAIC”) and/or its local counterpart, which is responsible for review and approval of establishment of domestic and foreign invested companies in China and issuance of their business licenses.

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

Pricing

Until 2002, the production and pricing of coal 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.

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 (Fa Gai Yun Xing [2006] No. 2867). According to the notice, in 2007, policies were 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.

Fees and Taxes

There are various taxes and fees that are imposed upon coal producers in Fujian Province, as well as statutory reserves which coal producers are required to set aside. Such taxes, fees and statutory reserves as applicable to our company at December 31, 2011 and December 31, 2010 which coal company has to purchase and pay RMB120 per tons to the local Coal Management Authority that set out the relevant tax rate as follows:

Item Base Rate
Corporate income tax
Taxable income
about US$0.85 per ton
(equivalent to RMB 5.5 per ton)
VAT Revenue from domestic sales about US$3.62 per ton

10



Item Base Rate
    (equivalent to RMB 23.4 per ton)
City construction tax Amount of VAT and business tax About US$0.18 per ton
(equivalent to RMB 1.17 per ton)
Education surcharge Amount of VAT and business tax About US$0.15 per ton
(equivalent to RMB 0.94 per ton)
Stamp duty fee Proceeds from the sale of coal About US$0.01 per ton
(equivalent to RMB 0.05 per ton)
Resource tax Volume of raw coal produced About US$0.39 per ton
(equivalent to RMB 2.5 per ton)
General fund (comprise of safety fund, maintenance fund, environmental fund and forestry fund) Volume of raw coal produced About US$12.9 per ton
(equivalent to RMB 83.94 per ton)
Individual income tax Volume of raw coal produced About US$0.39 per ton
(equivalent to RMB 2.5 per ton)

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

All coal producers are subject to PRC environmental protection laws and regulations which currently impose fees for the discharge of waste substances, require the payment of fines for serious pollution and provide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage. We have not been notified by the PRC Government authorities of any environmental damages.

Domestic Trading of Coal

Pursuant to the Measures for the Regulation of Coal Operations promulgated by the NDRC on December 27, 2004, the state implemented a system to examine coal operation qualifications in respect of coal operations, including the wholesale and retail of raw coal and processed coal products, and the processing and distribution of coal for civilian use. Before an enterprise can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprise that deals in coal products which it did not itself produce and process is required to obtain coal operation qualifications. The enterprise is also prohibited from dealing in coal products produced and/or processed by a coal mine enterprise that does not have a coal production permit. An enterprise is also prohibited from selling coal products to a coal operation enterprise that does not have coal operation qualifications. Our company has applied for and obtained a coal production permit and this permit is valid until December of 2031.

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, MEP 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

11


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. Our current facilities are in compliance with environmental standards.

Mining operations, including both open pit mines and underground mines, may result in disturbances of surface and underground land and cause water pollution, landslides and other types of environmental damage. To manage the adverse effects that the coal industry has on the environment, China 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. We have not received any notices from the relevant government authorities demanding us to pay any fines or threatening to close our operations.

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

The 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 June 15, 1986, and amended on August 28, 2004, and the Land Rehabilitation Regulations, issued by the State Council in 1988 and effective January 1, 1989, coal producers must undertake measures to restore the mining site to its original state within a prescribed time frame if mining activities result in damage to arable land, grassland or forest. The rehabilitated land must meet rehabilitation standards, as required by law from time to time, and may only be subsequently used upon examination and approval by the land authorities. A coal producers’ failure to comply with this requirement or its failure to return the mining site to its original state will result in the imposition of fines, rehabilitation fees and/or rejection of applications for land use rights by the local bureau of land and resources.

12


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 Standing Committee of National People’s Congress in May 1984 and as amended in May 1996 and February 2008, which became effective in June 2008, and the Administrative Regulations on the Levy and Use of Discharge Fees, issued by the State Council in January 2003 and effective in July 2003. Any new construction projects, such as coal mines and coking plants, must submit an environmental impact statement, which shall include an assessment of the water pollution hazards the project is likely to produce and its impact on the ecosystem. The environmental impact statement must also contain measures to prevent and control the water pollution hazards. Every new production facility must be equipped with waste water processing facilities which must be put in use together with the production facilities. Construction projects that discharge pollutants into water shall pay a pollutant discharge fee in accordance with state regulations.

Violators of the Environmental Protection Law and various environmental regulations may be subject to warnings, payment of damages and fines. Any entity undertaking construction work or manufacturing activities before the pollution and waste control and processing facilities are inspected and approved by the environmental protection department may be ordered to suspend production or operations and may be fined. The violators of relevant environmental protection laws and regulations may be exposed to criminal liability if violations result in severe loss of property, personal injuries or death. Our management is of the view that we are in compliance with the Environmental Protection Law and various environmental regulations. We have not received any notice from the relevant government authorities advising us that we are in violation of the Environmental Protection Law or various environmental regulations.

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. We have applied for and received our mining permit (*3500000620055) valid until April of 2016. Upon approval, a mining permit is issued by the relevant administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdictions. The holders of mining rights are required to file annual reports with the relevant administrative authorities. We have filed our annual reports with the relevant administrative authorities to maintain the validity of our mining permit.

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

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

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

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

13


produced coal from an area beyond the area covered by our valid mining permit, we may be subject to fine or revocation of our mining permit. However, our management believes that the likelihood of any enforcement action is low as we have applied for and obtained in May of 2011 another mining permit covering an additional 6.8 km2 of mining area.

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 are consistent with the NDRC’s announcement on the revision of the Coal Law and reiterated the PRC Government’s policies with respect to the administration of coal reserves, enhancement of coal mine safety, encouragement of industry consolidation among coal producers, acceleration of the construction of large coal production bases, improvement of mining techniques and equipment for coal production and the organization and regulation of small coal mines.

The Measures for Implementing Work Safety Permits in Coal Mine Enterprises

The State Administration of Work Safety and the SACMS issued “The Measures for Implementing Work Safety Permits in Coal Mine Enterprises”, which came into effect on May 17, 2004. Pursuant to this document, a coal mine enterprise without a work safety permit may not engage in coal production activities. We have received a safety production permit ((2005)F107(G1)) that is valid until December of 2011. Coal mining enterprises and their mines that do not satisfy the safety conditions set forth in this document, or those that violate the provisions of this document, will be punished accordingly.

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

The Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines were promulgated and entered into effect on September 3, 2005. This regulation specifies that coal mine enterprises are responsible for preventing coal mine work safety-related accidents. If a coal mine has not obtained, in accordance with the law, a mining right permit, work safety permit, coal production permit or business license and if the mine manager has not obtained, in accordance with the law, a mine manager qualification certificate and a mine manager safety qualification certificate, the coal mine may not engage in production. As disclosed earlier, we have applied for and received a mining right permit, work safety permit, coal production permit. We also have a valid business license (350000100007198) and our mine manager has received a mine manager qualification certificate (MK350120043) and a mine manager safety qualification certificate (10035050100182). 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:

  1.

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.

14



  2.

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.

     
  3.

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 operations personnel to qualified coal mine safety training institutions for training in a timely manner; and obtain the corresponding qualification certificates.

     
  4.

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.

     
  5.

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

Special Regulation by the State Council on Shutting Down Small Coal Mines

The Special Regulation by the State Council on Shutting Down Small Coal Mines went into effect on September 28, 2006. The passage of regulation is the launch of a national campaign to close down small coal mines defined as having annual coal production capacity of 30,000 tons or less, as well as coal mines without proper licenses or permits. The intent of the regulation is to reduce both the high rate of accidents and pollution in the PRC coal mining industry. Under this regulation, 9,887 small and/or illegal coal mines were to have been shut down by the end of 2009. The regulation specifies that the Central Government will support the development of big coal mining operations, defined as having annual coal production capacity of 300,000 tons or more. However, the regulation is silent as to the PRC government’s position on coal mine operations having annual production capacity of more than 30,000 tons but less than 300,000 tons. We believe that the likelihood of our mining operation being shut down pursuant to The Special Regulation by the State Council on Shutting Down Small Coal Mines is relatively small because Fujian Province, where our mining operation is currently located, does not have sufficient coal production for use by local industries and relies heavily on import from other provinces. We have been advised by the County Coal Industry Management Bureau that we are not likely to be forced to shut down. Furthermore, our management also believes that, despite the fact that we have mined and produced coal beyond the area then covered by our valid mining permit, we will not likely be shut down because we have applied for and obtained in May 2011 another mining permit for an additional 6.8 km2 of mining area and that we have consistently demonstrated excellent safety records.

Our mining activities in the past had gone beyond the area covered by our mining permit and to a certain extent these activities have not met applicable regulatory requirements for permitting, inspections, conduct of operations, submission of information. However, we have not received any notice of penalty or fines for our past non-compliance. We believe the likelihood of our company being penalized or fined for past non-compliance is small as the Natural Resource Department of Fujian Province was made aware of our past non-compliance when we submitted our application for a new mining permit in May 2010 for an additional 7.5 km2 of mining area. As the coal deposit had been depleted by our past mining activities in some of the 7.5 km2 of mining area applied for, we were granted a mining permit for an area of 6.8 km2. As we have obtained in May 2011 the new mining permit for an additional 6.8 km2 of mining area, we intend to conduct our mining operation only within the areas covered by our valid mining permits.

We did not need to obtain additional environmental, health and safety permitting requirements when we applied for the new mining permit C3500002011051120112047 as our new mining permit was issued on the basis of our existing environmental, health and safety permitting approvals.

15


Laws and Regulations Applicable to Foreign Invested Enterprises (FIEs)

Under Chinese law, foreign invested enterprises refer to the enterprises jointly invested by Chinese investors and foreign investors or solely invested by foreign investors in China. Sino-foreign equity joint venture, Sino-foreign contractual joint venture and wholly foreign owned enterprise are the three types of foreign invested enterprises. Fujian Huilong, our operating subsidiary in China, is a wholly foreign owned enterprise invested by Dragon International and is a FIE under Chinese law.

The following is a brief summary of the principal law and regulations that apply to Fujian Huilong as a FIE.

Corporate Laws and Industry Catalogue Relating to Foreign Investment

The establishment, operation and management of corporate entities in China generally are governed by the Company Law of the PRC, or the Company Law, effective in 1994, as amended in 1999, 2004, 2005, respectively. The Company Law is applicable to, Fujian Huilong, our PRC Subsidiary, unless the PRC laws on foreign investment have stipulated otherwise.

The establishment, approval, registered capital requirement and day-to-day operational matters of WFOEs, such as our PRC Subsidiary, Fujian Huilong, is regulated by the Wholly Foreign Owned Enterprise Law of the PRC effective in 1986, as amended in 2000, and the Implementation Rules of the Wholly Foreign-owned Enterprise Law of the PRC effective in 1990, as amended in 2001. According to relevant provisions of the Wholly Foreign Owned Enterprise Law of the PRC and its Implementation Rules, MOFCOM Fujian branch issued the certificate of approval no. [2010] 0056 for the establishment of Fujian Huilong as a WFOE on December 21, 2010, and the SAIC Fujian branch issued the business license no. 350000100007198 for Fujian Huilong as a WFOE.

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by MOFOM and the National Development and Reform Commission, or the NDRC. The Catalogue divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations. The industry that Fujian Huilong is involved in is not listed in the Catalogue and is open to foreign investment.

Regulations of Taxation

On March 16, 2007, the Chinese government enacted the new Enterprise Income Tax Law, or the New EIT Law, and promulgated the New EIT Law Implementation Regulations. Both the New EIT Law and the New EIT Law Implementation Regulations became effective on January 1, 2008. Under the New EIT Law and the New EIT Law Implementation Regulations, foreign invested enterprises incorporated in the PRC, such as Fujian Huilong is subject to a uniform income tax rate of 25%.

Pursuant to the Provisional Regulations on Value-Added Tax of the PRC, promulgated by the State Council on December 13, 1993, as amended on November 5, 2008 (effective on January 1, 2009), and the Rules for Implementation of Provisional Regulations on Value-Added Tax of the PRC, promulgated on December 25, 1993 and amended on December 15, 2008 (effective on January 1, 2009), all entities and individuals engaged in selling goods, providing repair and placement services or importing goods into the PRC are generally subject to a value-added tax, or VAT, at a rate of 17% of the gross sales proceeds received (with the exception of certain goods which are subject to a rate of 13% or lower), less any VAT already paid or borne by the taxpayer on goods or services purchased and utilized in the production of goods or provision of services that have generated the gross sales proceeds. Fujian Huilong is subject to such value-added tax but according to local regulations, the local Coal Management Authority is the government authority responsible for collecting VAT as part of the approximately US$18.56 or RMB 120 per ton for all taxes, fees and statutory reserves payable by Fujian Huilong. The amount of VAT imposed by the local Coal Management Authority is about US$3.62 or RMB 23.4 per ton. The understanding of Fujian Huilong that the local Coal Management Authority is responsible for collecting VAT payment is for an indefinite period and rate is subject to adjustment by the local Coal Management Authority from time to time. For the last three years, the local Coal Management Authority has not adjusted the rate of VAT that they have imposed on our company. As compared to the rate of VAT applicable to other businesses subject to VAT rate of 17% on their gross proceeds received, our company’s effective VAT rates for the last years were 5.95% for 2008, 5.28% for

16


2009, 3.98% for 2010 and 3.41% for 2011. However, because the local Coal Management Authority is able to adjust the VAT rate unilaterally and arbitrarily, there is no assurance that the local Coal Management Authority will not impose materially higher VAT rate on our company in the future.

Regulations on Foreign Exchange

Foreign exchange activities of FIEs, such as Fujian Huilong, our PRC subsidiary, are primarily governed by the following regulations:

1.

Foreign Currency Administration Rules (2008), or the Exchange Rules; and

   
2.

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

Under the Exchange Rules, if documents certifying the purposes of the conversion of RMB into foreign currency are submitted to the relevant foreign exchange conversion bank, the RMB will be convertible for current account items, including the distribution of dividends, interest and royalties payments, and trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, securities investment and repatriation of investment, however, is subject to the approval of the SAFE or its local counterpart.

Under the Administration Rules, FIEs may only buy, sell and/or remit foreign currencies at banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE or its local counterpart.

On August 29, 2008, the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular No. 142, was issued. Pursuant to Circular No. 142, the Renminbi capital from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the applicable government authority and cannot be used for domestic equity investment, unless it is otherwise provided for. Fujian Huilong, as a FIE, is subject to the regulation of Circular 142. The business scope of Fujian Huilong currently includes coal mining and coal production.

Regulations on Dividend Distribution

The principal regulations governing dividend distributions of WFOEs include:

1.

Company Law (2005)

   
2.

Wholly Foreign-Owned Enterprise Law (2000); and

   
3.

Wholly Foreign-Owned Enterprise Law Implementing Rules (2001).

Under these regulations, WFOEs in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, WFOEs are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital. At the discretion of the WFOEs, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Fujian Huilong, as a WFOE, is in compliance with these regulations.

Labor Laws and Social Insurance

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. Violations of the PRC

17


Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise for serious violations.

In addition, employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds. To comply with these laws and regulations, which Fujian Huilong is subject to, Fujian Huilong have caused its full-time employees, other than miners working underground who belong to third party sub-contractors, to enter into labor contracts with Fujian Huilong and provides its employees with the proper welfare and employment benefits.

Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles

SAFE issued on October 21, 2005 the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular75, which became effective on November 1, 2005. Circular 75 requires PRC resident legal persons or individual residents to register with the competent local SAFE branches before establishing or controlling any company outside of the PRC (offshore special purpose vehicles or offshore SPV) for the purpose of offshore capital financing by using assets or equities held by such PRC resident legal persons or individual residents in a PRC domestic enterprise. Our Chinese legal counsel has advised us that based on its understanding of Circular 75, our PRC resident beneficial owners are not subject to the registration requirement under Circular 75 because our PRC resident beneficial holders have never held and are not holding any assets or equities of Fujian Huilong and therefore are not the PRC individual residents as defined under Circular 75 who are required to register with SAFE, for establishing or controlling companies outside of the PRC.

We have also been advised by our Chinese legal counsel that the reverse acquisition of SGB International Holdings Inc. by Dragon International Resources Group Co., Limited complied with the PRC Mineral Resources Laws and was not subject to any restrictions by the Ministry of Commerce of China, or MOFCOM, and the State Administration for Industry and Commerce of China, or SAIC.

We believe that the provisions of “Mineral Resources Law of the People’s Republic of China” and “Regulations for Implementation of the Mineral Resources Law of the People’s Republic of China” applicable to the reverse acquisition of SGB International Holdings Inc. by Dragon International Resources Group Co., Limited include:

Article 3 of Mineral Resources Law of the People’s Republic of China, which provides that mineral resources belong to the State. The right of State ownership in mineral resources is exercised by the State Council. State ownership of mineral resources, either near the earth's surface or underground, shall not change with the alteration of ownership or right to the use of the land which the mineral resources are attached to.

The State safeguards the reasonable development and utilization of mineral resources. Seizing or damaging of mineral resources by any means and by any organization or individual shall be prohibited. People's governments at various levels must make serious efforts to protect mineral resources.

Anyone who wishes to explore or mine mineral resources shall separately make an application according to law and shall register after obtaining the right of exploration or mining upon approval, with the exception of the mining enterprises that have, in accordance with law, applied for and obtained the right of mining and are conducting exploration within the designated mining area for the purpose of their own production. The State protects the right of exploration and of mining from encroachment and protects the order of production and other work in the mining and exploration areas from interference and disruption. Anyone engaged in exploring and mining of mineral resources shall meet the prescribed qualifications.

Article 5 of Mineral Resources Law of the People’s Republic of China, which provides that the State practices a system wherein the exploration right and mining right shall be obtained with compensation; however, the State may, in light of specific conditions, prescribe reduction of or exemption from the compensation for acquiring the exploration right and mining right. Specific measures and implementation procedures shall be formulated by the State Council.

18


Anyone who mines mineral resources must pay resource tax and resource compensation in accordance with relevant regulations of the State.

Article 15 of Mineral Resources Law of the People’s Republic of China, which provides that anyone who wishes to establish a mining enterprise must meet the qualifications prescribed by the State, and the department in charge of examination and approval shall, in accordance with law and relevant State regulations examine the enterprise's mining area, its mining design or mining plan, production and technological conditions and safety and environmental protection measures. Only those that pass the examination shall be granted approval.

Article 4 of Regulations for Implementation of the Mineral Resources Law of the People’s Republic of China, which provides that the exploration and exploitation of the mineral resources within the territory of the People's Republic of China and other sea areas under its jurisdiction must abide by the Mineral Resources Law of the People's Republic of China (hereinafter referred to as the Mineral Resources Law) and these Regulations.

Article 7 of Regulations for Implementation of the Mineral Resources Law of the People’s Republic of China, which provides that the state allows foreign companies, enterprises and other economic organizations as well as individuals to invest in exploration and exploitation of the mineral resources within the territory of the People's Republic of China and other sea areas under its jurisdiction pursuant to the relevant laws and regulations of the People's Republic of China.

Because Fujian Huilong has the right of exploration, right of mining and pays resource tax and resource compensation in accordance with relevant regulations. Through the acquisition of Fujian Huilong by Dragon International, Fujian Huilong became a wholly foreign owned enterprise, for exploitation of the mineral resources within the territory of the People's Republic of China under its jurisdiction pursuant to the relevant laws and regulations of the People's Republic of China. As a result, the reverse acquisition of Dragon International by SGB International Holdings Inc. complied with the provisions of “Mineral Resources Law of the People’s Republic of China” and “Regulations for Implementation of the Mineral Resources Law of the People’s Republic of China”.

Under the Guidance Catalogue of Industries for Foreign Investment promulgated by the National Development and Reform Commission and MOFCOM, which became effective as of December 1, 2007, mining of special coals falls within restricted industry for foreign investment, while mining of other types of coal is permitted for foreign investment and a foreign invested enterprise engaged in mining of non-special coal may be 100% owned by foreign investors. The business of Fujian Huilong involves only mining of non-special coal. Thus, the acquisition by Dragon International of the 100% share capital of Fujian Huilong in November 2010 complies with PRC laws on foreign investment in the mineral resources sector of the PRC.

In accordance with the Provisions on M&A of a Domestic Enterprise by Foreign Investors, which was initially promulgated by MOFCOM and SAIC, on August 8, 2006 and became effective on September 8, 2006, as amended on June 22, 2009, which is commonly known as Decree No. 10, acquisition by foreign investors of share capital of a domestic enterprise shall be approved by MOFCOM and registered with SAIC. According to our Chinese legal counsel, the acquisition by Dragon International of the 100% share capital of Fujian Huilong in November 2010 has been properly approved by MOFCOM and registered with SAIC pursuant to Decree No. 10.

Because we believe that there was no material relationship that existed between SGB International, the former principal shareholders of SGB International prior to the reverse acquisition, and the shareholders of Dragon International prior to the time of the reverse acquisition other than in respect of the reverse acquisition, our Chinese legal counsel advised us that Dragon International was not a special purpose vehicle company and that the reverse acquisition of Dragon International by SGB International is not subject to approval of MOFCOM and registration with SAIC. Our Chinese counsel never mentioned in its legal opinion the PRC Mineral Resources Law, although it did specifically mention the “Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign Investors,” Circular 75, MOFCOM and SAIC.

Employees

As of December 31, 2011, 2010, we had approximately 90 and 78 full-time employees respectively, which mainly comprise of management staff of our company including our President, Chief Executive Officer and our Chief Financial Officer, at our administrative office in Fujian Huilong. We also had 458 and 612 miners respectively

19


working underground who belong to third party sub-contractors. The working schedule for these contract miners is three shifts per day for 260 d/a. None of these employees are represented by any collective bargaining agreements. We have not experienced a work stoppage. Management believes that our relations with our employees are good. We do not have insurance for industry-related accident. For any accident-related costs below RMB50,000 is to be borne by the third party subcontractors. For any accident-related costs above RMB50,000, 95% of such costs is to be borne by our company and the remaining 5% is to be borne by the third party sub-contractors.

ITEM 1A. RISK FACTORS

In addition to other information in this report, the following risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our business and results of operations are dependent on coal markets, which may be cyclical.

As all of our revenue is derived from sales of coal in the PRC, our business and operating results are substantially dependent on the domestic Chinese demand for coal, especially the demand for coal in the province of Fujian . The Chinese coal market is cyclical and exhibits fluctuation in supply and demand from year to year. It is subject to numerous factors beyond our control, including, but not limited to, the economic conditions in the PRC and fluctuations in industries with high demand for coal, such as the power and steel industries. Fluctuations in supply and demand for coal affect coal prices, which in turn affects our operating and financial performance. We have experienced substantial price fluctuations in the past and believe such fluctuations will continue. The average selling price from the Shangzhai coal mine was about US$87 per ton (equivalent to RMB 585 per ton) in 2010 and about US $107 per ton (equivalent to RMB 687 per ton) in 2011.

The demand for coal is primarily affected by the overall economic development and the demand for coal from the electricity generation, steel and construction industries. The supply of coal, on the other hand, is primarily affected by the geographical location of the coal supplies, the volume of coal produced by the domestic and international coal suppliers, and the quality and price of competing sources of coal. Alternative fuels, such as natural gas, oil and nuclear power, and alternative energy sources, such as hydroelectric power also have influences on the market demand for coal. Excess supply of coal or significant reduction in the demand for our coal by domestic electricity generation or steel industries may have an adverse effect on coal prices, which would in turn cause a decline in our profitability. In addition, any significant decline in domestic coal prices could materially and adversely affect our business and results of operations.

Our mining operations may be shut down pursuant to Special Regulation by State Council on Shutting Down Small Coal Mines

The Special Regulation by the State Council on Shutting Down Small Coal Mines went into effect on September 28, 2006. The passage of regulation is the launch of a national campaign to close down small coal mines defined as having annual coal production capacity of 30,000 tons or less, as well as coal mines without proper licenses or permits. The regulation specifies that the Central Government will support the development of big coal mining operations, defined as having annual coal production capacity of 300,000 tons or more. However, the regulation is silent as to the PRC government’s position on coal mine operations having annual production capacity of more than 30,000 tons but less than 300,000 tons. We believe that the likelihood of our mining operation being shut down pursuant to The Special Regulation by the State Council on Shutting Down Small Coal Mines is relatively small because Fujian Province, where our mining operation is currently located, does not have sufficient coal production for use by local industries and relies heavily on import from other provinces. We have been advised by the County Coal Industry Management Bureau that we are not likely to be forced to shut down. Furthermore, our management also believes that, despite the fact that we have mined and produced coal beyond the area then covered by our valid mining permit, we will not likely be shut down because we have applied for and obtained in May 2011 another

20


mining permit for an additional 6.8 km2 of mining area and that we have consistently demonstrated excellent safety records.

Our mining operations are inherently subject to changing conditions that can affect our profitability.

Our mining operations are inherently subject to changing conditions that affect levels of production and production costs for varying lengths of time and can result in decreases in our profitability. We are exposed to commodity price risk related to our purchase of diesel fuel, explosives and steel. In addition, weather conditions, equipment replacement or repair, fires, variations in thickness of the layer, or seam, of coal, amounts of overburden, rock and other natural materials and other geological conditions can be expected in the future to have, a significant impact on our operating results. Prolonged disruption of production at our mine would result in a decrease in our revenues and profitability, which could be material. Other factors affecting the production and sale of our coal that could result in decreases in our profitability include:

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

  • changes in the laws and/or regulations that we are subject to, including permitting requirements; labor shortages; and

  • changes in coal market and general economic conditions.

Our coal operations are extensively regulated by the PRC Government and government regulations may limit our activities and adversely affect our business operations.

Our coal operations, like those of other Chinese energy companies, are subject to extensive regulations established by the PRC Government. Central governmental authorities, such as the National Development and Reform Commission, the State Environmental Protection Administration, the Ministry of Land and Resources, the State Administration of Coal Mine Safety, the State Bureau of Taxation, and provincial and local authorities and agencies exercise extensive control over various aspects of China’s coal mining and transportation (including rail and sea transport). These controls affect the following material aspects of our operations:

  • exploration, exploitation and mining rights and licensing;
  • rehabilitation of mining sites after mining is completed;
  • recovery rate requirements;
  • industry-specific taxes and fees;
  • target of our capital investments; and
  • environmental and safety standards.

There can be no assurance that the central or local governments in the PRC will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures. We may face significant constraints on our ability to implement our business strategies or to carry out or expand our business operations. Our business may also be materially and adversely affected by future changes in certain regulations and policies of the Chinese Government in respect of the coal industry. New legislation or regulations may be adopted that may materially and adversely affect our coal operations, our cost structure or the demand for our products. In addition, new legislation or regulations or different or more stringent interpretation of existing laws and regulations may also require us to substantially change our existing operations or incur significant costs.

The Chinese government has become increasingly concerned with workplace safety and environmental issues, particularly in light of several recent accidental explosions in coal mines due to poor internal safety measures, and as reflected by the implementation of the State Council’s Regulation on Shutting Down Small Coal Mines. Moreover, additional new legislation or regulations may be adopted, or the enforcement of existing laws could become more stringent, either of which may have a significant impact on our mining operations or our customers’ ability to use coal and may require us or our customers to significantly change operations or to incur substantial costs.

21


Our operations are subject to Value Added Tax imposed by local Coal Management Authority, which can adjust the rate of Value Added Tax to which we are subject unilaterally and arbitrarily.

Pursuant to the Provisional Regulations on Value-Added Tax of the PRC, promulgated by the State Council on December 13, 1993, as amended on November 5, 2008 (effective on January 1, 2009), and the Rules for Implementation of Provisional Regulations on Value-Added Tax of the PRC, promulgated on December 25, 1993 and amended on December 15, 2008 (effective on January 1, 2009), all entities and individuals engaged in selling goods, providing repair and placement services or importing goods into the PRC are generally subject to a value-added tax, or VAT, at a rate of 17% of the gross sales proceeds received (with the exception of certain goods which are subject to a rate of 13% or lower), less any VAT already paid or borne by the taxpayer on goods or services purchased and utilized in the production of goods or provision of services that have generated the gross sales proceeds. Fujian Huilong is subject to such value-added tax but according to local regulations, the local Coal Management Authority is the government authority responsible for collecting VAT as part of the approximately US$18.56 or RMB 120 per ton for all taxes, fees and statutory reserves payable by Fujian Huilong. The amount of VAT imposed by the local Coal Management Authority is about US$3.62 or RMB 23.4 per ton. The understanding of Fujian Huilong that the local Coal Management Authority is responsible for collecting VAT payment is for an indefinite period and rate is subject to adjustment by the local Coal Management Authority from time to time. For the last three years, the local Coal Management Authority has not adjusted the rate of VAT that they have imposed on our company. As compared to the rate of VAT applicable to other businesses subject to VAT rate of 17% on their gross proceeds received, our company’s effective VAT rates for the last years were 5.95% for 2008, 5.28% for 2009 and 3.98% for 2010. For the FY2011, the effective VAT rate for our company was approximately 3.41% . However, because the local Coal Management Authority is able to adjust the VAT rate unilaterally and arbitrarily, there is no assurance that the local Coal Management Authority will not impose materially higher VAT rate on our company in the future.

Our business operations may be adversely affected by present or future environmental regulations.

As a producer of coal products, we are subject to significant, extensive, and increasingly stringent environmental protection laws and regulations in China. These laws and regulations:

  • impose fees for the discharge of waste substances;

  • require the establishment of reserves for reclamation and rehabilitation;

  • require the payment of fines for serious environmental offences; and

  • allow the Chinese Government, at its discretion, to close any facility that fails to comply with orders requiring it to correct or stop operations causing environmental damage.

Our coal mining operations may produce waste water, gas and solid waste materials. Currently, the PRC Government is moving toward more rigorous enforcement of applicable laws and regulations as well as the adoption and enforcement of more stringent environmental standards. Our current amounts of capital expenditure for environmental regulatory compliance may not be sufficient if additional regulations are imposed and we may need to allocate additional funds for such purpose. If we fail to comply with current or future environmental laws and regulations, we may be required to pay penalties or fines or take corrective actions, any of which may have a material adverse effect on our business operations and financial condition.

In addition, China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1997 Kyoto Protocol, which are intended to limit emissions of greenhouse gases. Efforts to control greenhouse gas emission in China could result in reduced use of coal if power generators switch to sources of fuel with lower carbon dioxide emissions, which in turn could reduce the revenues of our coal business and have a material adverse effect on our results of operations.

22


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

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

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

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

Disruption of any of the transportation services that our customers use due to weather-related problems, flooding, drought, accidents, mechanical difficulties, strikers, lockouts, bottlenecks, and other events could temporarily impair our customers’ ability to purchase coal from us, resulting in decreased revenues.

Our future success depends upon our ability to continue acquiring and developing coal mining rights that are economically feasible.

The amount of coal underlying our mining rights declines as we produce coal. We may not be able to mine all of the coal underlying our mining rights as profitably as we do at our current operations. Our profitability depends substantially on our ability to mine coal that has the geological characteristics that enable it to be mined at competitive costs. As we can only increase our existing production capacity by a limited amount, the future increase in our coal production will depend on expanding our existing mining rights or acquisitions of new mining rights.

New mining rights may not be available when required or, if available, the underlying coal may not be capable of being mined at costs comparable to those characteristics of our existing mining rights. We may in the future acquire mining rights from third parties. We may not be able to accurately assess the geological characteristics to any mining rights that we acquire, which may adversely affect our profitability and financial condition.

If we are not able to obtain a permit to expand the mining area and increase production capacity for the Shangzhai coal mine, our operations and financial condition could be adversely affected.

The Shangzhai coal mine produced 134,668t, 156,303 t and 238,517 t of coal in 2011, 2010 and 2009, respectively. However, this production capacity may not be sustainable because portions of the mine development are situated outside the boundaries of the valid mining permit. According to Wardrop Engineering Inc., the Shangzhai coal mine should have a production capacity of only 90,000 t/a under the current valid mining permit. Government authorities may order the Shangzhai coal mine to be closed or limited at any time, since the area of active mining currently exceeds the limits of the mining permit. The Shangzhai coal mine produced 156,303 t and 148,517 t of coal outside the boundaries of the valid mining permit in 2010 and 2009, respectively. As of May 13, 2011, Shangzhai has obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit, which also allows it to mine at different mining levels. At this time, our company is not contemplating apply for any new mining permit. Rather, we will focus on obtaining permission to increase our annual production rate. The coal production of 134,668 t in 2011 was conducted within the parameter stated in the mining permit. The remaining coal reserve as of December 31, 2011 still pending for the geological report to be issued from an independent and qualified Canada based geologist company, Wardrop Engineering Inc. (the “Wardrop”). Because we have obtained another mining permit, which allows to produce 90,000 t/a from a new mining area, we are confident that we will be able to secure future increase to our permitted rate of production from the authorities. Currently our application to increase the rate of production has received county approval and is being reviewed by the city level government. After receive the city level

23


approval, we will need to apply and receive the provincial level approval before the increase of our rate of production is finally approved.

A notice issued in 2006 by the State Environmental Protection Administration (SEPA) deemed that the Environmental Impact Assessment of a coal mine construction project within an area covered by a coal mine master plan cannot be approved until a planning Environmental Impact Assessment of the coal mine master plan is approved. Since the master plan for the Longyang Longtan – Shizhong coal mine area (which covers the Shangzhai coal mine) was under preparation as of November 2010, there is a risk that an Environmental Impact Assessment for the Shangzhai coal mine expansion will not be approved before the corresponding planning Environmental Impact Assessment is approved. Delay or failure in securing the relevant governmental approvals or permits as well as any adverse change in government policies may cause a significant adjustment to our operations and financial condition.

Risks inherent to mining could increase the cost of operating our business.

Our mining operations are subject to conditions beyond our control that can delay coal deliveries or increase the cost of mining at particular mines for varying lengths of time. These conditions include weather and natural disasters, unexpected maintenance problems, key equipment failures, variations in coal seam thickness, variations in the amount of rock and soil overlying the coal deposit, variations in rock and other natural materials and variations in geologic conditions.

As with all underground coal mining companies, our operations are affected by mining conditions such as a deterioration in the quality or thickness of faults and/or coal seams, pressure in mine openings, presence of gas and/or water inflow and propensity to spontaneous combustion, as well as operational risks associated with industrial or engineering activity, such as mechanical breakdowns. Although we have conducted geological investigations to evaluate such mining conditions and adapt our mining plans to address them, there can be no assurance that the occurrence of any adverse mining conditions would not result in an increase in our costs of production, a reduction of our coal output or the temporary suspension of our operations.

Underground mining is also subject to certain risks such as methane outbursts and accidents caused by roof weakness and ground-falls. There can be no assurance that the occurrence of such events or conditions would not have a material adverse impact on our business and results of operations.

We may suffer losses resulting from industry-related accidents and lack of insurance.

We operate coal mines and related facilities that may be affected by water, gas, fire or structural problems. As a result, we, like other coal mining companies, have experienced accidents that have caused property damage and personal injuries. There can be no assurance that industry-related accidents will not occur in the future. We do not currently maintain fire, or other property insurance covering our properties, equipment or inventories, other than with respect to vehicles. In addition, we do not maintain any business interruption insurance or any third party liability insurance to cover claims in respect of personal injury, property or environmental damage arising from accidents on our properties, other than third party liability insurance with respect to vehicles. For any accident-related costs below RMB50,000 is to be borne by the third party sub-contractors. For any accident-related costs above RMB50,000, 95% of such costs is to be borne by our company and the remaining 5% is to be borne by the third party sub-contractors. Any uninsured losses and liabilities incurred by us could have a material adverse effect on our financial condition and results of operations.

We may be required to allocate additional funds for land subsidence.

A consequence of the underground mining methods used at our mines is land subsidence above underground mining sites. Depending on the circumstances, we may be required to relocate inhabitants from the land above the underground mining sites prior to mining those sites or we may be required to compensate the inhabitants for losses or damages from land subsidence after the underground sites have been mined. We may also be required to make payments for land subsidence, restoration, rehabilitation or environmental protection of the land after the underground sites have been mined. Where such payment is required under applicable law or regulations, an estimate of such costs is recognized in the period in which the obligation is identified and is charged as an expense in our income statement in proportion to the coal extracted. The estimate of costs for land subsidence, restoration, rehabilitation or environmental protection of the land may be subject to change in the future as actual costs become

24


apparent and standards established by the PRC Government change from time to time. Therefore, there can be no assurance such estimates are accurate or that our land subsidence, restoration, rehabilitation and environmental protection costs will not substantially increase in the future or that the PRC Government will not impose new fees in respect of land subsidence. Any such substantial increases or new fees could have a material adverse effect on our results of operations.

The total ecological environment rehabilitation deposit for operating the Shangzhai coal mine is about US$596,782 (equivalent to RMB 3.86 million). We paid about US$179,035 (equivalent to RMB 1.16 million (or 30% of the total deposit)) to the Fujian Provincial Land and Resources Bureau on November 18, 2009. The balance of about US$417,747 (equivalent to RMB 2.70 million (or 70% of the total deposit)) must be paid to the Fujian Provincial Land and Resources Bureau before April 2015 (one year ahead of the expiration of the mining license).

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

We may seek to expand our operations both in the regions in which we operate as well as in other parts of China through acquisitions of businesses and assets. Acquisition transactions involve inherent risks, such as:

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

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

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

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

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

  • unexpected development costs that adversely affect our profitability.

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

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

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

Our reserve estimates may prove to be incorrect.

The mineral reserve figures in this report are estimates based on the interpretation of limited sampling and subjective judgments regarding the grade, continuity and existence of mineralization, as well as the application of economic assumptions, including assumptions as to operating costs, foreign exchange rates and future commodity prices. The sampling, interpretations or assumptions underlying any reserve estimate may be incorrect, and the impact on reserves may be material. Should the mineralization and/or configuration of a deposit ultimately turn out to be significantly different from that currently envisaged, then the proposed mining plan may have to be altered in a way that could affect the tonnage and grade of the reserves mined and rates of production and, consequently, could adversely affect the profitability of the mining operations. In addition, short term operating factors relating to the reserves, such as the need for orderly development of ore bodies or the processing of new or different ores, may

25


cause reserve estimates to be modified or operations to be unprofitable in any particular fiscal period. There can be no assurance that our projects or operations will be, or will continue to be, economically viable, that the indicated amount of minerals will be recovered or that they will be recovered at the prices assumed for purposes of estimating reserves.

Risks Related to Doing Business in China

Our operations are primarily located in China and may be adversely affected by changes in the policies of the Chinese government.

The political environment in the PRC may adversely affect our business operations. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a “socialist market economy” and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. These effects could substantially impair our business, profits or prospects in China. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.

The Chinese government exerts substantial influence over the manner in which companies in China must conduct their business activities.

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

Future inflation in China may inhibit economic activity and adversely affect our operations.

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

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent our company from providing needed capital to Fujian Huilong

In August of 2008, China’s State Administration of Foreign Exchange (“SAFE”) issued Circular 142, which regulates the process of foreign currency capital verification by foreign invested enterprises in China. Circular 142 introduced new statutory requirements that impact the use of Renminbi converted capital invested by FIEs. In particular, Circular 142 imposes additional capital verification procedures, restricts investments by FIEs in domestic enterprises, prohibits purchase of domestic real estate by FIEs; and imposes additional approval process on payment of consideration to domestic individuals and institutions in M&A transactions. Like many of SAFE’s other regulations, Circular 142 is broadly drafted, making it difficult to predict how local SAFE branches will interpret and enforce certain provisions of Circular 142. We do not expect Circular 142 having a significant effect on our company because even though Fujian Huilong is a FIE, for the foreseeable future, we have no plan to make any equity investment in other domestic enterprises or real estate in PRC through Fujian Huilong.

26


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

The Renminbi is not a freely convertible currency at present. We receive all of our revenue in Renminbi, which may need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective July 1, 1996, foreign currency “current account” transactions by foreign investment enterprises, including sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange (“SAFE,” formerly, “State Administration of Exchange Control”), but need only a ministerial review, according to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996 (the “FX regulations”). “Current account” items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered a “current account transaction.” Other non-current account items, known as “capital account” items, remain subject to SAFE approval. Under current regulations, we can obtain foreign currency in exchange for Renminbi from swap centers authorized by the government. We do not anticipate problems in obtaining foreign currency to satisfy our requirements; however, there is no assurance that foreign currency shortages or changes in currency exchange laws and regulations by the Chinese government will not restrict us from freely converting Renminbi in a timely manner. If such shortages or change in laws and regulations occur, we may accept Renminbi, which can be held or reinvested in other projects.

Future fluctuation in the value of the Renminbi may negatively affect our sales globally and our ability to convert our return on operations to U.S. dollars in a profitable manner.

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including U.S. dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has appreciated approximately 15%. Countries, including the U.S., have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets.

The PRC legal system embodies uncertainties that could limit the legal protection available to our shareholders.

The PRC’s legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China’s regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that we will not be able to achieve our business objectives.

Risks Related to Our Company

Our management team does not have North American public company experience and it could adversely impact our ability to comply with the reporting requirements of the securities laws.

Our management team has no North American public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002. Other than Thomas Tze Khern Yeo, who serves as Chief Financial Officer and Company Secretary of Sunshine Holdings Limited, a company listed on the Singapore Main Board, our other officers and directors do not have experience with public companies. Accordingly, our senior management collectively has limited experience with the responsibilities related to managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such legal, regulatory compliance and reporting requirements, including establishing and maintaining internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our

27


ability to comply with the reporting requirements of the Securities Exchange Act of 1934, which is necessary to maintain our public company status. If we were to fail to fulfill those obligations, our ability to continue as a public company would be in jeopardy in which event you could lose your entire investment in our company.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal control over our financial reporting is not effective. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs (approximately $200,000 per year) and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

Our Accounting staff lacks experience with U.S. GAAP and we may not be able to accurately report our financial results or report them on time.

We have limited ability to prepare financial statements and maintain our books and records in U.S. GAAP. Our books and records are maintained and prepared in PRC GAAP and our employees who have primary responsibilities of preparing and supervising the preparation of the financial statements under U.S. GAAP do not have extensive knowledge of and professional experience with U.S. GAAP and SEC rules and regulations. Accordingly, we may not be able to report our financial results accurately as required by SEC rules and regulations and we may report our financial results late. Furthermore, we confirm that we will evaluate these factors in the future in concluding on the effectiveness of disclosure controls and procedures under Item 307 of Regulation S-K and internal control over financial reporting under Item 308 of Regulation S-K.

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

All of our assets are located outside the United States. In addition, our directors and officers are a national and/or resident of a country other than the United States, and all or a substantial portion of their respective assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our directors and officers, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under United States federal and state securities laws against us or our directors and officers.

Because Longwen Lin, our Chairperson, President and director, controls a large percentage of our common shares, he has the ability to influence matters affecting our shareholders.

Longwen Lin, our Chairperson, President and director, beneficially direct owns 53.10% of the issued and outstanding common shares of our company as at December 31, 2011. As a result, he has the ability to influence matters affecting our shareholders, including the election of our directors and the acquisition or disposition of our assets. Because he controls such shares, our shareholders will find it difficult to replace our management if they disagree with the way our business is being operated. Because the influence by Mr. Lin could result in management making decisions that are in his best interest and not in the best interest of our shareholders, our shareholders may lose some or all of the value of their investments in our common shares.

28


Our lack of independent directors could adversely affect our company.

We have no independent members of our board of directors. Our board of directors is comprised of three people, all of whom are employed by us. Accordingly, none of our directors is "independent" using the definition set forth in the NASDAQ Marketplace Rules. Although our directors are subject to the fiduciary duties imposed on board members pursuant to British Columbia law, our shareholders do not have the protections afforded by independent directors which are some of the traditional procedural safeguards that protect the interests of minority shareholders. Our lack of independent directors on our board of directors may also make decisions of our board of directors more prone to legal claims or shareholder criticism than if made by a board of directors with independent board members.

Risks Related to Our Common Shares

If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

Our authorized capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. We have not issued any preferred shares. Our board of directors may choose to issue some or all of such shares to acquire one or more companies or properties and to fund our overhead and general operating requirements. The issuance of any such shares will reduce the book value per share and may contribute to a reduction in the market price of the outstanding common shares of our company. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.

Our common shares are illiquid and the price of our common shares may be negatively impacted by factors which are unrelated to our operations.

Although our common shares are currently quoted on the OTC Bulletin Board, relatively few of our shares have been purchased or sold on that market. Even when a more active market is established, trading through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common shares could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common shares, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common shares.

We do not intend to pay cash dividends on any investment in the shares of stock of our company.

We have never paid any cash dividends and currently do not intend to pay any cash dividends for the foreseeable future. Because we do not intend to declare cash dividends, any gain on an investment in our company will need to come through an increase in the stock’s price. This may never happen and investors may lose all of their investment in our company.

Trading of our stock is restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our common shares.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account

29


statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common shares.

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2. PROPERTIES

Executive Offices and Address for Service

Our current address for the principal place of business is located at Xiamen City, Si Ming District, Jia He Road No.25, Xinjing Centre, Unit C2606, PRC China 361009. We paid a monthly rent of RMB11,042 to an unrelated party.

Properties

The Shangzhai Coal Mine

We own 100% equity interest in the Fujian Huilong coal property, located at Yongding County, Fujian Province, People’s Republic of China, about 30 km south of the nearest major town, Longyan City, and about 130 km northwest of Xiamen, a major coastal port for Fujian Province. The nearest village, Shangzhai, is about 1.5 km away. The road between this property and Shangzhai village is paved. Provincial Highway 203 passes through the village and is in turn connected to a recently constructed freeway. The nearest rail access is about 15 km away at Canton City.

30


The Shangzhai coal property is comprised of a mining license about 5.7 km2 in area. Currently, we are producing about 150,000 t of coal annually from eight coal seams in two underground operating areas. We applied for a new mining permit to expand our mining area to 7.5 km2 in order to increase the amount of coal mined. As of May 13, 2011, we obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows us to mine at different mining levels.

The climate in this part of China is semi-tropical. The climate along the coastal area of the province is semi-tropical (hot in the summer, and cool in winter). Mean temperatures range from about 84°F (29°C) in July to about 52°F (11°C) in January. There are three seasons: November through February is the cool season, March through May, the warm season; and June through October, the hot season. The growing period lasts throughout the year; likewise, mining operations are possible on a year-round basis.

The Shangzhai coal property has sufficient surface rights for current and anticipated mining operations, as well as sufficient power, water, and personnel. The surface rights relate to the rights relating to the mining facilities on the surface. These surface rights are distinct from the rights conveyed in our existing mining license, which allow us to mine for coals underground. The mine is connected to the state power grid and a river flows through the Shangzhai coal property. This region of Fujian has numerous coal mining operations and a large skilled workforce.

History of Exploration and Development

The earliest documented exploration in the area dates from 1950 to 1960 when Fujian Province Coal Exploration Team 121 carried out regional exploration for coal. Exploration on the Shangzhai coal property itself began in 1989 by the same exploration team as part of a regional evaluation that was carried out until 1994. Part of this exploration consisted of driving adits so that production began at almost the same time that exploration was initiated.

Over the period of 1989 to 2003, this team excavated an unknown number of trenches and underground development, as well as drilled 26 core holes. In 2000, with increasing concern about mine safety, the government rescinded the mining licence that was issued to the initial operator whose operational procedures were sub-standard. Details pertaining to the amount of exploration, development, and extraction by the previous owner are not known.

Fujian Huilong incorporated and obtained the business licence on August 4, 2005 and first mining license was obtained in April of 2006, approximately 2.7 km2 in area and with an annual permitted production rate of 60,000 t, and have been in operation ever since. In 2005, the license area was expanded to its present size of approximately 5.7 km2 with an annual permitted mining rate of 90,000 t. Having rights to legally extract stated amount of coal does not guarantee reserves or the amount that may be economically extracted. We have not conducted any drilling or conducted any other exploration on the property that is subject to the existing mining permit.

Geology

The Shangzhai coal property contains eight coal seams of Permian age that are mined commercially within a mining licence that measures about 5.7 km2 in area. The eight commercial seams (numbered 3, 5, 7, 9, 23, 24, 28 Upper and

31


28), are among about 24 seams that occur within the Permian age Tongziyan Formation. The strata have been deformed by low-angle thrusting and folding. This deformation has resulted in the division of the mining areas into northern and southern sectors separated by a zone in which structural deformation has removed or truncated the coal-bearing strata.

Annual Production

The following table shows the annual sale and production volume from our Shangzhai coal mine and the average sale price before tax per ton for our coal for the last two years.

Year Annual Sale and Production Volume (t) Average Sale Price (US$)
2010 156,303 87
2011 134,668 107

The following table shows the annual production volume for the last three fiscal years was produced from the area covered by our mining permit numbered 3500000620055 and from the area covered by our new mining permit numbered C3500002011051120112047:




Year
Annual Sale and Production Volume from
area covered by the existing mining permit
3500000620055
(t)
Annual Sale and Production Volume from
area covered by the new mining permit
C3500002011051120112047
(t)
2009 116,850.2 121,667
2010 23,317 132,986
2011 22,893 111,775

Coal Reserve

We retained Wardrop Engineering Inc., an independent firm, to prepare a technical report in compliance with National Instrument 43-101 on the Shangzhai coal property. The information that follows relating to the Shangzhai coal mine is derived, for the most part, from, and in some instances is an extract from, the technical report dated May 10, 2011, authored by Greg Mosher, P.Geo, Wenchang Ni, P.Eng., and Doug Ramsey, P.Eng. of Wardrop Engineering Inc. in respect of the Shangzhai coal property. At the time of the preparation of the technical report, these authors were independent of our company and were a “qualified persons”, as that term is defined in National Instrument 43-101.

Portions of the following information are based on assumptions, qualifications and procedures which are not fully described herein. Reference should be made to the full text of the technical report on the Shangzhai coal property which has been filed with certain Canadian securities regulatory authorities pursuant to National Instrument 43-101 and is available for review at www.sedar.com.

The Shangzhai coal mine’s coal reserves as reported by Wardrop Engineering Inc. presented here comply with National Instrument 43-101 Standards of Disclosure for Mineral Projects. The information we have provided in this Form 8-K is presented in accordance with the requirements of Industry Guide 7. However, information concerning the resources estimates contained in this report may not be comparable to information made public by United States companies subject to the reporting and disclosure requirements of the SEC, specifically the SEC’s Industry Guide 7. National Instrument 43-101 is a rule developed by the Canadian Securities Administrators that establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Unless otherwise indicated, all reserve estimates contained in this report have been prepared in accordance with National Instrument 43-101. These standards differ significantly from the requirements of the SEC, and reserve information contained herein may not be comparable to similar information disclosed by U.S. companies.

Based on the report of Wardrop Engineering Inc. dated May 10, 2011, the total remaining coal reserve at the end of 2009 was 1,354,000 t, including 416,000 t of proven coal reserve, and 938,000 t of probable coal reserve. Modified factors mainly include a 25% coal pillar loss rate, 85% panel recovery rate, and 5% dilution rate. Because most of

32


the annual production of 150,000t in year 2010 was produced outside of the 5.7 km2 area covered by our valid mining permit (permit number: 3500000620055), the coal reserve estimate as of December 31, 2010 remained at approximately 1,354,000 t. The coal production of 134,668 t in 2011 was conducted within the parameter stated in the mining permit. The remaining coal reserve as of December 31, 2011 still pending for the geological report to be issued from an independent and qualified Canada based geologist company, Wardrop Engineering Inc. (the “Wardrop”).Because the scope of Wardrop’s work on the NI-43-101 technical report covered 5.7 km2 area of the mining permit numbered 3500000620055, which provides for an annual production rate of 90,000 t/a and is in good standing until April 2016, but Wardrop noted that Fujian Huilong’s production was over 200,000 t in year 2009 and about 150,000 t in year 2010, and that portions of Fujian Huilong’s mine development were situated outside the boundaries of the 5.7 km2 mining permit, accordingly, it was Wardrop’s opinion that Shangzhai should renew the mining permit as soon as possible to verify the legality and safety of the mine. As of May 13, 2011, Shangzhai has obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit, which also allows it to mine at different mining levels. As of May 13, 2011, Shangzhai has obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit, which also allows it to mine at different mining levels.

Summary of Underground Coal Reserves as of December 31, 2010

Classified Coal Reserves (t)  
Total Coal Reserves (t)
Proven Probable
416,000 938,000 1,354,000

The remaining coal reserve as of December 31, 2011 still pending for the geological report to be issued from an independent and qualified Canada based geologist company, Wardrop Engineering Inc. (the “Wardrop”).

Our Mining Operations

The Shangzhai coal property is comprised of Mining Licence No. 3500000620055, is 5.7 km2 in area and is held in the name of Fujian Huilong. This licence includes an earlier, smaller licence that is approximately 2.7 km2 in area. The licence was issued in April 2006 and remains in good standing until April 2016. As of May 13, 2011, we have obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows us to mine at different mining levels.

The Shangzhai coal mine located in the Shangzhai coal property is a typical multi-seam coal mine with decline shaft access that employs longwall mining with a low degree of mechanization. The Shangzhai coal mine operates on the eight thin coal seams. The thicknesses of coal seams seldom exceeds 1 m.

The mine exploits eight coal seams that do not outcrop on the Shangzhai coal property but are of regional extent; therefore the coal resource is more extensive than the Shangzhai coal property. The Shangzhai coal property does, however, contain all mine development and storage as well as all related infrastructure, including explosives storage and an electrical substation.

The main facilities at the Shangzhai coal mine include the north main shaft, the south main shaft, the north auxiliary shaft with two axial fans, the south auxiliary shaft, and the south vent shaft with two axial fans. Other ancillary facilities include an air compressor room, four ground surface winch rooms, two coal storage sheds, one old coal gangue storage area, one new coal gangue storage area, two mining water sedimentation tanks, office buildings, dormitories, kitchens, and canteens, etc.

The Shangzhai coal mine has two operation areas – North and South – divided by the F12 fault. Both the North and South areas have independent ventilation and hoisting systems. The main decline shafts are equipped with winches to pull and lower mine cars on tracks between each production level to surface. Production levels, which generally have 40 m vertical interval, are grouped in a system with respect to the decline.

33


We utilize a central methane monitoring and controlling system. The mine dispatcher can continuously monitor the methane level of major underground working places and, in the event of unsafe methane levels, appropriate action can be taken immediately.

Since 2007, the Shangzhai coal mine production capacity has been progressively increased from approximately 50,000 t/a to 240,000 t/a, with the exception of a decrease in 2010 to 156,000 t/a and further decrease in 2011 to 134,668t/a due to the continuous construction of mining shafts and other facilities. Most of the coal was produced from the Southern area, since mine development was not finished in the Northern area. However, we performed a lot of mine development in the Northern area, which is not subject to the existing mining permit, and prepared more than enough working places for extending the permitted production capacity.

Although the mine produced more than 100,000 t of coal from 2009 to 2011, this production capacity may not be sustainable because portions of the mine development are situated outside the boundaries of the valid mining permit. According to Wardrop Engineering Inc., the Shangzhai coal mine should have a production capacity of only 90,000 t/a under the current valid mining permit. Government authorities may order the Shangzhai coal mine to be closed or limited at any time, since the area of active mining currently exceeds the scope of the mining permit. However, our management believes that this risk has been minimized since as of May 13, 2011, we have obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows us to mine at different mining levels. We initially applied for a mining permit covering an area of 7.5 km2, including area covered by our past active mining operations. The new mining permit issued to us covers an area of 6.8 km2, which is the 7.5 km2 area we applied for less the area exhausted by our past mining activities. After receiving this new mining permit, we intend to conduct our mining operations only within the areas covered by our valid mining permits.

Our annual permitted mine production rate increased gradually since 2006 from 60,000 t/a to the current 90,000 t/a with full support of the local mining authorities. At the annual permitted mine production rate of 90,000 t/a, our mine operation is consider larger than the local artisan mining operations, which are target of government enforcement. As we expanded of our actual mine production beyond the 90,000 t/a, our mine production infrastructure has also been steadily developed to support the excess production. It is our management’s view that our current mine development can support an annual production of 300,000 t/a. Our management’s view of our production capability being 300,000 t/a is based on the facts that when we expanded our mining operation through the years, we have developed our mine production infrastructure with a goal of exceeding 300,000 t/a and also that we were able to produce 238,517 t, 156,303 t and 134,668t of coal for years 2009, 2010 and 2011 respectively. Our management is also of the view that this annual production capability of 300,000 t/a is based on mining operations only in the areas covered by current valid mining permits. We intend to and are in the process of applying for an increase to our annual permitted mine production rate to 300,000 t/a in stages over the next few years. The application process includes submitting an application and plan for the production increase, followed by the review of records and inspection by officials onsite. The factors in determining whether an application to increase annual production rate would be approved include past production records, actual production capacity, adequacy of equipment and infrastructure and past safety records. The government authorities may approve increase annual production rate in stages and with requirements of trial period. Because of the condition of our mining operation, we are confident that we will be able to secure future increase to our permitted rate of annual production from the authorities, if not directly to 300,000 t/a, to a rate of 180,000 t/a as the first stage increase. The likelihood of the authorities shutting down our mine for non-compliance is relatively small. In May of 2011, we also obtained a new mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit, which also allows it to mine at different mining levels. This new mining permit also allows us to produce at an annual production rate of 90,000 t/a from the area covered by this ming permit. Accordingly, we are currently able to produce 90,000 t/a from each of the areas covered by our two mining permits. Should the authorities indicate to us that strict compliance with permitted mine production rate is required, we intend to limit our mine production to 90,000 t/a from each of the areas covered by our two mining permits until such time when our annual permitted mine production rate is increased.

The unit operation cost in 2009 was US$32.40/t, in 2010 was US$43/t and in 2011 was US$65/t. Labour costs occupy 41 to 48% of the total operation cost.

Wardrop Engineering Inc. estimated that the Shangzhai coal mine had a remaining coal reserve of 1,354,000 t as of Dec 31, 2009. Because most of the mining activity in 2010 was performed outside the area covered by our valid

34


mining permit, the remaining coal reserve in the 5.7 km2 area is essentially the same as that at the end of 2009. The coal production of 134,668 t in 2011 was conducted within the parameter stated in the mining permit. The remaining coal reserve as of December 31, 2011 still pending for the geological report to be issued from an independent and qualified Canada based geologist company, Wardrop Engineering Inc. (the “Wardrop”).Wardrop recommends that Shangzhai should renew the mining permit as soon as possible to verify the legality and safety of the mine. As of May 13, 2011, we obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows us to mine at different mining levels. Under the current valid mining permit, the life of mine will be approximately 15 years at a production rate of 90,000 t/a. The life of mine will be re-evaluated when Shangzhai renewed its mining permit with updated mining area and production rate.

Growth Strategy

We plan to increase our coal reserves by: (i) performing further exploration programs in the current valid mining permit to upgrade our coal resources into the coal reserves; and (ii) expanding the mining boundary, and conducting corresponding feasibility studies with a new mining permit to increase the coal reserves. As of May 13, 2011, Shangzhai has obtained a mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by its existing mining permit but also allows it to mine at different mining levels. We expended approximately US$78,125 (RMB500,000) to retain Fujian Province Coal Exploration Team 8 to investigate preliminarily the geological characteristics, coal seam distribution, structure, thickness, lithology and formation. A preliminary coal resource estimate has been completed on this 6.83 km2 mining area. In addition, we also expended approximately US$70,313 (RMB450,000) to commission Fujian Huaxia Architecture Design Institute to complete a 300,000 t/year feasibility study. Shangzhai is planning to update the current NI 43-101 report prepared by Wardrop beginning in November of 2011 to incorporate the coal resource and reserves in the 6.83 km2 area, which is expected to be in compliance with the CIM standards (the standards set forth by Canadian Institute of Mining, Metallurgy and Petroleum). We anticipate that we will need to spend approximately US$60,000 to update the NI 43-101 report. We anticipate that the updated NI 43-101 report will be finalized by June 2012. The National Instrument 43-101 is a rule developed by the Canadian Securities Administrators that establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects, designed to improve the accuracy and integrity of the information provided by mining issuers.

Permits and Other Regulatory Requirements

Permits

We operate the Shangzhai coal mine pursuant to the following 7 permits:

Name of Permit Permit No. Expiry Date Limits (Area) Issued by
Business Licence 350000100007198 August 2035 N.A. Administration for Industry and Commerce of Fujian Province
Certificate of Organization Code 77753680-8 August 2012 N.A. Fujian Bureau of Quality and Technical Supervision
Tax Licence 350822777536808 Permanent N.A. Tax Department of Fujian Province
Mining Permit *3500000620055 April 2016 5.7 km2 & above +328 masl Natural Resource Department of Fujian Province
Mining Permit C3500002011051120112047 May 2021 6.8 km2 from 700 m to -300 m Natural Resource Department of Fujian Province
Coal Production Permit 203508220136 December 2031 N.A. Economic and Trade Commission of Fujian Province

35



Safety Production Permit (2005)F107(G1) December 2011 N.A. Coal Mine Safety and Supervision Department of Fujian Province

*Note: the scope of Wardrop’s work is limited to the area covered by mining permit 3500000620055 only.

Wardrop Engineering Inc. recommended that we should renew and expand the mining permit as soon as possible to guarantee that mine production is legal and to ensure safe operation. We submitted applications to the authorities to expand our mining area for an additional 7.5 km2 and increase production capacity in May of 2010. As of May 13, 2011, we have obtained another mining permit (C3500002011051120112047) for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows us to mine at different mining levels.

A notice issued in 2006 by the State Environmental Protection Administration (SEPA) deemed that the Environmental Impact Assessment of a coal mine construction project within an area covered by a coal mine master plan cannot be approved until a planning Environmental Impact Assessment of the coal mine master plan is approved, which management expects to be approved. Since the master plan for the Longyang Longtan – Shizhong coal mine area (which covers the Shangzhai coal mine) was under preparation as of November 2010, there is a risk that an Environmental Impact Assessment for the Shangzhai coal mine expansion will not be approved before the corresponding planning Environmental Impact Assessment is approved. However, we are not sure when the master plan for the Longyang Longtan – Shizhong coal mine area will be finalized so we have no way to assess the likely impact on our Shangzhai coal mine. We intend use commercial reasonable efforts to comply with any additional requirements imposed by the master plan for the Longyang Longtan – Shizhong coal mine area on our Shangzhai coal mine.

Safety Risk Deposit

According to the Yongding County Coal Mine Safety Risk Deposit Management Measures (effective as of July 1, 2005), the safety risk deposit will be about US$154,560 (equivalent to RMB 1 million) for coal mines with a capacity of up to 60,000 t/a and about US$231,839 (equivalent to RMB 1.5 million) for coal mines with a capacity above 60,000 t/a.

On August 26, 2005, we paid about US$154,560 (equivalent to RMB 1 million) to the Yongding County Coal Development Company as a representative of the Yongding County Coal Industry Management Bureau. In 2005, the approved capacity of the Shangzhai Mine was 60,000 t/a. Since April 2006, the approved capacity of the Shangzhai coal mine was increased to 90,000 t/a. According to consultation with the Yongding County Coal Industry Management Bureau in November 2010, there is no regulation that specifically requires a coal mine that has paid the safety risk deposit at an originally approved capacity to increase the safety risk deposit once its capacity is increased. In addition, we have received from Yongding County Coal Industry Management Bureau a confirmation that our safety risk deposit will not increase as the safety risk deposit was an one-time fee. As we have already received this confirmation from Yongding County Coal Management Bureau, we believe the risk of any fines or other penalties being assessed against our company as a result of any failure to properly pay safety risk deposit is minimal.

Ecological Environment Rehabilitation Deposit

The Fujian Provincial Mine Ecological Environment Rehabilitation Deposit Management Measures (effective as of January 1, 2007) requires every mining license holder within Fujian Province to:

  • prepare a Mine Ecological Environment Rehabilitation Plan;

  • sign a Mine Ecological Environment Rehabilitation Agreement with the Fujian Land and Resources Bureau;

  • pay a Mine Ecological Environment Rehabilitation Deposit.

The Mine Ecological Environment Rehabilitation Deposit should be paid to the Fujian Province Land and Resources Bureau who issued the Mining License. The deposit can be paid in one lump sum, or in partial installments annually.

36


The total Ecological Environment Rehabilitation Deposit for operating the Shangzhai coal mine is about US$596,782 (equivalent to RMB 3.86 million). We paid about US$179,035 (equivalent to RMB 1.16 million (or 30% of the total deposit)) to the Fujian Provincial Land and Resources Bureau on November 18, 2009. The balance of about US$417,747 (equivalent to RMB 2.702826 million (or 70% of the total deposit)) must be paid to the Fujian Provincial Land and Resources Bureau before April 2015 (one year ahead of the expiration of the mining license).

Environmental, Health, and Safety Approvals

Environmental Resources Management Shanghai Limited (“ERM”) was commissioned by Wardrop Engineering Inc. to undertake an environmental, health, safety review of the Shangzhai coal mine, which was used by Wardrop Engineering Inc. to complete a technical report on the Shangzhai coal property. ERM identified 13 environmental risks, 4 occupational health and safety risks, and no community (social) risks. According to the technical report of Wardrop Engineering Inc., most of the risks identified by ERM’s review may result in fines below the material threshold (US$250,000), but should not result in immediate shut-down of the operations.

ERM recommended that we apply for the following environmental, health, and safety approvals, which were not in place at the time of the site visit by ERM from October 31, 2010 to November 1, 2010:

  • Occupational Disease Hazard Pre-Assessment (ODHA);

  • Occupational Disease Hazard Control Effectiveness Assessment (ODHCEA);

  • Firefighting Design approval and Firefighting Completion Inspection approval;

  • Water Abstraction Permit.

Currently ODHA and ODHCEA systems have not been set up in Fujian province, accordingly, we are unable to complete these assessments as there are no regulatory bodies in Fujian province current responsible for implementation of these systems. Because the ODHA and ODHCEA systems have not been implemented in Fujian Province, our management does not believe that we are currently in violation of existing rules or laws in this regard. Our management intends to comply with the requirements of ODHA and ODHCEA systems when they are implemented in Fujian Province. However, because these systems are not yet in place, our management is not able to assess the likely length of time and costs that are required for our company to comply with these requirements. We do not know and have not basis to predict when ODHA and ODHCEA systems will be available in Fujian province. We will continue to monitor the status of potential implementation of ODHA and ODHCEA systems in Fujian province closely and be ready for future compliance requirements. However, Shangzhai has incorporated voluntarily the yearly occupational disease examination for coal miners. In addition, Shangzhai pays the work injury insurance at a 30% ration of all the employees without naming beneficiaries. The water abstraction has not been regulated in the Shangzhai mine area. We do not know and have not basis to predict when water abstraction regulations will be implemented in the Shangzhai mine area. We will monitor the status of potential implementation of water abstraction regulations in the Shangzhai mine area closely and be ready for future compliance requirements. When the relevant regulations are in place, Shangzhai intends to apply for these approvals. The water for mine operation is now shared with the local people at a pre-agreed payment. The written contractual agreement between Fujian Huilong and the villagers is valid until June 2016 and provides that Fujian Huilong shall pay Xia Village Charitable Affairs Commission an annual payment of RMB15,000 for the right to share the water resources with Xia Village.

The mine production in 2009 exceeded the permitted production capacity, as well as using a newly constructed coal gangue storage facility that may result in a fine up to about US$31,250 (equivalent to RMB 200,000) and temporarily shut-down of mine operation. The management is of the view that the likelihood of our company being fined or our mine operation being temporarily shut-down because of the use of the newly constructed coal gangue storage facility is small because we have already paid the first instalment of the Ecological Environment Rehabilitation Deposit, which we believe is being applied to ensure our use of the newly constructed coal gangue storage facility will not have severe environmental impact. Another material level risk is the lack of the firefighting design approval or firefighting completion inspection approval has not been presented during the site visit made by ERM, retained by Wardrop to undertake an EHS and community review of the Shangzhai Mine which is part of the independent technical report in accordance with the NI 43-101. The lack of firefighting design approval may result

37


in a fine up to about US$46,875 (equivalent to RMB 300,000) and shut-down for non-compliance with the firefighting law. The original firefighting approval documents had been submitted to and filed in Longyan Coal Administrator Bureau in the application progress for the previous expansion in 2008 on the 5.7 km2 area. Fujian Huilong provided the 2008 expansion approval document issued by Longyan Coal Administrator Bureau “Longmeianjian 2008 (34)”. The approval and inspection occurred in the 5.7 km2 area covered by our mining permit No. 3500000620055. We believe that the risks of not receiving the environmental, health and safety approvals in connection with our coal mining operations outside of the area of your mining permits are now minimal because we have obtained the mining permit for an area of 6.8 km2 that is adjacent to (and with a small overlapping area with) the 5.7km 2 area covered by our existing mining permit, which also allows it to mine at different mining levels, and we intend to limit our mining operations the areas covered by our mining permits only in the future. The file shows the inspection and acceptance for the 5.7 km2 area covered by mining permit No. 3500000620055 were made in four disciplines: i) safety, ii) mining, iii) ventilation, including methane monitoring system and firefighting system, and iv) mechanics and electrical. Because the approval document issued by Longyan Coal Administrator Bureau “Longmeianjian 2008 (34)” indicated inspection and acceptance of “methane monitoring system and firefighting system”, we believe the likelihood of our company being fined for lack of firefighting design approval is relatively small. We also believe that the inspection and acceptance in the approval document covers firefighting design approval and we currently have no intention of applying for firefighting design approval. The inspection and acceptance for the 6.8 km2 area covered by mining permit C3500002011051120112047 in the following four disciplines: i) safety, ii) mining, iii) ventilation, including methane monitoring system and firefighting system, and iv) mechanics and electrical, is underway right now and we anticipate that we will receive final acceptance in all four disciplines by June of 2012. We believe that because the inspection and acceptance in the four disciplines described above cover firefighting design approval, we will not need to apply separately for firefighting design approval. Accordingly, we currently have no intention of applying for firefighting design approval for the 6.8 km2 area covered by mining permit C3500002011051120112047.

According to the technical report of Wardrop Engineering Inc., in order to expand capacity of the Shangzhai coal mine, the following environmental, health, and safety permitting requirements are applicable for mine expansion:

  • Environmental Impact Assessment Report and subsequent approval from the appropriate Environmental Protection Bureaus (EPB);

  • Environmental Completion Acceptance Inspection Investigation and the subsequent approval from the appropriate EPB;

  • ODHA Report and subsequent approval from the appropriate Health Bureau;

  • ODHCEA Report and subsequent approval from the appropriate Health Bureau;

  • Safety Pre-assessment Report and subsequent approval from the appropriate Safe Production Supervision and Management Bureau;

  • Safety Completion Acceptance Assessment Report and subsequent approval from the appropriate Safe Production Supervision and Management Bureau;

  • Firefighting Design Approval and Firefighting Completion Inspection and approval from the appropriate firefighting authority.

  • ERM recommended that we comply with these permitting requirements for any future expansion of the Shangzhai coal mine, which we plan to do so.

ITEM 3. LEGAL PROCEEDINGS

We know of no material pending legal proceedings to which our company is a party or of which any of our property is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

38


We know of no material proceedings in which any director, officer or affiliate of our company, or any registered or beneficial stockholder of our company, or any associate of any such director, officer, affiliate, or stockholder is a party adverse to our company or has a material interest adverse to our company.

ITEM 4. MINE SAFETY DISCLOSURES

Under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and under the SEC's recently adopted Item 104 of Regulation S-K, each operator of a coal or other mine is required to include disclosures regarding certain mine safety results in its periodic reports filed with the SEC. The operation of the our quarries is subject to regulation by the federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977. We do not own any mines in the United States and as a result, this information is not required. Please refer to the subheading “Mining Safety” beginning on page 14.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market information

Our common shares are quoted on the OTC Bulletin Board of the Financial Industry Regulatory Authority, Inc. Our symbol is “SGBHF” and our CUSIP number is 78417V 104.

Set forth below are the range of high and low bid quotations for the period indicated as reported by the OTC Bulletin Board. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

Quarter End Bid High Bid Low
12/30/2011 $0.00 $0.00
09/30/2011 - -
06/30/2011 $0.16 $0.00
03/31/2011 $0.10 $0.00
12/31/2010 $0.00 $0.00
09/30/2010 $0.00 $0.00
06/30/2010 $0.00 $0.00
03/31/2010 $0.00 $0.00

Transfer Agent

The transfer agent and registrar for our common stock is Pacific Stock Transfer Company 500 E. Warm Springs Road, Suite 240, Las Vegas NV 89119 (702) 361-3033

Holders of Common Stock

As of April 13, 2012, there were 78 holders of record of our common stock. As of such date, 373,793,578 shares were issued and outstanding.

Dividends

We have not declared any dividends on our common stock since the inception of our company. There is no restriction in our articles of incorporation and bylaws that will limit our ability to pay dividends on our common stock. However, we do not anticipate declaring and paying dividends to our shareholders in the near future.

39


Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

During our fiscal year ended December 31, 2011, we did not sell any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a quarterly report on Form 10-Q or in a current report on Form 8-K.

Securities authorized for issuance under equity compensation plans.

The following table summarizes certain information regarding our equity compensation plans as at December 31, 2011.







Plan category



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



Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
  (a) (b) (c)
Equity compensation plans approved by security holders Nil N/A 2,282,044
Equity compensation plans not approved by security holders Nil N/A Nil
Total Nil N/A 2,282,044

2010 Equity Compensation Plan

On October 27, 2010, our board of directors approved and adopted our 2010 equity compensation plan and on November 30, 2010, our shareholders approve the plan. Pursuant to the plan, our board of directors may grant stock options or stock awards to employees, directors, officers or consultants of our company or subsidiary. A maximum of 10% of the total issued and outstanding common shares of our company at the time of grant may be issued upon exercise of stock options granted under the plan or as stock awards granted under the plan.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our shares of common stock or other securities during our fiscal year ended December 31, 2011.

ITEM 6 SELECTED FINANCIAL DATA

Not applicable.

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Results of Operations

For the years ended December 31, 2011 and 2010

The following table sets forth the consolidated financial statements of the Company for the years ended December 31, 2011 and 2010.

40



  Year Ended Year Ended
  December 31, 2011 December 31, 2010
      (Restated)
  $ % of Sales $ % of Sales
Net sales 14,353,067 100% 13,617,770 100%
Cost of sales 8,782,818 61% 6,921,203 51%
Gross profit 5,570,249 39% 6,696,567 49%
Operating expenses 2,521,421 18% 1,647,896 12%
Profit from operations 3,048,828 21% 5,048,671 37%
Other items and income tax 1,354,353 9% 1,625,849 12%
Net income 1,694,475 12% 3,422,822 25%

Net Sales

Our revenues are derived from the sales of coal. The overall revenue increased by $0.73 million or 5% from $13.62 million in financial year ending 2010 to $14.35 million in financial year ending 2011 albeit a decrease of the production volume by 21,635 tons or 14% from about 156,303 tons in financial year ending 2010 to about 134,668 tons in financial year ending 2011. We have yet to attain the full production capacity in financial year ending 2011 due mainly to the continuing construction of the current mining facilities.

Despite the lower production volume registered in financial year ending 2011 as compared to financial year ending 2010, our average selling price for financial year ending 2011 increased by $20 per ton or 23% from about $87 per ton in financial year ending 2010 to about $107 per ton in financial year ending 2011 mainly due to higher market demands.

Cost of Sales

Cost of sales increased by $1.86 million or 27% from $6.92 million in financial year ending 2010 to $8.78 million in financial year ending 2011, principally due to the increase of certain raw material, labour costs and overhead costs in financial year ending 2011. Accordingly, the average cost per ton increase by $21 per ton or 48% from about $44 per ton in financial year ending 2010 to about $65 per ton in financial year ending 2011.

Gross Profit

In line with the higher costs registered, our gross profit decreased by $1.13 million or 17% from $6.70 million in financial year ending 2010 to $5.57 million in financial year ending 2011 which resulted in a lower gross profit margin of 39% registered in financial year ending 2011 as compared to 49% in financial year ending 2010.

Operating Expenses

Operating expenses increased by $0.87 million or 53% from $1.65 million in financial year ending 2010 to $2.52 million in financial year ending 2011, due principally to the increase of the salary for the management team in financial year ending 2011.

As a result of the reverse acquisition transaction between SGB International Holdings Inc. and the shareholders of Dragon International in 2011Q2, we anticipate that we will incur considerable costs (approximately $200,000 per year) and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

Other items and income tax

Other items and income tax represent the interest, other operating expenses and income tax which decreased by about $0.26 million or 17% from about $1.50 million in financial year ending 2010 to about $1.24 million in financial year ending 2011, due to the decrease of an interest bearing loan of RMB49.00 million being replaced by an issuance of 128,769,132 new ordinary shares to the unrelated debtors for US$0.06 per share in pursuant to a debt-to-equity conversion agreement on December 29, 2011.

41


Net Income

With the lower gross profit and higher operating expenses recorded in financial year ending 2011 compared to financial year ending 2010, the net income decreased by about $1.73 million or 50% from $3.42 million in financial year ending 2010 to $1.69 million in financial year ending 2011.

Impact of Inflation

We believe inflation has had a net negative impact on our results of operations in financial year ending 2011. The average inflation rate in China was at 5.53% in financial year ending 2011 relative to an average inflation rate in China during of 3.17% in financial year ending 2010. Chinese government has carried out a serial of financial and monetary policies to control the increasing inflation.

Liquidity and Capital Resources

Working Capital at December 31, 2011 and 2010

    2011     2010  
          (Restated)  
Current Assets $  741,046   $  2,673,912  
Non Current Assets $  21,597,580   $  17,115,479  
Total Assets $  22,338,626   $  19,789,391  
             
Current Liabilities $  4,650,605   $  5,493,041  
Non Current Liabilities $  196,062   $  8,079,602  
Total Liabilities $  4,846,667   $  13,572,643  
             
Working Capital (Deficit) $  (3,909,559 ) $  (2,819,129 )

Current assets decreased by $1.93 million or 72% from $2.67 million as at December 31, 2010 to $0.74 million as at December 31, 2011, principally due to the settlement of a prepaid construction and labour costs in financial year ending 2011 in connection to the completion of one mining shaft and other mining facilities in financial year ending 2011.

Current liabilities decreased by $0.84 million or 15% from $5.49 million as at December 31, 2010 to $4.65 million as at December 31, 2011, principally due to settlement made by the Company during the year. The current liabilities registered amounts due to a related party of $3.02 million as at December 31, 2011 and $3.64 million as at December 31, 2010, which was due to Mr. Lin Longwen, a major and controlling shareholder of SGB who will only be repaid if the Company has surplus cash.

Taken as a whole of the above, we registered a deficit working capital of $3.91 million in as at December 31, 2011 compared to $2.82 million as at December 31, 2010 as the Company is focusing on the construction of mine shafts and facilities for the past few years.

Non current assets increased by $4.48 million or 26% from $17.12 million as at December 31, 2010 to $21.60 million as at December 31, 2011 principally due to the completion of one mining shaft and other mining facilities during the year while the other two mining shafts are still construction in progress which expected to due for completion in the 2nd half of 2012.

Non current liabilities decreased by $7.88 million or 98% from $8.08 million as at December 31, 2010 to $0.20 million as at December 31, 2011, as a loan balance of $7,726,148 was assigned to two creditors who settled the loan balance with the Company’s subsidiary Dragon International, for the share capital of the Company pursuant to a series of transaction effective December 29, 2011, where Dragon International subscribed for 128,769,132 shares of the common stock of the Company at a deemed price of $0.06 per share, which shares were allotted and issued to Dragon International to be transferred to the two creditors in exchange for the settlement of loans.

Cash Flows

42


For the years ended December 31, 2011 and 2010

    2011     2010  
          (Restated)  
Net cash provided by operating activities $  4,732,737   $  2,719,576  
Net cash used in investing activities $  (4,725,823 ) $  (4,783,555 )
Net cash provided by financing activities $  31,540   $  2,180,720  
Cash and cash equivalents at end of year $  614,445   $  526,564  

Notwithstanding of the deficit working capital registered in financial year ending 2011, the net cash provided by operating activities increased by $2.01 million or 74% from $2.72 million in financial year ending 2010 to $4.73 million in financial year ending 2011.

Net cash used in investing activities registered $4.78 million in 2010 and $4.73 million in 2011, principally due to the continuous construction of mine shafts and facilities in respective years.

Net cash provided by financing activities in 2011 was mainly due from proceeds collected from capital contribution and net-off with settlement made by the Company for the term loan and amounts due to Mr. Lin Longwen during the year. Net cash provided by financial activities in 2010 was mainly from the amount advanced by Mr. Lin Longwen and net-off with repayment of portion of term loan.

Taken as a whole, our cash and cash equivalents as at December 31, 2011 increased by $87,881 or 17% from $526,564 as at December 31, 2010 to $614,445 as at December 31, 2011.

Off Balance Sheet Arrangements

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

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited consolidated financial statements are stated in United States dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

The following consolidated financial statements are filed as part of this annual report:

Report of MNP LLP, our Independent Registered Public Accounting Firm

Audited Consolidated Balance Sheets of SGB International Holdings Inc. as of December 31, 2011 and 2010 (Restated)

Audited Consolidated Statements of Income and Comprehensive Income of SGB International Holdings Inc. for the years ended December 31, 2011 and 2010 (Restated)

Audited Consolidated Statements of Cash Flows of SGB International Holdings Inc. for the years ended December 31, 2011 and 2010 (Restated).

Audited Consolidated Statements of Stockholders’ Equity of SGB International Holdings Inc. for the years ended December 31, 2011 and 2010

Notes to Consolidated Financial Statements of SGB International Holdings Inc. for the years ended December 31, 2011 and 2010

Report of Parker Randall CF (H.K.) CPA Limited, Independent Registered Public Accounting Firm

Audited Balance Sheets of Yongding Shangzhai Coal Mine Co., Ltd. for the years ended December 31, 2010 and 2009

Audited Consolidated Statements of Income and Comprehensive Income of Yongding Shangzhai Coal Mine Co., Ltd. for the years ended December 31, 2010 and 2009

Audited Consolidated Statements of Stockholders’ Equity of Yongding Shangzhai Coal Mine Co., Ltd. for the years ended December 31, 2010 and 2009

Audited Consolidated Statements of Cash Flows of Yongding Shangzhai Coal Mine Co., Ltd. for the years ended December 31, 2010 and 2009

Notes to Consolidated Financial Statements of Yongding Shangzhai Coal Mine Co., Ltd. for the years ended December 31, 2010 and 2009

43


 

 

SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2011

 

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

SGB International Holdings Inc.

We have audited the consolidated balance sheet of SGB International Holdings Inc. (the “Company”) as at December 31, 2011 and the related consolidated statements of income and comprehensive income, cash flows and stockholders’ equity, for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the Company’s financial statements as of and for the year ended December 31, 2010, which were audited by other auditors whose report, dated April 12, 2011 except for what mentioned in note 19 which is as of April 11, 2012, expressed an unqualified opinion, has been furnished to us.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2011 and the result of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Vancouver, Canada
April 13, 2012 Chartered Accountants



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

          2011     2010  
                (Restated – note 19)
    Note      
ASSETS                  
Current Assets                  
   Cash and cash equivalents   4     614,445     526,564  
   Receivables   5     97,931     81,806  
   Prepaid expenses and deposits   6     28,670     2,065,542  
                   
Total Current Assets         741,046     2,673,912  
                   
Non-current Assets                  
   Prepaid expenses and deposits   6     507,863     150,996  
   Property, equipment and mine development costs   7     20,735,551     16,605,741  
   Intangible assets   8     354,166     358,742  
                   
Total Non-current Assets         21,597,580     17,115,479  
                   
Total Assets         22,338,626     19,789,391  
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
Current Liabilities                  
   Account payable and accrued liabilities   9     1,410,772     1,767,974  
   Asset retirement obligation   10     171,404     81,538  
   Amounts due to a related party   11     3,019,409     3,643,529  
   Term loan – current   12     49,020     -  
                   
Total Current Liabilities         4,650,605     5,493,041  
                   
Non-current Liabilities:                  
   Asset retirement obligation   10     186,268     227,819  
   Term loan   12     9,794     7,851,783  
                   
Total Non-current Liabilities         196,062     8,079,602  
                   
Total Liabilities         4,846,667     13,572,643  
                   
Stockholders’ Equity                  
   Common stocks   13     1,412,396     123,913  
   Stocks to be issued   13     7,726,148     -  
   Contributed surplus         100,000     -  
   Reserve         429,769     71,725  
   Retained earnings         7,208,617     5,872,186  
   Accumulated other comprehensive income         615,029     148,924  
Total Stockholders’ Equity         17,491,959     6,216,748  
                   
Total Liabilities and Stockholders’ Equity         22,338,626     19,789,391  

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



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

    2011     2010  
          (Restated – note 19)
     
Revenue   14,353,067     13,617,770  
Cost of revenue   (8,782,818 )   (6,921,203 )  
Gross profit   5,570,249     6,696,567  
Selling expenses   (112,721 )   (570 )
General and administrative   (2,356,206 )   (1,625,159 )
Depreciation and amortization   (52,494 )   (22,167 )
Total operating expenses   (2,521,421 )   (1,647,896 )
Net income from operations   3,048,828     5,048,671  
Other items:            
Interest expense   (1,223,895 )   (1,196,796 )
Other expense   (15,557 )   (343,427 )
Other income         42,196  
    (1,239,452 )   (1,498,027 )
Income before income tax expense   1,809,376     3,550,644  
Income tax expense   (114,901 )   (127,822 )
Net income   1,694,475     3,422,822  
Foreign currency translation adjustment   466,105     135,592  
Comprehensive income   2,160,580     3,558,414  
Earnings Per Share – Basic and Diluted   0.01     0.02  
Weighted Average Shares Outstanding – Basic and Diluted   236,230,417     220,522,000  

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



SGB INTERNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

    2011     2010  
          (Restated –  
          note 19)  
Cash flows from operating activities    
             
Net income   1,694,475     3,422,822  
             
Items not involving cash:            
Depreciation & amortization   1,538,813     1,033,082  
Interest expense   31,791     27,694  
Imputed interest from a related party   100,000     -  
Loss on retirement of fixed assets   -     315,725  
             
Changes in non-cash working capital:            
Receivable   (5,783 )   161,625  
Prepaid expenses and deposit   1,771,772     (2,033,985 )
Accounts payable and accrued liabilities   (353,120 )   (207,387 )
Deferred revenue   (45,211 )   -  
             
Net cash provided by operating activities   4,732,737     2,719,576  
             
Cash flows from investing activities            
             
Purchase of property, equipment and mine development costs   (4,725,823 )   (4,783,555 )
             
Net cash (used in) investing activities   (4,725,823 )   (4,783,555 )
             
Cash flows from financing activities            
             
Capital contribution   1,284,917     -  
Increase (decrease) of term loan   (465,513 )   (1,407,138 )
Cash provide in connection with acquisitions   4,285     -  
Amounts due to a related party   (792,149 )   3,587,858  
             
Net cash provided by financing activities   31,540     2,180,720  
             
Increase in cash and cash equivalents   38,454     116,741  
Effect of exchange rate changes on cash   49,427     14,090  
Cash and cash equivalents – beginning of year   526,564     395,733  
             
Cash and cash equivalents – end of year   614,445     526,564  
             
Supplemental disclosure of cash flow information:            
Income tax 114,901 127,822
Interest expenses 1,887,656 1,685,515

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



SGB INTERNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

    Common shares                             Accumulated     Total  
                Stocks to     Contributed       Reserve       Retained     other     stockholders’  
    Shares     Amount     be issued     surplus           earnings     comprehensive     equity  
                                        income        
                     
                                                 
Balance at December 31, 2009 (Restated)   220,522,000     123,913     -     -     71,725     2,449,364     13,332     2,658,334  
                                                 
Net income for the year   -     -     -     -     -     3,422,822     -     3,422,822  
Currency translation adjustments   -     -     -     -     -     -     135,592     135,592  
Balance at December 31, 2010 (Restated)   220,522,000     123,913     -     -     71,725     5,872,186     148,924     6,216,748  
                                                 
                                                 
Recapitalization – Dragon International   -     1,277,694     -     -     -     -     -     1,277,694  
Recapitalization – SGB   24,502,446     10,789     -     -     -     -     -     10,789  
Settlement of debt   -     -     7,726,148     -     -     -     -     7,726,148  
Imputed interest from a related party   -     -     -     100,000     -     -     -     100,000  
Net income for the year   -     -     -     -     -     1,694,475     -     1,694,475  
Appropriation to reserve   -     -     -     -     358,044     (358,044 )   -     -  
Currency translation adjustments   -     -     -     -     -     -     466,105     466,105  
Balance at December 31, 2011   245,024,446     1,412,396     7,726,148     100,000     429,769     7,208,617     615,029     17,491,959  

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



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

1

ORGANIZATION AND PRINCIPAL ACTIVITIES

SGB International Holdings Inc. (“SGB” or the “Company”) was incorporated in British Columbia, Canada on November 6, 1997. Through its subsidiary, the Company is engaged in coal production and sales by exploring, developing, and mining coal properties.

On May 11, 2011, the Company completed the acquisition of Dragon International Resources Group Co., Limited (“Dragon International”), a Hong Kong corporation incorporated on October 5, 2010, and its wholly-owned subsidiary through a share exchange which resulted in the former shareholders of Dragon International acquiring the control of SGB. This transaction was accounted for as a reverse takeover transaction (“RTO”) for accounting purpose, as Dragon International was deemed to be the acquirer, and these consolidated financial statements are a continuation of the consolidated financial statements of Dragon International. The carrying amounts of SGB’s assets and liabilities are included in these consolidated financial statements.

Prior to the above noted RTO, and on February 21, 2011, pursuant to a share transfer agreement, Dragon International completed the acquisition of Fujinan Huilong Coal Mine Co., Ltd. (“Fujian Huilong”) (formerly known as Yongding Shangzhai Coal Mine Co., Ltd.), a People’s Republic of China corporation and was incorporated on August 4 2005. Upon the completion of the acquisition, Fujian Huilong has become the wholly-owned subsidiary of Dragon International and the control in substance was not changed. For accounting purposes, the acquisition has been accounted for using the continuity of interest method, which recognizes Fujian Huilong as the successor. The net assets of Dragon International prior to the acquisition has been accounted as recapitalization as at the date of acquisition.

In connection with the above acquisitions, the consolidated financial statements included the operations of SGB, Dragon International and Fujian Huilong for the periods from May 12, 2011 to December 31, 2011, periods from February 21, 2011 to December 31, 2011 and for the year ended December 31, 2011, respectively. The 2010 comparative figures are those of Fujian Huilong. The Company and its subsidiaries are considered to be operating in one segment based on its organizational structure and strategic decision making method.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at December 31, 2011 and 2010, the Company had working capital deficiency of $3,909,559 and $2,819,129, respectively, and requires additional funds to maintain its operations. In view of the working capital deficiency, the management has reviewed the cash position as at the balance sheet date and the cash flow forecast for the next twelve months and taken into factors that (i) the major and controlling shareholder has undertaken that payment on the amounts due to him of $3,019,409 as at December 31, 2011 will only be made if the Company has surplus cash after paying for the operations and capital expenditure; (ii) the successful debt restructuring on the interest bearing loans (the “Loans”) that was settled with the Company for the share capital of the Company pursuant to a debt-to-equity settlement agreement (Note 12); (iii) No material interest liability is expected for the next twelve months after the settlement of the aforesaid Loans; (iv) stable client base and strong coal demands in Fujian Province ensure revenue can be continue to generate from the existing coal mine operation; and (v) to raise equity financing as required; and (vi) to obtain the principle shareholder’s support in funding the required working capital. After taking the above circumstances and facts into consideration, the management of the Company is satisfied that the Company will have sufficient funds to complete the current development and to meet in full its financial obligation and operations or capital expenditure as they fall due for the foreseeable future.

2

ACQUISITIONS

Dragon International

On May 11, 2011, SGB completed a reverse acquisition transaction with the shareholders of Dragon International pursuant to which SGB acquired 100% of the issued and outstanding capital stock of Dragon International in exchange for an aggregate of 220,522,000 common shares of SGB, which constituted 90% of SGB’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. Prior to the acquisition, SGB has no business with a minimal assets and liabilities which did not meet the definition of a business, therefore, the reverse take-over of SGB by Dragon International has been accounted for as a capital transaction. A breakdown of SGB’s net assets as at May 11, 2011 is as follows:



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

2

ACQUISITIONS (cont’d)


Dragon International (cont’d)      
   
       
Cash and cash equivalents   2,758  
Tax receivable   6,562  
Prepaid expenses   5,197  
Accounts payable and accrued liabilities   (3,728 )
       
Net assets   10,789  

Fujian Huilong

On November 1, 2010, Mr. Longwen Lin (chief executive officer who held control in substance in Fujian Huilong and was also the primary beneficiary of Fujian Huilong) caused Dragon International entering into a share transfer agreement with Mr. Chuanzhen Lin, Mr. Wensi Lin, and Mr. Qingdong Shi, under which Dragon International acquired all of the outstanding equity shares of Fujian Huilong. On February 21, 2011, Fujian Huilong received its new business license and became a wholly foreign owned entity (“WFOE”) under the People’s Republic of China (“PRC”) laws. Subsequent to and upon the completion of acquisition, Mr. Longwen Lin acquired 94% of Dragon International which resulted no change of substantial control after the acquisition. For accounting purpose, the acquisition has been accounted for using the continuity of interest method, which recognizes Fujian Huilong as the successor. The net assets of Dragon International prior to the acquisition has been accounted as recapitalization into Fujian Huilong’s equity as at the date of acquisition. A breakdown of Dragon International’s net assets as at February 21, 2011 is as follows:

   
       
Cash and cash equivalents   1,527  
Share subscriptions receivable   1,285,000  
Accounts payable and accrued liabilities   (8,833 )
       
Net assets   1,277,694  



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; asset impairments; environmental and reclamation obligations; acquisition accounting; other employee benefit obligations; useful lives for depreciation, depletion, and amortization; current and deferred income taxes; and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

Principles of consolidation

These consolidated financial statements included the accounts of the Company and its wholly-owned subsidiaries as follows:

Dragon International, a Hong Kong corporation incorporated on October 5, 2010.

Fujinan Huilong, a People’s Republic of China corporation incorporated on August 4, 2005.

All significant intercompany accounts and transactions have been eliminated upon consolidation.

Foreign currency translation

The Company’s functional currency and presentation currency is Canadian dollars (“CAD”) and U.S. dollars, respectively. The Company’s subsidiaries’ functional currencies are Hong Kong dollars (“HKD”) and Chinese RMB (“RMB”).

Transactions in a currency other than the functional currency (“foreign currency”) are measured in the respective functional currencies of the Company and its subsidiaries and are recorded on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Exchange gains and losses are recorded in the statements of income and comprehensive income.

Assets and liabilities of the Company and its subsidiaries are translated into the U.S. dollars at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rate and revenues and expenses are translated by using the average exchange rates. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the statements of stockholders’ equity.

Cash and cash equivalents

Cash and cash equivalents include those short-term money market instruments which are highly-liquid investments and readily convertible into cash with a term to maturity of 90 days or less when acquired. As of December 31, 2011 and 2010, cash and cash equivalents consisted of cash only.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Inventories

Coal inventories are stated at the lower of average cost or market. The cost of coal inventories is determined based on average cost of production, which includes all costs incurred to extract, transport and process the coal. Market represents the estimated replacement cost, subject to a floor and ceiling, which considers the future sales price of the product as well as remaining estimated preparation and selling costs. Coal is reported as inventory at the point in time the coal is extracted from the mine and weighed at a loading facility.

As at December 31, 2011 and 2010, the Company carried no inventories.

Property, equipment and mine development costs

Property, plant and equipment, are stated at cost less depreciation and amortization and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation of property, plant and equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:

Machinery / Mobile mining equipment 10 years
Motor vehicles 5 years
Office equipment 5 years
Leasehold improvement Lease term

Costs for mineral properties and mine development incurred to expand capacity of operating mines or to develop new mines are capitalized and charged to operations (i) on a straight-line basis with the estimated useful lives of 10 to 20 years for fiscal year 2010; (ii) on the units-of-production method over the estimated proven and probable reserve tons directly benefiting from the capital expenditures but up to the Company’s allowable quotas set by the local government effectively January 1, 2011. The change of depreciation and depletion method is the result of the change of estimate and prospective application has been adopted. Mine development costs include costs incurred for site preparation and development of the mines during the development stage.

Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefitted. Maintenance and repairs are expensed as incurred. When equipment is retired or disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposal is recognized in cost of coal sales.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Intangible asset

Intangible asset represents the coal mining right and is recorded at cost less accumulated amortization. For fiscal year 2010, amortization is provided over the term of the right agreements on a straight-line basis with the estimated useful lives of 10 years. Effective January 1, 2011, the Company changed its method of amortization on the units-of-production method over the estimated proven and probable reserve tons directly benefiting from the capital expenditures but up to the Company’s allowable quotas set by the local government. The change of amortization method is the result of the change of estimate and prospective application has been adopted.

Construction in progress

Construction-in-progress (“CIP”) represents mine shaft under construction, and is stated at cost less accumulated impairment losses, if any. Costs include construction and acquisition costs. No provision for depreciation is made on construction-in-progress until such time as the assets are completed and ready for use. When the asset being constructed becomes available for use, the CIP is transferred to the appropriate category of property, equipment and mine development costs.

Asset impairment and disposal of long-lived assets

Long-lived assets, such as property, equipment and mine development costs, owned and leased mineral rights and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed would separately be presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the consolidated balance sheets.

Asset Retirement Obligation

Minimum standards for mine reclamation have been established by various regulatory agencies and dictate the reclamation requirements at the Company's operations. The Company's asset retirement obligations consist principally of costs to reclaim acreage disturbed at surface operations and estimated costs to reclaim support acreage and perform other related functions at underground mines. The Company records these reclamation obligations at fair value in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. The Company annually reviews its estimated future cash flows for its asset retirement obligations.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Stock based compensation

The Company adopted ASC Topic 718-10, Compensation - Stock Compensation - Overall, to account for its stock options and similar equity instruments issued. Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period. ASC Topic 718-10 requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

Borrowing costs

Borrowing costs are capitalized as part of the cost of a qualifying asset if they are directly attributable to the acquisition, construction or production of that asset. Capitalization of borrowing costs commences when the activities to prepare the asset for its intended use or sale are in progress and the expenditures and borrowing costs are incurred. Borrowing cost are capitalized until the assets are substantially completed for their intended use or sale. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Income tax

The Company accounts for income taxes under the provisions of ASC Topic 740-10, Income Taxes, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The effect on deferred income tax assets and liabilities of a change in income tax rates is included in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.

Other comprehensive income

The Company accounts for comprehensive income under the provisions of ASC Topic 220-10, Comprehensive Income - Overall, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company is disclosing this information on its Statements of Income and Comprehensive Income. The Company’s comprehensive income consists of net earnings for the period and currency translation adjustments.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Earnings per share

Basic earnings per share is calculated using the weighted average number of shares outstanding during the year. The Company has adopted ASC Topic 260-10, Earnings per Share - Overall, and uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on earnings per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. As at December 31, 2011 and 2010, the basic earnings per share is equal to diluted earnings per share as there were no dilutive instruments outstanding as at December 31, 2011 and 2010.

Revenue recognition

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). Coal sales revenues represent sales to individual customers who sold the coal to coal processing companies, power stations and steel factories. Sales revenue is recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured.

Cost of revenue

Cost of revenue consists primarily of labour cost, governmental charges of coal excavation and related expenses and overhead which are directly attributable to coal excavation.

Fair value of financial instruments

The estimated fair values for financial instruments under ASC Topic 825-10, Financial Instruments, are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of the Company’s financial instruments includes cash and cash equivalents, receivables, accounts payable and accrued liabilities, asset retirement obligation, due from a related party and term loan. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.

The Company adopted ASC Topic 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in US GAAP, and expands disclosures about fair value measurements.

ASC Topic 820-10 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Fair value of financial instruments (cont’d)

Level one – Quoted market prices in active markets for identical assets or liabilities;

Level two – Inputs other than level one inputs that are either directly or indirectly observable; and

Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

For the years ended December 31, 2011 and 2010, the fair value of cash and cash equivalents was measured using Level one inputs.

The book values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and amounts due to a related party approximate their respective fair values due to the short-term nature of these instruments. The book value of asset retirement obligation and term loan as at December 31, 2011 and 2010 approximates the fair value. Items identified are measured at fair value on a recurring basis.

There were no assets or liabilities measured at fair value on a non-recurring basis during the years ended December 31, 2011 and 2010.

Segment information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker whose members are responsible for allocating resources and assessing performance of the operating segments.

Statutory reserves

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity's registered capital.

The Company allocated $358,044 and $nil from after-tax net earnings to statutory surplus reserve for the years ended December 31, 2011 and 2010, respectively.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

New accounting pronouncements adopted

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. It also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The guidance is applicable for annual periods beginning after November 15, 2009. The adoption of the guidance did not have a material impact on the Company's financial position, results of operations and cash flows.

In June 2009, the FASB issued ASC 860, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 ("ASC 860"), which amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. ASC 860 is effective for fiscal years beginning after November 15, 2009. The adoption of the guidance did not have a material effect on the Company's financial position, results of operations or cash flows.

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2010-6, Improving Disclosures About Fair Value Measurements ("ASU 2010-6"),which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. ASU 2010-6 relates solely to disclosures in the notes to the financial statements. The adoption of the applicable provisions in 2010 did not have an effect on the Company's financial position, results of operations or cash flows. The adoption of the applicable provisions did not have an effect on the Company's financial position, results of operations or cash flows.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

3

SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Recent accounting pronouncements

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The Company is currently evaluating the impact of the adoption.

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s financial position or results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

4

CASH AND CASH EQUIVALENTS


    2011     2010  
          (Restated)  
     
             
Cash denominated in Chinese RMB   576,842     526,564  
Cash denominated in Canadian or Hong Kong Dollars   37,603     -  
             
    614,445     526,564  



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

4

CASH AND CASH EQUIVALENTS (Continued)

As at December 31, 2011, the Company has cash and cash equivalents placed with banks or held by its subsidiary in the People’s Republic of China denominated in Chinese Renminbi (“RMB”) amounting to RMB 3,634,627 (2010: RMB 3,487,277) where the remittance of funds to jurisdictions outside the PRC is subject to certain government rules and regulations on foreign currency controls. Under the People’s Republic of China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Company is permitted to exchange RMB for foreign currencies but may require approval of governmental authorities or designated banks in the PRC.

5

RECEIVABLES


    2011     2010  
          (Restated)  
     
             
Trades receivable (i)   49,853     -  
Employee receivable (ii)   36,991     80,413  
Tax receivable   8,156     -  
Others   2,931     1,393  
             
    97,931     81,806  

Notes:

(i) The Company does not hold any collateral over these balances. The average age of these receivable are 30 days.

(ii) Unsecured, interest free and repayable on demand

6

PREPAID EXPENSES AND DEPOSITS


    2011     2010  
          (Restated)  
     
             
Prepaid construction material and labour costs (i)   -     2,065,542  
Safety risk deposit (ii)   158,707     150,996  
Prepaid mining license fee (iii)   349,156     -  
Prepaid rental fee   22,749     -  
Other prepaid expense   5,921     -  
             
Subtotal   536,533     2,216,538  
Current portion   (28,670 )   (2,065,542 )
             
Non-current   507,863     150,996  



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

6

PREPAID EXPENSE AND DEPOSITS (Continued)

Notes:

(i)

The payment relates to the new shaft under construction which has been fully settled during the year ended December 31, 2011.

 

(ii)

On August 26, 2005, an one-off safety risk deposit equivalent to RMB 1.0 million was paid to the Yongding County Coal Development Company as a representative of the Yongding County Coal Industry Management Bureau according to the Yongding County Coal Mine Safety Risk Deposit Management Measures (effective as of July 1, 2005).

 

(iii)

The prepayment (equivalent to RMB 2,200,000) associated with issuance of our new mining permit on the new extended mining area obtained in May 2011. The exact total fees payable and payment terms for issuance of the new mining permit is expected to be known by the end of 2012 from the Fujian Provincial Department of Land and Resources Mining Development Management Bureau.


7

PROPERTY, EQUIPMENT AND MINE DEVELOPMENT COSTS


          Accumulated        
    Cost     amortization     Net book value  
       
December 31, 2011                  
Mine development costs   18,502,406     2,217,223     16,285,183  
Machineries   4,905,739     1,288,852     3,616,887  
Motor vehicles   120,584     49,134     71,450  
Office equipment   131,524     17,601     113,923  
Construction in progress   648,108     -     648,108  
                   
Total   24,308,361     3,572,810     20,735,551  
                   
                   
December 31, 2010 (Restated)                  
Mine development costs   12,234,853     1,109,154     11,125,699  
Machineries   4,404,915     787,248     3,617,667  
Motor vehicles   184,055     25,611     158,444  
Office equipment   37,387     1,585     35,802  
Construction in progress   1,668,129     -     1,668,129  
                   
Total   18,529,339     1,923,598     16,605,741  

During the years ended December 31, 2011 and 2010, the Company charged amortization and depreciation expenses of $1,478,904 and $943,860 to the cost of revenue and 52,494 and $22,167 to the depreciation and amortization expenses, respectively.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

8

INTANGIBLE ASSETS

The following is a summary of intangible asset:

  2011     2010  
          (Restated)  
   
Cost   696,123     662,298  
Accumulated amortization   341,957     303,556  
Net carrying value   354,166     358,742  

During the years ended December 31, 2011 and 2010, the Company charged amortization expenses of $22,388 and $ 65,218 to the cost of revenue.

9

ACCOUNT PAYABLE AND ACCRUED LIABILITIES

The following is a summary of accounts payable and accrued liabilities:

    2011     2010  
          (Restated)  
   $    
Interest payable (i)   -     564,307  
Mining license fee payable (ii)   -     422,788  
Staff costs / wage payable   974,034     479,351  
Accrued liabilities   359,172     107,649  
Employee safety deposits   38,414     98,134  
Other payable   39,152     95,745  
    1,410,772     1,767,974  

Notes:

(i)

During the financial year ended December 31, 2010, loan interest was accrued for the interest-bearing loan payable to an unrelated third party. No interest is accrued in the year ended December 31, 2011 as the related loan has been settled and converted into the Company’s shares in pursuant to a settlement agreement. (Note 12).

   
(ii)

The mining license fee accrual is associated with the issuance of mining permit. The total fees payable under the mining permit is RMB 4,386,200 (equivalent to about $685,344) payable in 6 installments. The remaining balances of RMB 2,200,000 was settled as at December 2011.




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

10

ASSET RETIREMENT OBLIGATION

The following is a summary of asset retirement obligation:

    2011     2010  
          (Restated)  
     
Face value   428,959     408,115  
Effective interest rate – 10%   (71,287 )   (98,758 )
Subtotal   357,672     309,357  
Current portion   171,404     81,538  
             
Asset retirement obligation – long term   186,268     227,819  

The Asset Retirement Obligation is associated with the Ecological Environment Rehabilitation fee of about RMB3.86 million payable to the Fujian Provincial Land and Resources Bureau for operating the coal mine. As of December 27, 2010, a payment extension has been applied and approved till April 2015 for the full settlement of approximately RMB2.7 million. The Company is not required to pay any interest on the postponed payment for the Ecological Environment Rehabilitation fee. The Company accounted the remaining asset retirement obligation by applying the relative discounted rate of 10%. During the years ended December 31, 2011 and 2010, the Company charged interest accretion expense of $31,791 and $27,694 respectively in connection with the asset retirement obligation.

11

AMOUNTS DUE TO A RELATED PARTY


    2011     2010  
          (Restated)  
     
             
Amounts due to a related party   3,019,409     3,643,529  

The amounts are due to the Executive Chairman and Chief Executive Officer of the Company, Mr. Longwen Lin, which are unsecured, non-interest bearing and no specific terms of repayment. During the year ended December 31, 2011, the Company recorded imputed interest on the amounts due to a related party at a market rate of 3.3% (estimated interest benefit contributed by the related party) thereby leading to the recognition of interest expense of approximately $100,000 (2010: $nil). A corresponding amount was recorded as contributed surplus.




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

12

TERM LOAN

The following is a summary of term loan:

    2011     2010  
          (Restated)  
     
             
Interest bearing loan at 2.5% per month, unsecured and due on July 30, 2013   -     7,851,783  
Interest bearing loan at 3% per annum, unsecured and due on November 10, 2014:   9,794     -  
Interest bearing loan at 15% per annum, unsecured and due on April 28, 2012:   19,608     -  
Interest bearing loan at 15% per annum, unsecured and due on December 28, 2012:   29,412     -  
             
Total   58,814     7,851,783  
Current portion   49,020     -  
Non-current   9,794     7,851,783  

During the years ended December 31, 2011 and 2010, the Company accrued or paid interest expense of $1,887,656 and $1,434,994 in connection with the term loan, respectively. Included in the interest expenses accrued and paid, $233,818 and $265,594 were capitalized and included in the mine development costs for the year ended December 31, 2011 and 2010, respectively. Further, a total of unpaid $579,910 interest was forgiven by the lender and has netted off against the interest expense for the year ended December 31, 2011.

On December 29, 2011, a loan balance of $7,726,148 was assigned to two creditors who settled the loan balance with the Company for the share capital of the Company pursuant to a settlement agreement dated December 29, 2011, where a private placement of 128,769,132 shares of the common stock of the Company at a deemed price of $0.06 per share were allotted and to be issued in exchange for the loan.

13

STOCKHOLDERS’ EQUITY

Authorized:

Unlimited number of common shares without par value
Unlimited number of preferred shares without par value

Issued and outstanding

As at December 31, 2011, 245,024,446 common stocks issued and outstanding which were derived from the following transactions:

Prior to the RTO with Dragon International and as at May 11, 2011, SGB had 24,502,446 common shares issued and outstanding.



SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

13

STOCKHOLDERS’ EQUITY (cont’d)

Issued and outstanding (cont’d)

On May 11, 2011, SGB completed a reverse acquisition transaction with the shareholders of Dragon International pursuant to which SGB acquired 100% of the issued and outstanding capital stock of Dragon International in exchange for an aggregate of 220,522,000 common shares of SGB, which constituted 90% of SGB’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. Prior to the acquisition, SGB has no business with a minimal assets and liabilities which did not meet the definition of a business, therefore, the reverse take-over of SGB by Dragon International has been accounted for as a capital transaction which is deemed Dragon International acquired SGB by issuance of 24,502,446 common shares (issued and outstanding prior to the RTO) for its net assets of $10,789.

Prior to the RTO and on February 21, 2011, Dragon International completed the acquisition of Fujian Huilong and for accounting purpose, the acquisition has been accounted for using the continuity of interest method, which recognizes Fujian Huilong as the successor. The net assets of Dragon International totaling $1,277,694 as at the date of acquisition have been accounted as recapitalization into Fujian Huilong.

Fujian Huilong has a registered and paid-in capital of $123,913 (RMB 1,000,000) prior to being acquired by Dragon International.

As the consolidated financial statements is the continuation of Fujian Huilong, therefore, the share capital of Fujian Huilong has been restated to reflect the 220,522,000 common shares that effected the RTO for the purpose of financial statements presentation and earnings per share calculation.

On December 29, 2011, the Company settled $7,726,148 by agreeing to issue 128,769,132 shares of the common stock of the Company at a deemed price of $0.06 per share. The Company has allotted the shares but not yet issued as December 31, 2011.

14

RELATED PARTY TRANSACTIONS

During the year ended December 31, 2011, the Company accrued or paid $159,481 (2010 - $nil) in salaries and consulting fees to senior officers and directors of the Company. Included in accounts payable and accrued liabilities, $105,225 (2010 - $254,800) were payable to the senior officers and directors of the Company. Included in receivable, $24,600 (2010 - $nil) were receivable from a senior officer and director of the Company. Also see note 11.

15

INCOME TAX

SGB, Dragon International and Fujian Huilong are subject to income tax laws in their respective tax jurisdictions, which are the same as their respective place of incorporation.




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

15

INCOME TAX (cont’d)

The Company is subject to Canadian income tax laws at 26.5% tax rate and Dragon International is subject to Hong Kong tax law at 16.5% tax rate. Fujian Huilong is subject to the local tax law in Yongding Town, Fujian Province, PRC, the income tax of coal industry is calculated by weight of exploitation, claiming $0.9 (RMB 5.5) per ton since March 31, 2008. This tax rate difference is adjusted under Rate differences in other jurisdictions.

Income tax expenses consist of the following:

    2011     2010  
          (Restated)  
   $    
Current income tax expense   114,901     127,822  
Deferred income tax expense   -     -  
Total   114,901     127,822  

A reconciliation of the income tax expense is as follows:

    2011     2010  
          (Restated)  
   $    
Net income before income taxes   1,809,376     3,550,644  
Expected income tax expense   497,662     127,822  
             
Adjustments resulting from:            
Non-deductible items   -     -  
Rate differences in other jurisdictions   (475,421 )   -  
Changes in enacted rates   (3,989 )   -  
Other   7,978     -  
Change in valuation allowance   113,671     -  
    114,901     127,822  

Deferred income taxes arise from temporary differences in the recognition of income and expenses for financial reporting and tax purposes. The significant components of deferred income tax assets (liabilities) are as follows:

    2011     2010  
          (Restated)  
     
Deferred income tax assets (liabilities):            
Operating tax losses carried forward   113,671     -  
Valuation Allowance   (113,671 )   -  
             
    -     -  




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

15

INCOME TAX (cont’d)

As at December 31, 2011, the Company had available for deduction against future taxable income in Canada non-capital losses of approximately $265,944. These losses, if unutilized, have expiration year until 2031.

The Company conducts its business in China, which currently has a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include value added tax, corporate income tax (profits tax), and payroll (social) taxes, together with others. Laws related to these taxes have not been in force for a significant period or could be implemented differently under different regional government (ie., provision of tax incentives or exemption from regional government to promote regional business development), in contrast to more developed market economies; therefore, implementing regulations are often unclear or nonexistent. Often, differing opinions regarding legal interpretation exist both among and within government ministries and organizations; thus, creating uncertainties and areas of conflict.

Tax declarations, together with other legal compliance areas (as examples, customs and currency control matters) are subject to review and investigation by a number of authorities, who are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in China substantially more significant than typically found in countries with more developed tax systems.

The risk remains that the relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from further review.

During the years ended December 31, 2011 and 2010 and to the current date, the Company had not received any tax re-assessment from the federal and regional governmental authorities.

16

COMMITMENTS

The Company has entered into an operating lease for its office and employee accommodation in Xiamen, Fujian, PRC expiring in August, 2016. Annual leased payments are as follows:

  2011  
 
Fiscal year      
2012   31,250  
2013   20,648  
2014   20,648  
2015   20,648  
2016   13,765  
       
Total   106,959  




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

17

GEOGRAPHIC SEGMENT AND ECONOMINC DEPENDENCE

The Company is located and operated in China. The Company’s net income (loss) by geographic locations for the years ended December 31, 2011 and 2010 are as follows

    2011     2010  
          (Restated)  
     
China (including Hong Kong)   1,960,419     3,422,822  
Canada   (265,944 )   -  
             
Total   1,694,475     3,422,822  

The Company’s total assets by geographic locations for the years ended December 31, 2011 and 2010 are as follows:

    2011     2010  
          (Restated)  
     
China (including Hong Kong)   22,301,424     19,789,391  
Canada   37,202     -  
             
Total   22,338,626     19,789,391  

During the year ended December 31, 2011 and 2010, the Company had four and four customers accounted for more than 10% of total sales representing 80% and 54% of total sales, respectively.

18

COMPARATIVE FIGURE

Certain comparative figures have been reclassified to conform to the presentation adopted in current year.

19

RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010

The Company has restated its financial statements as at and for the year ended December 31, 2010 as follows:

a)

Borrowing costs

   

Borrowing costs for qualifying assets of the Company were incorrectly expensed over the prior periods when it should have been capitalized and included in the mine development costs.

   

The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $1,175,186, decrease reserve by $1,038, increase accumulated other comprehensive income by $65,320, increase retained earnings by $1,110,904, increase cost of revenue by $50,952 and decrease interest expenses by $265,595.





SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

19 RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 (cont’d)
   
b) Asset retirement obligation

Asset retirement obligation of the Company was incorrectly calculated and expensed over the prior periods when the related asset retirement obligation amounts should have been capitalized and included as part of mine development cost while the related obligation should have been discounted and recorded its net present value.

   

The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $374,269, decrease accounts payable and accrued liabilities by $300,783, increase asset retirement obligation by $309,357, decrease reserve by $362, increase accumulated other comprehensive income by $22,817, increase retained earnings by $343,240, increase cost of revenue by $69,103, decrease general and administrative expenses by $126,956 and increase interest expenses by $27,693.

   
c)

Employee welfare and benefit

   

Employee welfare and benefit payable of the Company was over accrued over the prior periods when the related employee welfare and benefit should have been accounted for it upon the related expenses are incurred.

   

The impact of the amounts restated for the above noted errors was to decrease accounts payable and accrued liabilities by $221,795, decrease reserve by $66, increase accumulated other comprehensive income by $4,159, increase retained earnings by $217,702 decrease general and administrative expenses by $160,643.

   
d)

Reclassification

   

Certain reclassification was made to reflect proper financial presentation which included reclassified $150,996 from receivables to prepaid expenses and deposits – non-current, reclassified $3,643,529 from term loan to amounts due to a related party and reclassified $98,722 from depreciation and amortization to cost of revenue.




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

19

RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 (cont’d)

The following tables summarized the restatements for the year ended December 31, 2010:

    Previously              
Balance sheet   reported     Adjustment     Restated  
       
Cash and cash equivalents   526,564     -     526,564  
Receivables   232,802     (150,996 )   81,806  
Prepaid expenses and deposits   2,065,542     -     2,065,542  
Current assets   2,824,908     (150,996 )   2,673,912  
Prepaid expenses and deposits – non-current   -     150,996     150,996  
Property, equipment and mine development   15,056,286     1,549,455     16,605,741  
costsIntangible assets, net   358,742     -     358,742  
                   
Total assets   18,239,936     1,549,455     19,789,391  
                   
Accounts payable and accrued liabilities   2,290,552     (522,578 )   1,767,974  
Asset retirement obligation - current   -     81,538     81,538  
Amounts due to a related party   -     3,643,529     3,643,529  
                   
Current liabilities   2,290,552     3,202,489     5,493,041  
Asset retirement obligation – long term   -     227,819     227,819  
Term loan   11,495,312     (3,643,529 )   7,851,783  
                   
Total liabilities   13,785,864     (213,221 )   13,572,643  
Paid-in capital   123,913     -     123,913  
Reserve   73,191     (1,466 )   71,725  
Retained earnings   4,200,339     1,671,847     5,872,186  
Accumulated other comprehensive income   56,629     92,295     148,924  
                   
Total stockholders’ equity   4,454,072     1,762,676     6,216,748  
                   
Total liabilities and stockholders’ equity   18,239,936     1,549,455     19,789,391  




SGB INTERNATIONAL HOLDINGS INC.
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

19

RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 (cont’d)


Statement of income and comprehensive income   Previously     Adjustment        
    reported     Adjustment     Restated  
     
Revenue   13,617,770     -     13,617,770  
Cost of revenue   (6,702,426 )   (218,777 )   (6.921.203 )
Gross profit   6,915,344     (218,777 )   6,696,567  
Selling expenses   (570 )   -     (570 )
General and administrative expenses   (1,912,758 )   287,599     (1,625,159 )
Depreciation and amortization   (120,889 )   98,722     22,167  
Profit from operations   4,881,127     167,544     5,048,671  
Interest expenses   (1,434,697 )   237,901     (1,196,796 )
Other expenses   (343,427 )   -     (343,427 )
Other income   42,196     -     42,196  
Income before tax   3,145,199     405,445     3,550,644  
Income tax   (127,822 )   -     (127,822 )
Net income   3,017,377     405,445     3,422,822  
Currency translation adjustment   92,929     42,663     135,592  
Comprehensive income   3,110,306     448,108     3,558,414  

    Previously              
Statement of cash flows   reported     Adjustment     Restated  
       
Net cash provided by operating activities   2,453,982     265,594     2,719,576  
Net cash (used in) investing activities   (4,517,961 )   (265,594 )   (4,783,555 )
Net cash provided by financing activities   2,180,720     -     2,180,720  
Increase in cash and cash equivalents   116,741     -     116,741  
Effect of exchange rate changes on cash   14,090     -     14,090  
Cash and cash equivalents – Beginning of year   395,733     -     395,733  
Cash and cash equivalents – End of year   526,564     -     526,564  

20

SUBSEQUENT EVENTS

Subsequent to the year end, the Company issued 128,769,132 common shares of the Company in pursuant to a debt settlement agreement on December 29, 2011.


 


YONGDING SHANGZHAI COAL MINE CO., LTD
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

 

 



YONGDING SHANGZHAI COAL MINE CO., LTD
INDEX TO FINANCIAL STATEMENTS

 

CONTENTS

  Page(s)
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

2
BALANCE SHEETS 3
STATEMENT OF INCOME AND COMPREHENSIVE
INCOME
4
STATEMENT OF STOCKHOLDERS' EQUITY 5
STATEMENT OF CASH FLOWS 6
NOTES TO THE FINANCIAL STATEMENTS 7-27

1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Yongding Shangzhai Coal Mine Co., Ltd

We have audited the accompanying balance sheets of Yongding Shangzhai Coal Mine Co., Ltd (the "Company") as of December 31, 2010 and 2009 and the statements of income and comprehensive income, shareholders’ equity and cash flows for the years ended December 31, 2010 and 2009. The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit.

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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.

 


______________________________________________

 

Parker Randall CF (H.K.) CPA Limited
Certified Public Accountants,
Hong Kong
April 12, 2011 except as to what is mentioned in note 2 (b) which is as of April 14, 2012.

2



YONGDING SHANGZHAI COAL MINE CO., LTD
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

    Notes      December 31,      December 31,  
          2010     2009  
ASSETS          
Current assets                  
 Cash         526,564     395,733  
 Other receivables   3     232,802     384,988  
 Prepaid expenses   4     2,065,542     -  
Total current assets         2,824,908     780,721  
                   
Non-current assets                  
 Property, Plant and Equipment, net   5     16,605,741     12,656,873  
 Intangible asset, net   6     358,742     412,182  
Total non-current assets         16,964,483     13,069,055  
TOTAL ASSETS         19,789,391     13,849,776  
                   
                   
LIABILITIES AND STOCKHOLDERS' EQUITY                  
Current liabilities                  
 Other payables and accrued liabilities   7     1,767,974     1,917,226  
 Due to a director   8     -     1,468,908  
Total current liabilities         1,767,974     3,386,134  
                   
Non-current liabilities                  
 Asset retirement obligation   10     309,357     272,770  
 Long-term borrowings   9     11,495,312     7,532,538  
Total non-current liabilities         11,804,669     7,805,308  
TOTAL LIABILITIES         13,572,643     11,191,442  
                   
STOCKHOLDER’S EQUITY                  
 Paid-in capital         123,913     123,913  
 Reserves         71,725     71,725  
 Retained earnings         5,872,186     2,449,364  
 Effect of foreign currency translation         148,924     13,332  
TOTAL STOCKHOLDER’S EQUITY         6,216,748     2,658,334  
TOTAL LIABILITIES AND                  
STOCKHOLDERS' EQUITY         19,789,391     13,849,776  

See accompanying notes to the financial statement

3



YONGDING SHANGZHAI COAL MINE CO., LTD
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

          Years ended     Years ended  
    Notes     December 31,     December 31,  
          2010     2009  
               
Sales         13,666,807     15,483,419  
 Less: Sales Tax         49,037     73,670  
 Net sales         13,617,770     15,409,749  
Cost of sales         (6,702,426 )   (9,171,294 )
 Gross profit         6,915,344     6,238,455  
Selling expenses         (570 )   (1,746 )
Administrative expenses         (1,625,159 )   (1,074,218 )
Depreciation and amortization         (240,944 )   (137,354 )
 Profit from operations         5,048,671     5,025,137  
Other non-operating expenses         (343,427 )   (2,679,816 )
Other income         42,196     397,728  
Interest expense         (1,196,796 )   (475,604 )
 Income before tax         3,550,644     2,267,445  
Income tax   11     (127,822 )   (192,031 )
 Net income         3,422,822     2,075,414  
Other comprehensive income                  
 - Effects of foreign currency conversion         135,592     1,519  
 Comprehensive income         3,558,414     2,076,933  

See accompanying notes to the financial statements

4



YONGDING SHANGZHAI COAL MINE CO., LTD
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

                      Accumulated        
                      other        
    Paid-in           Retained     comprehensive        
    capital     Reserve     earnings     income     Total  
           
                               
Balance at December
31, 2008
 
123,913
   
42,063
   
403,612
   
11,813
   
581,401
 

Net income for the year


-



-



2,075,414



-



2,075,414

Appropriation to
statutory reserves
 
-
   
29,662
   
(29,662
)  
-
   
-
 
Foreign currency
   translation adjustment
 
-
   
-
   
-
   
1,519
   
1,519
 
                               
Balance at December,
2009
 
123,913
   
71,725
   
2,449,364
   
13,332
   
2,658,334
 
                               
                               
                               
Net income for the year   -     -     3,422,822     -     3,422,822  
Foreign currency
   translation adjustment
 
-
   
-
   
-
   
135,592
   
135,592
 
                               
Balance at December,
2010
 
123,913
   
71,725
   
5,872,186
   
148,924
   
6,216,748
 

See accompanying notes to the financial statements

5



YONGDING SHANGZHAI COAL MINE CO., LTD
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

    Year ended     Year ended  
    December,     December  
    2010     31, 2009  
     
Cash Flows from Operating Activities            
Net income   3,422,822     2,075,414  
Provided by operating activities:            
 Depreciation and amortization   1,031,248     947,885  
 loss on retirement of fixed assets   315,725     2,673,302  
Changes in assets and liabilities:            
 Other receivables   161,625     (237,168 )
 Prepaid expenses   (2,033,985 )   -  
 Other payables and accrued liabilities   (443,453 )   136,235  
         
Net cash provided by operating activities   2,453,982     5,595,668  
             
Cash Flows from Investing Activities            
 Purchase of property and equipment   (4,517,961 )   (1,119,195 )
 Proceeds from disposal of property and equipment   -     102,805  
Net cash used in investing activities   (4,517,961 )   (1,016,390 )
             
Cash flows from financing activities            
 Cash receipts from amounts borrowed   5,466,745     731,916  
 Cash repayments of amounts borrowed   (3,286,025 )   (5,003,367 )
Net cash provided by/(used in) financing activities   2,180,720     (4,271,451 )
             
Effect of foreign currency translation on cash and cash equivalents   14,090     228  
             
Net increase in cash and cash equivalents   130,831     308,055  
Cash and cash equivalents at beginning of year   395,733     87,678  
             
Cash and cash equivalents at end of year   526,564     395,733  
             
Supplemental disclosure of cash flow information:            
 Cash paid for interests   1,685,515     519,513  
 Cash paid for income taxes   127,822     192,031  

See accompanying notes to the financial statements

6



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

The Company was incorporated in the People's Republic of China ("PRC") on August 4, 2005 in Fujian province, with the principle business of coal mining and production.

As of November 1, 2010, Mr. Lin Chuanzheng, Mr. Lin Wensi and Mr. Shi Qingdong, the shareholders of the Company have signed the share capital transfer agreement with Dragon International Resources Group Co, Limited (“Dragon International”), a company registered in Hong Kong, for the total equity interest transfer by 50%, 25% and 25%. As of December 20, 2010, the Company obtained the approval from the local authority for the Company to be purchased by Dragon International and transform from a PRC registered company to a Wholly Foreign Owned Enterprise with the same aggregate investment, registered capital and paid-in capital of RMB1 million (the “Acquisition”). The Acquisition was completed on February 21, 2011 as disclosed in Note 14 Subsequent Event.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Method of Accounting

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

(b) Basis of Presentation

The Company's financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").

This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC ("PRC GAAP"), the accounting standards used in the places of their domicile. The accompanying financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with US GAAP.

7



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(b) Basis of Presentation (continued)

Based on the Company’s board resolution dated on February 20, 2012, the following accounting policies have been changed. i) Borrowing costs Borrowing costs for a qualifying asset of the Company which were expensed over the prior periods has been changed to have been capitalized and included in the mine development costs.

ii) Asset retirement obligation

Asset retirement obligation of the Company that was expensed over the prior periods has been changed to have been capitalized and included as part of mine development cost while the related obligation has been discounted and recorded its net present value.

iii) Reserves

The Board also resolved that the Company accrued 0% of the staff welfare reserve.

iv) Reclassification and amendments

Certain reclassification was made to reflect proper financial presentation.

The Company has amended disclosures of Property, Plant and Equipment as in Note 5.

The Company has amended disclosures of Other payables and accrued liabilities as in Note 7.

The Company has provided additional disclosures regarding asset retirement obligation as in Note 2 (i) and Note 10.

As a result of the above mentioned changes in accounting policies, the Company has also amended disclosures of Administrative expenses ,Depreciation and amortization, Interest expenses, Effects of foreign currency conversion as in Statement of income and comprehensive income and disclosures in Statement of Shareholders’ Equity.

(c) Economic and Political Risks

The Company's operations are conducted in the PRC. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

8



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(d) Use of Estimates

In preparing of the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and machinery. Actual results could differ from those estimates.

(e) Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and amounts due from a related party. The Company places its cash with financial institutions with high-credit ratings and quality. In addition, the Company conducts periodic reviews of the related party financial conditions and payment practices.

During the year ended December 31, 2010, five customers represented 17.0%, 14.0%, 11.0%, 12.0% and 8.0% of the total revenue, respectively. During the year ended December 31, 2009, five customers represented 15.4%, 15.3%, 15.2%, 15.1% and 15.0% of the total revenue, respectively. The Company’s revenue is generated from buyers in mainland China.

(f) Cash and Cash Equivalents

The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.

9



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(g) Property, plant and equipment

Property, plant and equipment, are stated at cost less depreciation and amortization and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Depreciation of property, plant and equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:

  Leasehold improvements and buildings 20 years
  Mining property 6.5 years
  Machinery 10 years
  Motor vehicles 5 years
  Office equipment 5 years

(h) Intangible asset

Intangible asset represents the coal mining right and is recorded at cost less accumulated amortization. Amortization is provided over the term of the right agreements on a straight-line basis with the estimated useful lives of 10 years.

i) Asset Retirement Obligation

Minimum standards for mine reclamation have been established by various regulatory agencies and dictate the reclamation requirements at the Company's operations. The Company's asset retirement obligations consist principally of costs to reclaim acreage disturbed at surface operations and estimated costs to reclaim support acreage and perform other related functions at underground mines. The Company records these reclamation obligations at fair value in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. The Company annually reviews its estimated future cash flows for its asset retirement obligations.

10



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(j) Foreign Currency Translation

The Company maintains its financial statements in the functional currency. The functional currency of the Company is the Renminbi (RMB). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements of the Company which are prepared using the functional currency have been translated into United States dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

  2010.12.31 2009.12.31
     
Year end US$ : RMB exchange rate 6.6227 6.8282
Average periodic US$ : RMB exchange rate 6.7255 6.8314

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

11



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(k) Revenue Recognition

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). Coal sales revenues represent sales to individual customers who sold the coal to coal processing companies, power stations and steel factories. Sales revenue is recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured.

(l) Cost of Revenue

Cost of revenue consists primarily of labour cost, governmental charges of coal excavation and related expenses which are directly attributable to coal excavation.

12



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m)Statutory Reserves

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity's registered capital.

The Company allocated 50% of the registered capital by $73,191 from after-tax net earnings to statutory surplus reserve for the year ended December 31, 2009.There was no statutory surplus reserve provided for the year ended December 2010.

(n) Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

(o) Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current components of other comprehensive income are the foreign currency translation adjustment.

13



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(p) Recent Accounting Pronouncements

In April 2009, the FASB issued FSP 157-4, DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET OR LIABILITY HAVE SIGNIFICANTLY DECREASED AND IDENTIFYING TRANSACTIONS THAT ARE NOT ORDERLY (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP 157-4 requires comparative disclosures only for periods ending after initial adoption. The adoption of the provisions of FSP 157-4 is not anticipated to materially impact on the Company’s results of operations or the fair values of its assets and liabilities.

In May 2009, the FASB issued FSP SFAS 165 “Subsequent Events”. The objective of this Statement is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the interim and annual periods ending after June 15, 2009, which is now codified as FASB ASC 855 “Subsequent Events”. The adoption of FASB ASC 855 did not have a material impact on the Company’s financial position, results of operations and cash flows. Effective February 24, 2010, the Company adopted Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”, which removes the requirement to disclose the date through which subsequent events have been evaluated. The adoption of the ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No 162”, which supersedes all existing non-SEC accounting and reporting standards. The codification does not change GAAP but rather organizes it into a new hierarchy with two levels: authoritative and non-authoritative. All authoritative GAAP carries equal weight and is organized in a topical structure. The adoption of SFAS 168 did not have a material impact on the Company’s financial position, results of operations and cash flows.

14



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(p) Recent Accounting Pronouncements (Continued)

In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”, which is codified as ASC 820, “Fair Value Measurements and Disclosures”. This Update provides amendments to ASC 820-10, Fair Value Measurements and Disclosures –Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of ASC 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability. The amendments in this Update clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the assets are required are Level 1 fair value measurements. ASC 820 is effective for the first reporting period (including interim periods) beginning after August 28, 2009. The amendments of ASC 820 did not have a material impact on the Company’s financial position, results of operations and cash flows.

In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, and it provides implementation guidance on accounting for uncertainty in income taxes effective for interim and annual reporting period ending on or after September 15, 2009. The adoption of ASU No. 2009-06 did not have any impact on the Company's financial position, results of operations and cash flows.

15



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(p) Recent Accounting Pronouncements (Continued)

In October 2009, the FASB issued ASU No. 2009-13 “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. While the Company does not believe this Update will have a material impact, it is currently evaluating the impact of this update on the Company's financial statements.

16



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

(p) Recent Accounting Pronouncements (Continued)

In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This update provides amendments to Subtopic 820-10 that required new disclosures for 2 situations. i) A report entity should disclose separately the amount of significant transfer in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfers. ii) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuance, and settlements. None of the new pronouncements has current application to the Company.

In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”. This Update provides amendments to i)An entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. ii)The glossary of Topic 855 is amended to include the definition of SEC filer. iii)An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. iv)The glossary of Topic 855 is amended to remove the definition of public entity. v)The scope of the reissuance disclosure requirements is refined to include revised financial statements only. None of the new pronouncements has current application to the Company.

In May 2010, the FASB issued ASU No. 2010-19 “ Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update)”. The purpose of this Update is to codify the SEC Staff Announcement made at the March 18, 2010 meeting of the FASB Emerging Issues Task Force (EITF) by the SEC Observer to the EITF. The Staff Announcement provides the SEC staff’s view on certain foreign currency issues related to investments in Venezuela. None of the new pronouncements has current application to the Company.

17



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

3. OTHER RECEIVABLES

Other receivables mainly consist of loans to third parties, which are interest free, unsecured and repayable on demand.

4. PREPAID EXPENSES

Prepaid expenses mainly consist of construction fee advance to third-party contractors, which will be transferred to construction in progress once the material arrived or expenses occurred.

5. PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment:

   
December 31, 2010
December 31, 2009
 
 
 
Cost            
       Leasehold improvements and buildings   11,778,713     9,057,891  
       Mining property   456,140     442,412  
       Machineries   4,404,915     4,020,200  
       Motor vehicles   184,055     95,110  
       Office equipments   37,387     3,907  
       Construction in progress   1,668,129     -  
Total   18,529,339     13,619,520  
             
Accumulated depreciation   (1,923,598 )   (962,647 )
             
Property, plant and equipment, net   16,605,741     12,656,873  

Depreciation expenses for the years ended December 31, 2010 and 2009 were $1,031,248 and $947,885, respectively.

The Company incurred costs to reclaim acreage disturbed at surface operations and estimated costs to reclaim support acreage and perform other related functions at underground mines. These costs would bring a probable future benefit to the Company and the Company can obtain the benefit and control others’ access to it. The costs are capitalized and recorded at fair value while at the same time asset obligation was recorded. The associated long-lived assets were amortized at a useful life of 78 months.

18



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

5. PROPERTY, PLANT AND EQUIPMENT (Continued)

Borrowing costs are capitalised as part of the cost of a qualifying asset if they are directly attributable to the acquisition, construction or production of that asset.

The company has incurred borrowing costs as part of the costs of the property, plant and equipment and the Company capitalized a cost of RMB 8,450,159 (approximately USD 1,275,939) and was amortized or depreciated at a useful life of the asset to which the cost was attributable.

19



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

6. INTANGIBLE ASSET

The following is a summary of intangible asset:

    December 31, 2010     December 31, 2009  
     
Cost            
   Coal mining right   662,298     642,365  
Accumulated Amortization   (303,556 )   (230,183 )
             
Intangible asset, net   358,742     412,182  

On April 6, 2006, the Company applied to the Fujian Ministry of Land and Resources PRC (“Ministry of LR”), for the underground coal mining right in Shangzhai Village, Yongding Town, Fujian Province, southwestern of China, covering an area of around 5,741.3 square metres. The mine is accessible by both railway and public roads. At the end of 2006, total remained coal resources were estimated by the Huaxia Institute to be 5.535 million tons within the valid mining permit and the remained mineable coal reserve was estimated to be 3.098 million tons. At the end of 2009, total remaining coal reserve was estimated by Wardrop Engineering Inc. to be 1.354 million tons, including proven reserve 416K tons and Probable reserve 938K tons with 15-year mine life. The existing mining licence area is estimated to contain about 621K tons of measured resources, 1.4 million tonnes of indicated resource and 1.6 million tons of inferred resources. The proposed expansion licence area is estimated to contain about 3.1 million tons of measured resources, 9.3 million tons of indicated resources and 32.5 million tons of inferred resources.

As of December 28, 2006, the governmental reply from Fujian Economic and Trade Committee stated the retain reserve of the mine is 6.32 million tons and the legally producible reserve for the Company is 3.59 million tons, with the annual capacity of 90K tons for 26.6 years. As of December 15, 2010, the annual capacity had been approved to increase to 300K tons by Yongding Coal Industry Ministry.

The total consideration for the coal mining right is RMB4.39 million by installment for the available period from April, 2006 to April 2016. The Company can apply for the extension on coal mining right 30 days before the maturity. The price is determined by the local mining bureau from which the Company acquired its mining rights, based in part on market price set by the Ministry of LR. As of December 31, 2010 and 2009, the balances of coal mining right payable for the Company were $422,788 and $410,064. See additional discussion in Note 7, “OTHER PAYABLES”. The Company has obtained the Safe Production Certificate from November 10, 2008 to December 14, 2011 and Coal Production Certificate from December 18, 2008 to December 1, 2031.

20



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

6. INTANGIBLE ASSET(Continued)

Amortization expense was approximately $65,219 and $64,207 for the years ended December 31, 2010 and 2009, respectively.

7. OTHER PAYABLES

The following is a summary of other payables and accrued liabilities:

    December 31, 2010     December 31, 2009  
     
Interest payable   564,307     794,072  
Coal mining right payable   422,788     243,379  
Environmental protection and Safety payable   98,134     313,396  
Staff costs / wage payable   392,647     82,335  
Construction fee payable   119,749     390,908  
Accrued audit and consultant fee   107,649     86,886  
Other payable   62,700     6,250  
    1,767,974     1,917,226  

As of December 27, 2010, the Company applied for the postponed payment of the coal mining right within the available period. As of January 12, 2011, the Company had received the approved certificate from the Fujian Ministry of LR.

8. DUE TO A DIRECTOR

The amount due to a director was mainly obtained from Mr. Shi Qingdong by RMB23,560,000 from September 2007 to July 1, 2010. The loan is interest free, unsecured and repayable on demand.

21



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

9. LONG-TERM BORROWINGS

The following is a summary of Long-term borrowings:

    December 31,     December 31,  
    2010     2009  
     
Loans from personal bearing interest at 1.5% per month, unsecured         2,562,901  
Loans from personal bearing interest at 2.5% per month, unsecured   7,851,783     -  
Loans from personal with no interest, unsecured   3,643,529     4,969,637  
    11,495,312     7,532,538  
             
Less: Current portion   -     -  
Long-term borrowings   11,495,312     7,532,538  

The unsecured long-term borrowings were obtained from Mr. Chen Yongle and Lin Longwen, a third party to the Company. Accordance to a supplementary agreement entered with the Mr. Chen Yongle, he will consider converting his loans into shares of the Company at a condition to be renegotiated after the Company obtained approval for listing in the US capital market and also approval from the new investors, if any.

10. ASSET RETIREMENT OBLIGATION

As at Dec 31,2010 and 2009, asset retirement obligation are as follows:

    December 31, 2010     December 31, 2009  
     
Asset retirement obligation   309,357     272,770  

11. INCOME TAX

According to the local tax law in Yongding Town, Fujian Province, PRC, the income tax of coal industry is calculated by weight of exploitation, claiming $0.8(RMB5.5) per ton since March 31, 2008.

12. RELATED PARTY TRANSACTIONS

Apart from the transactions and balances disclosed elsewhere in the financial statements, the Company had no material transactions with its related parties during the periods presented.

22



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

13. SEGMENT INFORMATION

No segment information is disclosed as the Company is engaged in the sales of coal. The nature of the products, the type of their customers and their distribution methods are substantially similar. The Company operates in a single segment in the PRC. SFAS 131, codified in FASB ASC Topic 280, has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment -coal mining.

14. ENVIRONMENTAL CONCERN

The Company obtained the eight commercial seams, numbered 3, 5, 7, 9, 23, 24, 28 and 28#, located in the coal mine zone in Shangzhai village, Fujian Province with no water on the earth’s surface and the residential area is far from the coal mine zone. As of November 25, 2009, the Ministry of LR signed the environmental recovery agreement with the Company for the management of environmental recovery of the coal mine in time, with the deposit by RMB3.86 million. As of the years ended December 31, 2010 and 2009, the amounts of environmental protection fee for the Company were $128,926 and $168,085.

15. SUBSEQUENT EVENT

Upon the acquisition capital received from Dragon International in acquiring the equity interest of the Company as of February 21, 2011, the Company has became a wholly-owned foreign investment subsidiary of Dragon International.

16.RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 and 2009

The Company has restated its financial statements as at and for the year ended December 31, 2009 as follows:

a)

Borrowing costs

   

Borrowing costs for qualifying assets of the Company were incorrectly expensed over the prior periods when it should have been capitalized and included in the mine development costs.

   

The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $926,598 (equivalent to RMB6,326,997), increase depreciation and amortisation expenses by $45,538 (equivalent to RMB311,089) and decrease interest expenses by $39,896 (equivalent to RMB272,418).

   
b)

Asset retirement obligation

   

Asset retirement obligation of the Company was incorrectly calculated and expensed over the prior periods when the related asset retirement obligation amounts should have been capitalized and included as part of mine development cost while the related obligation should have been discounted and recorded its net present value.

23



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

16 . RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 and 2009 (Continued)
   
The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $431,069 (equivalent to RMB2,943,423), decrease accounts payable and accrued liabilities by $166,685 (equivalent to RMB1,138,158), increase asset retirement obligation by $272,770 (equivalent to RMB1,862,527), decrease general and administrative expenses by $168,085 (equivalent to RMB1,148,256) and increase interest expenses by $11,357 (equivalent to RMB77,458).
   
c) Employee welfare and benefit
   
Employee welfare and benefit payable of the Company was over accrued over the prior periods when the related employee welfare and benefit should have been accounted for it upon the related expenses are incurred.
   
The impact of the amounts restated for the above noted errors was to decrease accounts payable and accrued liabilities by $62,986 (equivalent to RMB430,279) and decrease general and administrative expenses by $62,986 (equivalent to RMB430,279).

The impact of the amounts restated for the above noted also decrease the reserve by $1,466, increase the accumulated other comprehensive income by $49,632 and increase the retained earnings by $1,266,402

The following tables summarized the restatements for the year ended December 31, 2009:

    Previously              
Balance sheet   reported     Adjustment     Restated  
       
Cash and cash equivalents   395,733     -     395,733  
Receivables   384,988     -     384,988  
Prepaid expenses and deposits   -     -     -  
Current assets   780,721     -     780,721  
Prepaid expenses and deposits – non-current   -     -     -  
Property, equipment and mine development costs   11,299,206     1,357,667     12,656,873  
Intangible assets, net   412,182     -     412,182  
                   
Total assets   12,492,109     1,357,667     13,849,776  
                   
Accounts payable and accrued liabilities   2,146,897     (229,671 )   1,917,226  
                   
Amounts due to a related party   1,468,908     -     1,468,908  
                   
Current liabilities   3,615,805     (229,671 )   3,386,134  
Asset retirement obligation – long term   -     272,770     272,770  
Term loan   7,532,538     -     7,532,538  
                   
Total liabilities   11,148,343     43,099     11,191,442  
                   
Paid-in capital   123,913     -     123,913  
Reserve   73,191     (1,466 )   71,725  
Retained earnings   1,182,962     1,266,402     2,449,364  
Accumulated other comprehensive income   (36,300 )   49,632     13,332  
                   
Total stockholders’ equity   1,343,766     1,314,568     2,658,334  
                   
Total liabilities and stockholders’ equity   12,492,109     1,357,667     13,849,776  

24



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

16 . RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 and 2009 (Continued)

Statement of income and comprehensive income   Previously              
cccomprehensiveincome   reported     Adjustment     Restated  
       
Revenue   15,409,749     -     15,409,749  
Cost of revenue   (9,171,294 )   -     (9,171,294 )
Gross profit   6,238,455     -     6,238,455  
Selling expenses   (1,746 )   -     (1,746 )
General and administrative expenses   (1,305,289 )   231,071     (1,074,218 )
Depreciation and amortization   (91,816 )   (45,538 )   (137,354 )
Profit from operations   4,839,604     185,533     5,025,137  
Interest expenses   (504,143 )   28,539     (475,604 )
Other expenses   (2,679,816 )   -     (2,679,816 )
Other income   397,727     1     397,728  
Income before tax   2,053,372     214,073     2,267,445  
Income tax   (192,031 )   -     (192,031 )
Net income   1,861,341     214,073     2,075,414  
Currency translation adjustment   418     1,101     1,519  
Comprehensive income   1,861,759     215,174     2,076,933  

The Company has restated its financial statements as at and for the year ended December 31, 2010 as follows:

a)

Borrowing costs

   

Borrowing costs for qualifying assets of the Company were incorrectly expensed over the prior periods when it should have been capitalized and included in the mine development costs. The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $1,175,186 (equivalent to RMB7,782,905), increase depreciation and amortisation expenses by $50,952 (equivalent to RMB330,333) and decrease interest expenses by $265,594 (equivalent to RMB1,786,241).

   
b)

Asset retirement obligation

   

Asset retirement obligation of the Company was incorrectly calculated and expensed over the prior periods when the related asset retirement obligation amounts should have been capitalized and included as part of mine development cost while the related obligation should have been discounted and recorded its net present value.

25



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

16 . RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 and 2009 (Continued)
   
The impact of the amounts restated for the above noted errors was to increase the property, equipment and mine development costs by $374,269 (equivalent to RMB2,478,672), decrease accounts payable and accrued liabilities by $300,783 (equivalent to RMB1,991,994), increase asset retirement obligation by $309,357 (equivalent to RMB2,048,780), increase depreciation and amortisation expenses by $69,103 (equivalent to RMB464,751), decrease general and administrative expenses by $126,956 (equivalent to RMB853,836) and increase interest expenses by $27,693(equivalent to RMB186,253).
   
c) Employee welfare and benefit
   
Employee welfare and benefit payable of the Company was over accrued over the prior periods when the related employee welfare and benefit should have been accounted for it upon the related expenses are incurred.
   
The impact of the amounts restated for the above noted errors was to decrease accounts payable and accrued liabilities by $221,795 (equivalent to RMB1,068,064) and decrease general and administrative expenses by $160,643 (equivalent to RMB1,068,064).

The impact of the amounts restated for the above noted also decrease the reserve by $1,466, increase the accumulated other comprehensive income by $92,295 and increase the retained earnings by $1,671,847

The following tables summarized the restatements for the year ended December 31, 2010:

    Previously              
Balance sheet   reported     Adjustment     Restated  
       
Cash and cash equivalents   526,564     -     526,564  
Receivables   232,802     -     232,802  
Prepaid expenses and deposits   2,065,542     -     2,065,542  
Current assets   2,824,908     -     2.824,908  
                   
Property, equipment and mine development costs   15,056,286     1,549,455     16,605,741  
Intangible assets, net   358,742     -     358,742  
                   
Total assets   18,239,936     1,549,455     19,789,391  
                   
Accounts payable and accrued liabilities   2,290,552     (522,578 )   1,767,974  
                   
Current liabilities   2,290,552     (522,578 )   1,767,974  
Asset retirement obligation – long term   -     309,357     309,357  
Term loan   11,495,312     -     11,495,312  
                   
Total liabilities   13,785,864     (213,221 )   13,572,643  
Paid-in capital   123,913     -     123,913  
Reserve   73,191     (1,466 )   71,725  
Retained earnings   4,200,339     1,671,847     5,872,186  
Accumulated other comprehensive income   56,629     92,295     148,924  
Total stockholders’ equity   4,454,072     1,762,676     6,216,748  
Total liabilities and stockholders’ equity   18,239,936     1,549,455     19,789,391  

26



YONGDING SHANGZHAI COAL MINE LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Stated in US Dollars)

16. RESTATEMENT FOR YEAR ENDED DECEMBER 31, 2010 and 2009 (Continued)

Statement of income and comprehensive income   Previously              
cccomprehensiveincome   reported     Adjustment     Restated  
       
Revenue   13,617,770     -     13,617,770  
Cost of revenue   (6,702,426 )   -     (6,702,426 )
Gross profit   6,915,344     -     6,915,344  
Selling expenses   (570 )   -     (570 )
General and administrative expenses   (1,912,758 )   287,599     (1,625,159 )
Depreciation and amortization   (120,889 )   (120,055 )   (240,944 )
Profit from operations   4,881,127     167,544     5,048,671  
Interest expenses   (1,434,697 )   237,901     (1,196,796 )
Other expenses   (343,427 )   -     (343,427 )
Other income   42,196     -     42,196  
Income before tax   3,145,199     405,445     3,550,644  
Income tax   (127,822 )   -     (127,822 )
Net income   3,017,377     405,445     3,422,822  
Currency translation adjustment   92,929     42,663     135,592  
Comprehensive income   3,110,306     448,108     3,558,414  

27


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL MATTERS

On December 29, 2011, the Board of Directors of our company dismissed by mutual agreement, Stan J.H. Lee, CPA (“Lee”), as its principal independent accountant. On December 29, 2011, we engaged MNP LLP, Chartered Accountants as our principal independent accountant. The audit committee of our company approved the dismissal of Lee and the engagement of MNP LLP as its independent auditor.

Lee’s report on our company’s financial statements for the fiscal years ended March 31, 2011 and March 31, 2010 did not contain an adverse opinion or disclaimer of opinion, or qualification or modification as to uncertainty, audit scope, or accounting principles, except that such report on our company’s financial statements contained an explanatory paragraph for the fiscal years ended March 31, 2011 and March 31, 2010 in respect to the substantial doubt about its ability to continue as a going concern.

During our company’s fiscal years ended March 31, 2011 and March 31, 2010 and in the subsequent interim period through the date of dismissal, there were no disagreements, resolved or not, with Lee on any matter of accounting principles or practices, financial statement disclosure, or audit scope and procedures, which disagreement(s), if not resolved to the satisfaction of Lee, would have caused Lee to make reference to the subject matter of the disagreement(s) in connection with its report.

During our company’s fiscal years ended March 31, 2011 and March 31, 2010 and in the subsequent interim period through the date of dismissal, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

We provided Lee with a copy of our Current Report on Form 8-K prior to its filing with the Securities and Exchange Commission, and requested that it furnish us with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made in this Current Report on Form 8-K, and if not, stating the respects with which it does not agree. A copy of the letter provided from Lee is filed as an exhibit to our Current Report on Form 8-K filed on January 3, 2012.

During our company’s fiscal years ended March 31, 2011 and March 31, 2010 and in the subsequent interim period through the date of appointment of MNP LLP on December 29, 2011, we have not consulted with MNP LLP regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, nor has MNP LLP provided to our company a written report or oral advice that MNP LLP concluded was an important factor considered by our company in reaching a decision as to the accounting, auditing or financial reporting issue. In addition, during such periods, our company has not consulted with MNP LLP regarding any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure controls and procedures

We maintain “disclosure controls and procedures”, as that term is defined in Rule 13a-15(e), promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by paragraph (b) of Rules 13a-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our management concluded that as of the end of the period covered by this annual report on Form 10-K, our disclosure controls and procedures were not effective.

45


Internal control over financial reporting

Management's annual report on internal control over financial reporting

Our management, including our principal executive officer, our principal financial officer and our principal accounting officer and our Board of Directors, is responsible for establishing and maintaining a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011. Our management’s evaluation of our internal control over financial reporting was based on the framework in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2011 due to material weaknesses in our internal control over financial reporting as follows:

  • lack of segregation of duties; and

  • inadequate security.

Our management continues to review processes and will make necessary changes to strengthen our system of internal controls over financial reporting

A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Limitations on Effectiveness of Controls

Our principal executive officer and principal financial officer do not expect that our disclosure controls or our internal control over financial reporting 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 our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B OTHER INFORMATION

None

46


PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

Our directors and executive officers, their age, positions held, and duration of such, are as follows:

Name Position Held with our Company Age Date First Elected or Appointed
Longwen Lin Chairperson, President, Chief Executive Officer and Director 50 May 11, 2011
Peifeng Huang Director 33 May 11, 2011
Thomas Tze Khern Yeo Chief Financial Officer and Corporate Secretary 38 May 11, 2011

Family Relationships

There are no family relationships between any director or executive officer.

Business Experience

Longwen Lin

Mr. Lin served as the president of Jindong Metal Industry Co., Ltd from 1995 to 2005 and has been a coal mining consultant for the Company and assisting in building up the Company from a bare land to fully operational mining company since 2006. Mr. Lin graduated from Fujian Geosciences University with a degree in Metal Casting.

Mr. Lin has been our Chairperson, President, and director since May 11, 2011 after the reverse acquisition of Dragon International.

We believe Mr. Lin is qualified to serve on our board of directors because of his knowledge of our current operations in addition to his education and business experiences described above.

Peifeng Huang

Mr Huang has served as a production manager of Tong Duan Ping Coal Mine in Fujian Province from 1997 to 2005 and has served as coal mine production manager of Fujian Huilong since 2006. Mr. Huang graduated from Fujian Coal University with a degree in coal mining.

Mr. Huang has been our director since May 11, 2011 after the reverse acquisition of Dragon International. We believe Mr. Huang is qualified to serve on our board of directors because of his knowledge of our current operations in addition to his education and business experiences described above.

Thomas Tze Khern Yeo, Chief Financial Officer and Corporate Secretary

Mr. Yeo has been our Chief Financial Officer and Corporate Secretary since May 11, 2011 after the reverse acquisition of Dragon International.

Mr Yeo is also the Chief Financial Officer and Company Secretary of a Singapore Main Board listed company, Sunshine Holdings Limited since 2009. Mr Yeo has served as an executive management staff of PKF Accounting Firm in Shanghai from 2007 to 2008, a senior manager of Lehman Brown Accounting firm in Shanghai from 2006 to 2007 and served as a audit manager in Ernst and Young Beijing Office and Singapore office from 1999 to 2006. Mr Yeo has years of working experience in accounting and financial management in private held and public-listed companies and also as an auditor in a big-four audit firm. Mr Yeo is non-practicing member of CPA Singapore, Australia and Hong Kong with a Master in Practicing Accounting from Monash University Australia. Mr. Yeo has been our Chief Financial Officer and Corporate Secretary since May 11, 2011 after the reverse acquisition of Dragon International.

47


Term of Office

Our directors cease to hold office immediately before their election at an annual general meeting or their appointment by the unanimous resolution of our shareholders, but are eligible for re-election or re-appointment. Notwithstanding the foregoing, our directors hold office until their successors are elected or appointed, or until their deaths, resignations or removals. Our officers hold office at the discretion of our board of directors, or until their deaths, resignations or removals.

Involvement in Certain Legal Proceedings

Our directors and executive officers have not been involved in any of the following events during the past ten years:

  1.

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

     
  2.

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

     
  3.

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

     
  4.

being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

     
  5.

being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

     
  6.

being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Compliance with section 16(a) of the Exchange Act

Because we are a foreign private issuer as defined under Rule 3b-4 promulgated under the Securities Exchange Act of 1934, our executive officers and directors and persons who own more than 10% of our common stock are not required to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission.

Code of Ethics

We have not adopted a code of ethics because our board of directors believes that our small size does not merit the expense of preparing, adopting and administering a code of ethics. Our board of directors intends to adopt a code of ethics when circumstances warrant.

48


Corporate Governance

Nominating or Compensation Committees

We currently do not have nominating or compensation committees or committees performing similar functions nor do we have a written nominating or compensation committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by our board of directors.

We do not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. We do not currently have any specific or minimum criteria for the election of nominees to our board of directors and we do not have any specific process or procedure for evaluating such nominees. Our board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.

A shareholder who wishes to communicate with our board of directors may do so by directing a written request to the address appearing on the first page of this annual report.

Audit Committee and Audit Committee Financial Expert

We do not have a standing audit committee at the present time. Our board of directors has determined that we do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.

We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have an audit committee because we believe that the functions of an audit committee can be adequately performed by the board of directors. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated any revenues from operations to date.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation

The particulars of compensation paid to the following persons:

  • our principal executive officer;
  • each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2011; and
  • up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the most recently completed financial year,

who we will collectively refer to as the named executive officers, for our years ended December 31, 2011 and 2010 are set out in the following summary compensation table:




Name and Principal
Position




Year



Salary
($)



Bonus
($)


Stock
Awards
($)


Option
Awards
($)

Non Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)


All Other
Compensation
($)



Total
($)
Longwen Lin
Chairperson,
President & Director1
2011
2010
45,282
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
45,282
NIL
Thomas Tze Khern
Yeo
CFO & Secretary 2
2011
2010
37,735
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
37,735
NIL



Xin Li
Former CEO &
Director 3
2011
2010
37,691
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
37,691
NIL
Stuart Wooldridge
former Secretary &
Director 4
2011
2010
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL
NIL

1 Mr. Lin was appointed an officer and director on May 11, 2011.
2 Mr. Yeo was appointed as an officer on May 11, 2011.
3 Mr. Li was appointed as CEO and executive director on May 11, 2011 but resigned from all positions on March 1, 2012.
4 Mr. Wooldridge resigned as a director and officer on May 11, 2011.

Employment Agreements

We have not entered into any employment agreement or consulting agreement with our directors and executive officers.

Retirement or Similar Benefit Plans

There are no arrangements or plans in which we provide retirement or similar benefits for our directors or executive officers.

Resignation, Retirement, Other Termination, or Change in Control Arrangements

We have no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to our directors or executive officers at, following, or in connection with the resignation, retirement or other termination of our directors or executive officers, or a change in control of our company or a change in our directors’ or executive officers’ responsibilities following a change in control.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth for each named executive officer certain information concerning the outstanding equity awards as of December 31, 2011.

Name Option awards Stock awards








Number of
securities
underlying
unexercised
options
(#)
exercisable








Number of
securities
underlying
unexercised
options
(#)
unexercisable




Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)











Option
exercise
price
($)












Option
expiration
date







Number
of shares
or units
of stock
that
have not
vested
(#)







Market
value of
shares of
units of
stock that
have not
vested
($)

Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights that
have not
vested
(#)
Equity
incentive
plan
awards:
Market
or payout
value of
unearned
shares,
units
or other
rights that
have not
vested
($)
Longwen Lin Nil Nil Nil Nil Nil Nil Nil Nil Nil
Thomas Tze Khern Yeo Nil Nil Nil Nil Nil Nil Nil Nil Nil
Xin Li
(Resigned as CEO and Executive Director on March 1, 2012)
Nil Nil Nil Nil Nil Nil Nil Nil Nil

50


Compensation of Directors

The table below shows the compensation of our directors who are not our named executive officers for our fiscal year ended December 31, 2011:





Name
Fees
earned or
paid in
cash
($)


Stock
awards
($)


Option
awards
($)
Non-equity
incentive
plan
compensation
($)
Nonqualified
deferred
compensation
earnings
($)


All other
compensation
($)



Total
($)
Peifeng Huang (1) Nil Nil Nil Nil Nil Nil Nil

1 Mr. Huang was appointed a director on May 11, 2011.

We have no formal plan for compensating our directors for their services in their capacity as directors. Our directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of April 13, 2012 certain information with respect to the beneficial ownership of our common shares by each stockholder known by us to be the beneficial owner of more than 5% of our common shares, by each of our directors, our named executive officers, and executive officers, and by our directors and executive officers as a group. We have determined the number and percentage of shares beneficially owned by such person in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. This information does not necessarily indicate beneficial ownership for any other purpose.

Name and Address of
Beneficial Owner

Title of Class
Amount and Nature of
Beneficial Ownership
Percentage
of Class(1)
Longwen Lin
Jinhuai Middle Street, Hong Hua
Yuan Block 1 Unit 907
Fengze District, Quanzhou City,
Fujian Province
PRC China 362300
Common Shares 198,469,800 Direct 53.10%
Chuanzheng Lin
#301 – 94 Minzhu Street, Nanan
City, Fujian Province
PRC China
Common Shares 64,384,566 Indirect(2) 17.22%
Zhifu Lin
#301 – 94 Minzhu Street, Nanan
City, Fujian Province
PRC China
Common Shares 64,384,566 Indirect(2) 17.22%
Thomas Tze Khern Yeo
Blk 215, Pasir Ris Street 21,
#05-270
Singapore 510215
Common Shares 2,205,220 Direct 0.59%
Peifeng Huang
Jinhuai Middle Street, Hong Hua
Yuan Block 1 Unit 907
Fengze District, Quanzhou City,
Fujian Province
PRC China 362300
Common Shares Nil N/A Nil
Directors and Executive Officers as a Group (4 persons) Common Shares 329,444,152 88.14%

51


1 Percentage of ownership is based on 373,793,578 shares of our common shares issued and outstanding as of April 13, 2012. Except as otherwise indicated, we believe that the beneficial owners of the common shares listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Common shares subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
2 These shares are currently registered under Dragon International, which has agreed to and is in the process of transfer these shares to these two respective holders.

Change in Control

There are no provisions in our articles that would delay, defer or prevent a change in control of our company and that would operate only with respect to an extraordinary corporate transaction involving our company or subsidiary, such as merger, reorganization, tender offer, sale or transfer of substantially all of our assets, or liquidation.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Other than as disclosed below, there has been no transaction, or currently proposed transaction, in which our company was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any of the following persons had or will have a direct or indirect material interest:

  (i)

Any director or executive officer of our company;

     
  (ii)

Any beneficial owner of shares carrying more than 5% of the voting rights attached to our outstanding common shares;

     
  (iii)

Any person who acquired control of our company when it was a shell company or any person that is part of a group, consisting of two or more persons that agreed to act together for the purpose of acquiring, holding, voting or disposing of our common shares, that acquired control of our company when it was a shell company; and

     
  (iv)

Any immediate family member (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons.

On January 1, 2010 we entered into a service agreement with Xin Li, a former CEO and executive director. Pursuant to this agreement, we agreed to accrue $984 (CDN$1,000) monthly as director fee. On March 31, 2010, Mr. Li agreed to convert the accrued director fee of $2,952 for the period from January 1 to March 31, 2010 and the accrued director fee of $12,403 for the period from July 1 to September 30, 2009 owed by us to shareholder’s loan.

During the year ended March 31, 2010 and the three month period ended June 30, 2010, SGB C&C Investment Ltd. loaned us $181,905 (CDN$193,661) for expenses and management fee to be incurred by us. The amount is non-interest bearing, unsecured, and due on demand.

On May 11, 2011, we acquired Dragon International Resources Group Co., Limited pursuant to a share exchange agreement dated April 12, 2011 made by and between SGB International Holdings Inc., Dragon International, the shareholders of Dragon International, and Fujian Huilong Coal Mine Co., Ltd. Pursuant to the terms of the share exchange agreement, we acquired all of the outstanding capital stock and ownership interests of Dragon International from its shareholders in exchange for an aggregate of 220,522,000 common shares of our company. Longwen Lin, who became our President and director in connection with this transaction received 198,469,800 common shares of our company, while Thomas Tze Khern Yeon, who became our Chief Financial Officer and Corporate Secretary in connection with this transaction received 2,205,220 common shares of our company.

52


Director Independence

We currently act with two directors consisting of Longwen Lin and Peifeng Huang. Our common shares are quoted on the OTC Bulletin Board operated by FINRA (the Financial Industry Regulatory Authority), which does not impose any director independence requirements. Under NASDAQ rule 5605(a)(2), a director is not independent if he or she is also an executive officer or employee of the corporation or was, at any time during the past three years, employed by the corporation. Using this definition of independent director, only Peifeng Huang is independent.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit Fees

The following table sets forth the fees billed to our company for the year ended December 31, 2011 for professional services rendered by MNP LLP, and for the year ended March 31, 2011 for professional services rendered by Stan Jeong-Ha Lee, our independent registered public accounting firm since July 31, 2009.

    Year Ended     Year Ended  
    December 31,     March 31,  
    2011     2011  
Audit Fees $  95,000   $ 12,000  
Tax Fees   0     0  
All Other Fees   0     0  
Total $  95,000   $ 12,000  

Pre-Approval Policies and Procedures

Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors before the respective services were rendered.

Our board of directors has considered the nature and amount of fees billed by MNP LLP or Stan Jeong-Ha Lee and believes that the provision of services for activities unrelated to the audit is compatible with maintaining their respective independence.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Exhibit
Number
Description
2.1

Share Exchange Agreement dated April 12, 2011 with Dragon International Resources Group. Co., Limited, its shareholders, and Fujian Huilong Coal Mine Co., Ltd. (incorporated by reference to an exhibit attached to our current report on Form 8-K filed on April 29, 2011)

3.1

Articles of Incorporation (incorporated by reference to an exhibit to our registration statement on Form SB-2 filed on August 7, 2007)

3.01

Notice of Alteration filed with the Ministry of Finance, BC Registry Services effective March 3, 2009 (incorporated by reference to an exhibit to our current report on Form 8-K filed on March 5, 2009)

3.02

Amended and Restated Articles of Incorporation of SGB International Holdings Inc. (incorporated by reference to an exhibit to our current report on Form 8-K filed on March 5, 2009)

3.03

Certificate evidencing subsidiary name change with English translation (incorporated by reference to an exhibit to our current report on Form 8-K filed on January 13, 2012)

10.1

Loan agreements between Fujian Huilong Coal Mine Co., Ltd. (formerly Yongding County Shangzhai Coal Mine Co., Ltd.) and Mr. Longwen Lin (contract numbers 2010-07-23, 2010-12, 2011-03 and 2011- 03 Supplementary) (incorporated by reference to an exhibit to our amended current report on Form 8- K/A filed on January 6, 2012)

10.2

Loan agreements between Fujian Huilong Coal Mine Co., Ltd. (formerly Yongding County Shangzhai Coal Mine Co., Ltd.) and Mr. Yongle Chen (contract numbers 2010-07-14, 2010-07) (incorporated by reference to an exhibit to our amended current report on Form 8-K/A filed on January 6, 2012)

53



Exhibit
Number
Description
16.1

Letter from Manning Elliott LLP dated July 31, 2009 (incorporated by reference to an exhibit attached to our current report on Form 8-K filed on August 8, 2009)

16.2

Letter from Stan J.H. Lee CPA dated December 29, 2011 (incorporated by reference to an exhibit attached to our current report on Form 8-K filed on January 4, 2012)

21.1

Dragon International Resources Group Co., Limited (Hong Kong) 100% wholly owned

21.2

Fujian Huilong Coal Mine Co., Ltd. (formerly Yongding County Shangzhai Coal Mine Co., Ltd.) (People’s Republic of China) 100% wholly owned by Dragon International

31.1*

Certification of the CEO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

31.2*

Certification of the CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

32.1*

Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of the CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1

Conflict of Interest Policy (incorporated by reference to an exhibit to our amended current report on Form 8-K/A filed on January 6, 2012)

* Filed herewith.

54


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SGB INTERNATIONAL HOLDINGS INC.

By: /s/ Longwen Lin
Longwen Lin
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 16, 2012

By: /s/ Thomas Tze Khern Yeo
Thomas Tze Khern Yeo
Chief Financial Officer and Corporate Secretary
(Principal Financial Officer and Principal Accounting Officer)
Date: April 16, 2012

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

By: /s/ Longwen Lin
Longwen Lin
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 16, 2012

By: /s/ Thomas Tze Khern Yeo
Thomas Tze Khern Yeo
Chief Financial Officer and Corporate Secretary
(Principal Financial Officer and Principal Accounting Officer)
Date: April 16, 2012

By: Peifeng Huang
Peifeng Huang
Director
Date: April 16, 2012

55