Edgar Filing: SINOCOKING COAL & COKE CHEMICAL INDUSTRIES, INC.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended June 30, 2011

TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________.

Commission File Number 001-15931

SinoCoking Coal and Coke Chemical Industries, Inc.

(Exact name of issuer as specified in its charter)

Florida		65-0420146
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

Kuanggong Road and Tiyu Road 10th Floor,

Chengshi Xin Yong She, Tiyu Road, Xinhua District,

Pingdingshan, Henan Province, China 467000

(Address of principal executive offices and zip code)

+86-3752882999

(Registrant’s telephone number, including area code)

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock $0.001 Par Value		NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

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

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 ¨ 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 herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨

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

As of December 31, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $162.8 million based on a closing price of $11.97 per share of common stock as reported on such date.

The registrant had a total of 21,090,948 shares of common stock outstanding as of September 6, 2011.

SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR YEAR ENDED JUNE 30, 2011

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	23
Item 1B.	Unresolved Staff Comments	34
Item 2.	Properties	35
Item 3.	Legal Proceedings	36
Item 4.	Reserved	36

PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	38
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	51
Item 9A.	Controls and Procedures	51
Item 9B.	Other Information	53

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	53
Item 11.	Executive Compensation	56
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62
Item 13.	Certain Relationships and Related Transactions	63
Item 14.	Principal Accounting Fees and Services	64

PART IV
Item 15.	Exhibits and Financial Statement Schedules	65

Signatures		68

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K (the “Report”) and other reports filed by the registrant from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, the registrant’s management as well as estimates and assumptions made by the registrant’s management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to the registrant or the registrant’s management identify forward looking statements. Such statements reflect the current view of the registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this Report entitled “Risk Factors”) relating to the registrant’s industry, the registrant’s operations and results of operations and any businesses that may be acquired by the registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although the registrant believes that the expectations reflected in the forward looking statements are reasonable, the registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the registrant’s financial statements and the related notes thereto included in this Report.

In this Report, “we,” “our,” “us,” “SinoCoking” or the “Company” sometimes refers collectively to SinoCoking Coal and Coke Chemical Industries, Inc. and its subsidiaries and affiliated companies.

PART I

ITEM 1. BUSINESS

General Overview

SinoCoking Coal and Coke Chemical Industries, Inc. (the “Company”) is a vertically-integrated coal and coke producer based in Henan Province, People’s Republic of China (“PRC” or “China”). Our products include raw coal, washed coal, “medium” coal and slurries, coke and coal tar. We also generate electricity with gas emitted during the coking process, which we use primarily to power our operations.

All of our business operations are conducted by Henan Province Pingdingshan Hongli Coal & Coke Co., Ltd. (“Hongli”), which we control through contractual arrangements that Hongli and its owners have entered into with Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd. (“Hongyuan”). These contractual arrangements provide for management and control rights, and in addition entitle us to receive the earnings and control the assets of Hongli. Hongyuan is wholly-owned by Top Favour Limited (“Top Favour”), our wholly-owned subsidiary. Other than our interests in the contractual arrangements, neither we, Top Favour nor Hongyuan own any equity interests in Hongli.

Currently:

coking related operations are carried out by Baofeng Coking Factory (“Baofeng Coking), a branch of Hongli;

coal related operations are under the following subsidiaries of Hongli:

Baofeng Hongchang Coal Co., Ltd. (“Hongchang Coal”);

Baofeng Shunli Coal Ming Co., Ltd. (“Shunli Coal”), which is wholly-owned by Hongchang Coal;

Baofeng Shuangrui Coal Mining Co., Ltd. (“Shuangrui Coal”); and

Baofeng Xingsheng Coal Mining Co., Ltd. (“Xingsheng Coal”);

and

electricity generation is carried out by Baofeng Hongguang Environment Protection Electricity Generating Co., Ltd. (“Hongguang Power”), also a wholly owned subsidiary of Hongli.

It is our intention to transfer all coal related operations from Hongli’s subsidiaries to a joint-venture established with Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”), a state-owned enterprise and qualified provincial-level coal mine consolidator. The joint-venture, Henan Hongyuan Coal Seam Gas Engineering Technology Co., Ltd. (“Hongyuan CSG”), has been established, although our planned transfer of coal related activities to Hongyuan CSG has not been carried out as of the date of this Report. Our interests in Hongyuan CSG are held by Henan Zhonghong Energy Investment Co., Ltd. (“Zhonghong”), which equity interests are presently held on Hongli’s behalf and for its benefit by three nominees pursuant to share entrustment agreements.

In addition, once we complete construction of our new coking plant, we intend to operate the plant through a newly established subsidiary of Hongli, Baofeng Hongrun Coal Chemical Co., Ltd. (“Hongrun”). As of the date of this Report, however, construction has not been completed.

History and Corporate Structure

We were incorporated in Florida on September 30, 1996, originally under the name “J. B. Financial Services, Inc.” From the date of incorporation until August 24, 1999, we had no material business and no material revenues, expenses, assets or liabilities. We changed our name to “Ableauctions.com, Inc.” on July 19, 1999, and subsequently operated an online auction business and a real estate business.

On December 30, 2009, our shareholders approved a Plan and Agreement of Share Exchange, dated July 17, 2009, with Top Favour under which we agreed to acquire all of the outstanding capital stock of Top Favour in exchange for the issuance of 13,117,952 shares of our common stock to the shareholders of Top Favour (the “Share Exchange”). The Share Exchange was consummated on February 5, 2010 (the “Closing Date”). On the Closing Date:

we ceased operating all of our businesses that existed and were held prior to the Closing Date;

we changed our name from “Ableauctions.com, Inc.” to “SinoCoking Coal and Coke Chemical Industries, Inc.” to reflect the business of Top Favour, and effected a 1-for-20 reverse stock split of our issued and outstanding shares of common stock, by filing an amendment to our articles of incorporation with Florida’s Department of State;

all of our directors and officers prior to the Share Exchange resigned, and successor officers and directors designated by Top Favour were appointed to our board of directors and management;

all of our pre-Share Exchange assets (e.g., relating to online auctions, liquidation, real estate services, finance and development) were transferred to a liquidating trust (the “Liquidating Trust”), including the capital stock of our pre-Share Exchange subsidiaries;

the Liquidating Trust assumed all of our pre-Share Exchange liabilities;

Top Favour and its subsidiaries and controlled companies became our subsidiaries and controlled companies; and

the business, operations and assets of Top Favour (e.g., production of coal, coke and electricity) became our sole business, operations and assets.

On March 11, 2010 we completed two private placement financings, pursuant to exemptions under Regulation S and Regulation D respectively, in which we sold and issued a total of 7,344,935 shares of common stock, and five-year warrants for the purchase of an additional 3,789,631 shares of common stock, resulting in aggregate proceeds of $44 million (collectively referred to as the “Financing”). The Financing was conducted pursuant to Securities Purchase Agreements dated February 5, 2010 and March 10, 2010, in two closings. The registration statement to register the shares of common stock issued or underlying the securities issued in connection with the Financing was filed on May 11, 2010 and was declared effective on September 13, 2010.

Top Favour

Top Favour is a holding company incorporated in the British Virgin Islands on July 2, 2008. Top Favour was formed by the owners of Hongli as a special vehicle for raising capital outside of the PRC. Other than holding 100% of the equity interests in Hongyuan, Top Favour has no operations of its own.

Hongyuan

Hongyuan is a PRC limited liability company with registered capital of $3 million and is the wholly-owned subsidiary of Top Favour. Hongyuan was approved as a wholly foreign owned enterprise (“WFOE”) by the Henan provincial government on February 26, 2009 and formally organized on March 18, 2009. Other than activities relating to its contractual arrangements with Hongli, Hongyuan has no separate operations of its own.

Hongli

Hongli is a limited liability company organized in the PRC on July 5, 1996 with registered capital of 8,808,000 Renminbi (“RMB”) (approximately $1,055,248), held by four Chinese nationals: 83.66% by Mr. Jianhua Lv, our chairman and chief executive officer, 6.44% by Ms. Xin Zheng, 4.95% by Mr. Wenqi Xu, and 4.95% by Mr. Guoxiang Song. In August 2010, the Pingdingshan municipal government notified Hongli to increase its registered capital to RMB 28,080,000 (approximately $4,001,248) in order to maintain its coal trading license. Accordingly, the owners of Hongli contributed the additional registered capital in full in August 2010, although not in proportion to their original ownership percentages: Mr. Lv and Ms. Zheng increased their holdings to 85.40% and 9.19%, respectively, while Mr. Xu and Mr. Song decreased their holdings to 3.99% and 1.42%, respectively. Registration of such additional contribution and change in ownership percentages with the Administration for Industry and Commerce (“AIC”) of Pingdingshan was completed in April 2011.

Currently, Hongli has a branch, seven subsidiaries and a joint venture as follows (collectively “Hongli Group”):

Branch:

Baofeng Coking was established on May 31, 2002 as a branch of Hongli, and operates our existing coking plant.

Subsidiaries:

Hongchang Coal is a limited liability company formed in the PRC on July 19, 2007 with registered capital of RMB 3 million (approximately $396,000). Hongchang Coal is a wholly-owned subsidiary of Hongli and holds the rights to mine Hongchang coal mine. While the mine has received clearance to resume full operation, the mine is currently undergoing operational and safety upgrades and has been operating at approximately 50% capacity (see “Our Products and Operations – Coal Mining” below).

Hongguang Power is a limited liability company formed in the PRC on August 1, 2006 with registered capital of RMB 22 million (approximately $2,756,600). Hongguang Power is wholly owned by Hongli.

Hongrun is a limited liability company formed in the PRC on May 17, 2011 with registered capital of RMB 30 million (approximately $4,620,000). Hongrun is a wholly-owned subsidiary of Hongli. We intend to operate our new coking plant through Hongrun. As the date of this Report, Hongrun has not commenced operations as construction of the new coking plant has not been completed.

Shuangrui Coal* is a limited liability company formed in the PRC on March 17, 2009 with registered capital of RMB 4,029,960 (approximately $620,000). Hongli currently holds 60% of the equity interests of Shuangrui Coal. Shuangrui Coal holds the rights to mine the Shuangrui coal mine, although there are currently no mining operations while the mine is undergoing safety upgrades and awaiting clearance to resume operation (see “Our Products and Operations – Coal Mining” below).

Shunli Coal*, Hongchang Coal’s wholly-owned subsidiary, is a limited liability company formed in the PRC on August 13, 2009 with registered capital of RMB 3 million (approximately $461,700). Shunli Coal holds the rights to mine Shunli coal mine, although there are currently no mining operations while the mine is undergoing safety upgrades and awaiting clearance to resume operation (see “Our Products and Operations – Coal Mining” below). We intend to dissolve Shunli in the future and operate Shunli coal mine under Hongchang Coal.

Xingsheng Coal* is a limited liability company formed in the PRC on December 6, 2007 with registered capital of RMB 3,634,600 (approximately $559,400). Hongli currently holds 60% of the equity interests of Xingsheng Coal. Xingsheng Coal holds the rights to mine the Xingsheng coal mine. While the mine has received clearance to resume full operation, the mine is currently undergoing operational and safety upgrades and is not operating (see “Our Products and Operations – Coal Mining” below).

Zhonghong is a limited liability company formed in the PRC on December 30, 2010 with initial registered capital of RMB 10,010,000 (approximately $1,513,500), which was further increased to RMB 20 million (approximately $3,044,000) on April 14, 2011, and to RMB 51 million (approximately $7,842,800) on July 12, 2011, of which RMB 30 million (approximately $4,798,800) has been paid and the balance due by December 20, 2015. Zhonghong’s equity interests are presently held on Hongli’s behalf and for its benefit by three nominees pursuant to share entrustment agreements, including Mr. Hui Zheng, Hongli’s vice president of operations, an employee of Hongli, and an unrelated party who also serves as Zhonghong’s general manager. We set up Zhonghong for the purpose of forming our joint-venture with Henan Coal Seam Gas.

Joint-Venture:

Hongyuan CSG is a joint-venture established in the PRC on April 28, 2011 by Zhonghong (49%) and Henan Coal Seam Gas (51%). Hongli’s interests in the joint-venture are held by Zhonghong. We intend to transfer all coal related operations from Hongli’s subsidiaries to Hongyuan CSG, although such transfers have not been carried out as of the date of this Report.

* On August 10, 2010, we entered into agreements with the owners of Shuangrui Coal and the owners of Xingsheng Coal to acquire 60% of these companies’ equity interests. On May 19, 2011, we entered into an agreement with the owners of Shunli Coal to acquire 100% of the company’s equity interests. As our objective has been these companies’ mining rights, each company’s owners also agreed to dispose of all other assets and liabilities before the transfer of equity interests to us is complete, and to assume all rights and obligations to such assets and liabilities until their disposal, which rights and obligations we would disclaim should any such asset or liability remains in the company after the transfer of equity interests to us is complete. On May 20, 2011, the transfers of equity interests to us for all three companies were completed when such transfers were registered with the Pingdingshan AIC, and each company was issued a new business license. The assets and liabilities that each company’s owners agreed to dispose of, however, remained intact on such date, and continue to remain so as of the date of this Report. In accordance with our agreements with them, each company’s owners are in the process of disposing all such assets and liabilities, and on September 2, 2011, we entered into a supplemental agreement with each company’s owners to memorialize such agreements, which were not previously reduced to writing.

Contractual Arrangements with Hongli Group and its Owners

Our relationship with Hongli Group and its owners are governed by a series of contractual arrangements, under which our subsidiary Hongyuan holds and exercises ownership and management rights over Hongli Group. We, Top Favour and Hongyuan do not own any direct equity interest in Hongli Group; however, the contractual arrangements with Hongli Group and its owners are designed to provide us with rights equivalent in all material respects to those we would possess as the sole equity holder of Hongli Group entities, including absolute control rights and the rights to their assets, property and income. According to a legal opinion issued by our PRC counsel, the contractual arrangements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC.

On March 18, 2009, Hongyuan entered into the following contractual arrangements with Hongli Group and its owners:

Consulting Services Agreement. Pursuant to the consulting services agreement, Hongyuan provides Hongli Group companies with general consulting services relating to their business management and operations on an exclusive basis. Additionally, Hongyuan owns any intellectual property rights that are developed during the course of providing these services. Each Hongli Group company pays a quarterly consulting service fee in RMB equal to its net income for such quarter to Hongyuan. The consulting services agreement is in effect unless and until terminated by written notice of either party in the event that: (a) the other party causes a material breach of the agreement, provided that if the breach does not relate to a financial obligation of the breaching party, that party may attempt to remedy the breach within 14 days following the receipt of the written notice; (b) the other party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due; (c) Hongyuan terminates its operations; (d) a Hongli Group business license or any other approval for its business operations is terminated, cancelled or revoked; or (e) circumstances arise which would materially and adversely affect the performance or the objectives of the consulting services agreement. Additionally, Hongyuan may terminate the consulting services agreement without cause.

Operating Agreement. Pursuant to the operating agreement, Hongyuan provides guidance and instructions on each Hongli Group company’s daily operations, financial management and employment issues. In addition, Hongyuan agrees to guarantee the performance of each Hongli Group company under any agreements or arrangements relating to its business arrangements with any third party. In return, the owners of Hongli Group must designate Hongyuan’s candidates as their representatives on each Hongli Group company’s board of directors, and Hongyuan has the right to appoint senior executives of each Hongli Group company. Additionally, each Hongli Group company agrees to pledge its accounts receivable and all of its assets to Hongyuan. Moreover, each Hongli Group company agrees not to engage in any transactions that could materially affect its assets, liabilities, rights or operations without Hongyuan’s prior consent, including without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of this agreement is the maximum period of time permitted by law unless sooner terminated by any other agreements reached by all parties or upon a 30-day written notice from Hongyuan. The term may be extended only upon Hongyuan’s written confirmation prior to the expiration of the agreement, with the extended term to be mutually agreed upon by the parties. Under current PRC Contract Law, there is no limitation on the maximum term permitted by law for the operating agreement. As long as the operating agreement is not terminated or discharged according to contract or by operation of the law and the contractual parties still exist, there is no limitation on term of the operating agreement. However, the PRC government may issue new laws and regulations in connection with these types of operating agreements which may limit the terms of such agreements in the future.

Equity Pledge Agreement. Under the equity pledge agreement, the owners of Hongli Group pledged all of their equity interests in Hongli Group to Hongyuan to guarantee each Hongli Group company’s performance of its obligations under the consulting services agreement. If a Hongli Group company or the owners breach their respective contractual obligations, Hongyuan, as pledgee, will be entitled to certain rights, including, but not limited to, the right to vote with, control and sell the pledged equity interests. The owners of Hongli Group also agreed that upon occurrence of any event of default, Hongyuan shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the owners to carry out the security provisions of the equity pledge agreement, and take any action and execute any instrument as required by Hongyuan to accomplish the purposes of the agreement. The owners of Hongli Group agreed not to dispose of the pledged equity interests or take any actions that would prejudice Hongyuan’s interest. This agreement will expire two years from the fulfillment of Hongli Group’s obligations under the consulting services agreement.

Option Agreement. Under the option agreement, the owners of Hongli Group irrevocably granted Hongyuan or its designee an exclusive option to purchase, to the extent permitted under Chinese law, all or part of the equity interests in Hongli Group for the cost of the owners’ initial contributions to the registered capital of each Hongli Group company or the minimum amount of consideration permitted by applicable Chinese law. Hongyuan or its designee has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is ten years from January 1, 2006 and may be extended prior to its expiration by written agreement of the parties.

Proxy Agreement. Pursuant to the proxy agreement, the owners of Hongli Group irrevocably granted a Hongyuan designee the right to exercise all voting rights of the owners with respect to their ownership interests in accordance with applicable laws and each Hongli Group company’s governing charters. This agreement may not be terminated without the unanimous consent of all parties, except that Hongyuan may terminate the proxy agreement with or without cause upon 30-day written notice to the owners.

As a result of the these contractual arrangements between Hongyuan and Hongli Group and its owners, we have the ability to effectively control Hongli Group’s daily operations and financial affairs, appoint senior executives and decide on all matters subject to owners’ approval. In other words, while Hongli’s owners continue to own 100% of its equity interests, they have given us all of their rights as owners through these contractual arrangements. Accordingly, we are considered the primary beneficiary of Hongli Group and Hongli Group are deemed our variable interest entities (“VIEs”).

On September 9, 2011 the operating agreement, option agreement, voting rights proxy agreement and option agreement were re-executed by and among Hongyuan, Hongli and the owners of Hongli. The re-executions were necessary to reflect the additional RMB 20 million of registered capital contributed by Hongli’s owners in August 2010, and the change in each owner’s ownership percentage as a result of such contribution. We were made a party to the re-executions to acknowledge them. However, control based on these contractual arrangements may ultimately not be as effective as direct ownership of Hongli Group, as we will need to enforce our rights through quasi-judicial proceeding in the event Hongli Group fails to perform its contractual obligations. In the event the outcome of such proceeding is unfavorable to us, we may effectively lose control over Hongli. See “Risk Factors – Risks Related to Our Corporate Structure – Our contractual arrangements with Hongli and its owners as well as our ability to enforce our rights thereunder may not be as effective in providing control over Hongli as direct ownership.” Mr. Lv held approximately 31.7% of our issued and outstanding common stock, and approximately 85.40% of the equity interests of Hongli, as of September 6, 2011. As such, we believe that our interests are aligned with those of Hongli Group and its owners. However, we cannot give assurance that such interests will always be aligned, or that we can effectively control Hongli Group if and when such interests are no longer aligned. See “Risk Factors - Risks Related to Our Corporate Structure – Management members of Hongli have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.”

Our Current Corporate Structure

The following diagram illustrates our current corporate structure:

Our Products and Operations

Overview

We are based in Henan Province in the central part of China, known as a coal-rich region of the country. Our current operations are located in west Baofeng County, a part of Pingdingshan Prefecture south of Zhengzhou, the provincial capital. We currently extract coal from Hongchang coal mine and truck the coal to our plant site nearby, where the bulk of the coal is processed and used by us to make coke (see the map under “Property, Plant and Equipment”). Finished coke is loaded onsite onto railcars on our private rail line and transported to customers through the connected national rail system. Castoffs of the coal-washing process (medium coal and coal slurries) are sold to industrial end-users and traders primarily as fuel for electricity and heat. Coal tar is extracted from the gas emitted during the coking process and sold, and the gas is then piped into an onsite electric plant to produce electricity to power our operations. Excess electricity, if any is generated, is sold to the state-owned electricity grid.

Coal Mining

Of the four coal mines that we control (through Hongchang Coal, Shuangrui Coal, Shunli Coal and Xingsheng Coal), only Hongchang coal mine is currently operating (see “Property, Plant and Equipment” below). As such, the description of mining operations below applies only to Hongchang coal mine.

Coal extracted from Hongchang coal mine consists of bituminous coal, and based on historical mining activities, approximately 8% of the coal extracted typically possesses properties that meet the requirements for coking (metallurgical) coal; however, this percentage varies depending on mine conditions and particular area of the seams mined.

Coal is extracted from Hongchang coal mine using the “room and pillar” method, in which a coal stratum is divided into horizontal planes and the coal is removed from each plane while leaving “pillars” of un-mined materials as supports, working from the uppermost plane down. Each plane is further divided into grids to determine the optimal pillar placements. Drilling and blasting techniques are used to extract the coal.

All raw coal is loaded and transported by a chain conveyor into crates which are carried out to the surface by an electrical winch. Each crate carries approximately 2.5 metric tons, and approximately 400 crates are carried to the surface during each 8-hour mining shift. Rock material is used for floor ballast with the excess sent to the surface for disposal. Air compressors are provided for underground air tool use. Electrical power is supplied from our own power stations as well as from the Baofeng Power Bureau through state-owned power lines, and supplied to the underground work site through a double-circuit cable designed to mitigate and circumvent potential power supply disruptions.

Normal water inflow into Hongchang coal mine is controlled by a system of ditches, sumps, pumps and drainpipes installed throughout the mine tunnels. The mine’s ventilation system includes an exhaustive fan on the surface of the main incline. Auxiliary fans are used as needed. The present mine fan is capable of satisfying ventilation demands of the mining operation.

The extracted coal is trucked to our processing plant located nearly (approximately 1.5 kilometers from Hongchang coal mine) for washing and sorting at our coal washing facility. Samples are taken prior to and after the coal washing process to analyze and determine coking readiness based primarily on moisture, ash, sulfur and volatile contents. We use washed coal that meets certain chemical and thermal requirements to make coke, although we may also sell some to customers.

Approximate annual production volumes of raw coal from Hongchang coal mine for the years ended June 30, 2009, 2010 and 2011 are as follows:

Fiscal Year	Annual Purchases (metric tons)
2009		260,938
2010		242,878
2011		132,449

In December 2009, the Henan provincial government issued a mandate to consolidate coal mines with annual production capacity below 300,000 metric tons, spurred by the central government’s decision to consolidate China’s coal industry in order to improve production efficiency and reduce coal mine accidents. In late June 2010, a temporary mining moratorium was imposed throughout Henan to facilitate an industry-wide coal mine safety inspection before mine consolidations can be finalized. As a result, all mining operations throughout Henan have more or less halted, although we have been operating Hongchang coal mine at approximately 50% capacity since the moratorium was imposed, and continue to do so through the date of this Report. On August 1, 2011, Hongchang coal mine and Xingsheng coal mine received safety clearance from mining engineers and safety experts of Henan Coal Seam Gas to resume full operations, and both mines are currently undergoing operational and safety upgrades. We are also preparing Shunli coal mine and Shuangrui coal mine for their safety clearance, although we do not know when we can receive such clearance, if at all.

Coal Trading

In addition to mining coal, we also engage in coal trading for profit. Depending on market conditions, we may broker coal from small independent mine operators in our surrounding areas that may lack the means to transport coal from their mine sites or are otherwise unable to sell their coal due to the size of their operations. If purchased coal meets requirements for coking, we will generally use it to produce coke; otherwise, we hold and sell the coal when market conditions are favorable. Given the provincial-wide mining moratorium, however, we only traded coal periodically from January 2011 to June 2011, primarily with two mine operators. Although also subject to the mining moratorium, these mine operators were able to have limited operations at their coal mines and to sell from their coal inventory.

Our total annual coal purchases from third parties for the years ended June 30, 2009, 2010 and 2011 are as follows:

Fiscal Year	Annual Purchases (metric tons)
2009		169,100
2010		336,014
2011		325,550

Coal Washing

We operate a coal-washing facility at our plant site that is capable of processing up to 750,000 metric tons of coal per year. Under current Chinese coking industry standards, raw coal with no more than 1% sulfur content is deemed suitable for coking, although other factors are also considered. In addition to low sulfur content, the industry preference is for lower ash content and volatile matters. While much of the coal that we extract is generally suitable for coking based on these parameters, the coal must nevertheless be washed before it is ready for the coking ovens, in order to reduce ash and sulfur content, and to increase thermal value. We use a water-based jig washing process, which is prevalent in China, and use both underground and recycled water. Sorting machines that can process up to 600 metric tons per hour sort the washed coal according to size. Washed coal is also typically blended with other coal in order to achieve the proper chemical composition and thermal value for coking.

Approximately 1.33 - 1.38 metric tons of raw coal yield 1 metric ton of washed coal. The bulk of the washed coal produced is intended for our coking plant, although on occasion we sell certain amounts if the pricing is favorable. In addition to washed coal, the coal-washing process produces two byproducts:

“Medium” coal (sometimes referred to as “mid-coal”), a PRC coal industry classification, is coal that does not have sufficient thermal value for coking, and is mixed with raw coal and even coal slurries, and sold for electricity generation, and domestic and industrial heating applications; and

Coal slurries, sometimes called coal slime, are the castoffs and debris from the washing process. Coal slurries can be used as a fuel with low thermal value, and are sold “as is” or mixed with “medium” coal to produce a blended mixture.

Our approximate annual production volumes of washed coal and the two byproducts of the coal-washing process for the years ended June 30, 2009, 2010 and 2011 are as follows:

	Annual Production (metric tons)
Fiscal Year	Washed Coal		Medium Coal*		Coal Slurries*
2009		243,958		32,800		40,100
2010		217,852		43,570		29,047
2011		107,526		35,852		17,926

* Estimated by management based on quantities of raw coal used as input for coal washing operations.

Coke Manufacturing

Coke is a hardened, solid carbonaceous residue derived from low-ash, low-sulfur bituminous coal from which the volatile constituents are driven off by baking in an oven without oxygen at high temperatures so that the fixed carbon and residual ash are fused together. Volatile constituents of the coal include water, coal-gas, and coal-tar. We produce two types of coke: metallurgical coke and chemical coke.

Metallurgical coke is primarily used for steel manufacturing. Chemical coke, commonly referred in China to as gas coke, is mainly used in China to produce synthesis gas, a gas mixture largely of hydrogen and carbon monoxide that is combustible and often used as a fuel source or as an intermediate for the production of other chemicals including methanol, formaldehyde and ammonia. China has exacting national standards for coke, based upon a variety of metrics, including most importantly, ash content, volatilization, caking qualities, sulfur content, mechanical strength and abrasive resistance. Typically, metallurgical coke must have more than 80% fixed carbon, less than 15% ash content, less than 0.8% sulfur content and less than 1.9% volatile matter. Chemical coke, on the other hand, must have more than 80% fixed carbon, less than 18% ash content, less than 1% sulfur content and less than 3% volatile matter. According to national standards, metallurgical coke is classified into three grades – Grade I, Grade II and Grade III, with Grade I being the highest quality – and chemical coke is its separate grade. Generally, customers do not provide specifications for coke, except that we may occasionally make requested adjustments, for instance to moisture content, as requested by customers from time to time. The amount of each type of coke that we produce is based on market demands, although historically our customers have mostly required Grade II metallurgical coke which has higher profit margin than other types of coke. Our productions of each grade of coke as a percentage of our total coke production for the years ended June 30, 2009, 2010 and 2011 are as follows:

	Annual Coke Production (%)
Fiscal Year	Metallurgical Coke						Chemical Coke
	Grade I		Grade II		Grade III
2009		0		76.96		15.57		7.47
2010		0		100		0		0
2011		0		100		0		0

Metallurgical coke and chemical coke are produced using an identical manufacturing process. At our current plant, we produce coke from a series of three WG-86 Type coke ovens lined up in a row with an annual capacity of 250,000 metric tons. Our metallurgical coke has typical characteristics of 85% fixed carbon, less than 12% ash, less than 1.9% volatile matter and less than 0.7% sulfur. Our chemical coke, on the other hand, has typical characteristics of more than 80% fixed carbon, less than 18% ash, less than 3% volatile matter and less than 0.8% sulfur.

After being processed at our coal-washing facility, coal is sent to a coal blending room where it is crushed and blended to achieve an optimal coking mixture. Samples are taken from the coal blend and tested for moisture, chemical composition and other properties. The crushed and blended coal is transported by conveyor to a coal bin to be fed into the waiting oven below. After processing through the three temperature-controlled ovens at temperature of 1200° C (2,192° F), hot coke is pushed out of the oven chamber onto a waiting coke cart, transported to an adjacent quench tower where it is cooled with water spray, and hauled to a platform area adjacent to our private rail line to be air-dried. Coke samples are taken at several stages during the process and analyzed in our testing facility, and data is recorded daily and kept by technicians. After drying, the coke is sorted according to size to meet customer requirements.

Our annual production volumes of metallurgical coke and chemical coke for the years ended June 30, 2009, 2010 and 2011 are as follows:

	Annual Production (metric tons)
Fiscal Year	Metallurgical Coke		Chemical Coke		Total
2009		143,092		11,550		154,642
2010		138,417		0		138,417
2011		156,785		0		156,785

Substantially all of the coal that we extract that is suitable for coking is used to make coke after the coal washing process. When the amount of metallurgical-quality coal that we extract is not sufficient for our full production capacity, we will source additional coal from third parties.

The Pingdingshan Bureau of Land and Resources is requiring coking factories with a furnace height of less than 4.3 meters to phase out their operations in the next two to three years. As the two sets of coking furnaces in our existing coking plant are 3 meters in height, we plan to upgrade and retrofit them to 5.5 meters in height in the next two years. Our new coking facility will also have furnaces that exceed these regulatory standards (see “Expansion Plans – New Coking Facility” below).

Coke Emissions Recycling

During the coking process, coal’s volatile contents, including water and coal tar, are driven off in gaseous forms when heated in the coke oven. Rather than allowing this coal gas to be emitted into the environment, we capture it for recycling. In the recycling process, coal gas is captured and piped into a cooling tower, where coal tar is separated out by condensation, and sold to dealers as a fuel byproduct (see “Coal Byproducts” below). We use the remaining purified coal gas to generate electricity, by burning it as a fuel to generate steam that drives steam-powered turbines (see “Electricity Generation” below).

Coal Byproducts

As described above, we derive coal tar from the condensation of coal gas. Coal tar is an ingredient of coal tar pitch used in the aluminum industry, and can be further refined to create chemicals and additives such as fine phenol, fine naphthalene and modified pitch that can be used as raw material in making concrete sealant, wood treatment compounds, agricultural pesticides and other chemical products. The coal tar industry in China is currently fragmented and populated with many small producers.

Our annual production volumes of coal tar for the years ended June 30, 2009, 2010 and 2011 are as follows:

Fiscal Year	Annual Production (metric tons)
2009		7,510
2010		5,239
2011		13,810

Other coal byproducts of the coking process include benzene, sulfur-based chemicals and methanol, which our current plant does not produce.

Electricity Generation

After coal tar is separated, the resulting purified coal gas is piped to two onsite 3,000-kilowatt power stations (the Daying power station and the Sunling power station) to generate electricity, each of which has an estimated maximum generating capacity of 26,280,000 kilowatt-hours per year. The electricity that is generated is used primarily to power operations at our current coking plant and at Hongchang coal mine and Shunli coal mine. Electricity for Xingsheng coal mine and Shuangrui coal mine is purchased from Baofeng Power Bureau, a local state-owned electric utility provider.

Our annual amounts of electricity generated for the years ended June 30, 2009, 2010 and 2011 are as follows:

Fiscal Year	Annual Generation (kilowatt)
2009		6,251,326
2010		5,678,168
2011		9,410,144

Expansion Plans

New Coking Plant. On March 3, 2010, we commenced construction of a new state-of-the-art coking plant on a 460,000 square meter site adjacent to our current plant in Pingdingshan. As of the date of this Report, we have completed construction of the shallow foundation, an underground workshop and the furnace and chimney rack, and are in the process of building furnaces and installing equipment and machineries. We currently expect to complete the plant and commence operations by the end of calendar year 2011. When completed as planned, this new plant is expected to have an estimated coke-producing capacity of up to 900,000 metric tons per year, as well as the ability to generate power and distill chemicals such as crude benzol, sulfur and ammonium sulfate from the coking process. The new plant is also expected to produce purified coal gas. Our plans to provide the coal gas as a fuel source to local residents through the state-owned gas grid have received approval from the authorities of Daying County, and we currently plan to offer the coal gas at a price per thermal equivalent unit that is estimated to be 20% less than the current price of liquid natural gas, a competing alternative.

Mine Acquisition Program. On May 20, 2011, the transfers to us of 60% of the equity interests of Shuangrui Coal and Xingsheng Coal, and 100% of the equity interests of Shunli Coal, were completed. Our payment to the owners of Xingsheng Coal and Shunli Coal have been made in full, while a payment to the owners of Shuangrui Coal of approximately $0.15 million (RMB 1 million) remains outstanding as of the date of this Report. The coal mines controlled by these three companies are currently subject to the provincial-wide mining moratorium and are therefore not in operations, although Xingsheng coal mine has received safety clearance to resume coal production. We intend to transfer our equity interests in these three companies to Hongyuan CSG, although such transfer has not been carried out as of the date of this Report.

Between May 2010 and September 2010, we also made refundable deposits of approximately $20,905,922 (RMB 135,138,476) in the aggregate to four other coal mine companies to potentially acquire them. However, we have recently abandoned such plans when such companies were assigned by the provincial government to be acquired by a state-owned consolidator. Pursuant to our agreements with their owners entered into in August 2011, approximately $7.5 million (RMB 50 million) of our deposits was returned to us in August 2011, with the balance of approximately $13,405,922 (RMB 85,138,476) to be returned to us in full by December 31, 2011.

Sales and Marketing

With respect to the sale of coal and coke products, we typically enter into non-binding annual letters of intent that set forth current year supply quantities, suggested pricing, and monthly delivery schedules with our customers at the beginning of each calendar year. The terms of the letters of intent are usually negotiated during the Annual National Coal Trading Convention organized by the China Coal Transport and Distribution Association. A significant portion of our sales during fiscal 2009 to fiscal 2011 were made through attendance at this convention. Changes in delivery quantity and pricing, which is based on open market pricing at the time of delivery, must be documented in a final written contract on a 30-day advance notice submitted by the party making the change and accepted by the other party. Almost all of our current customers enter into these non-binding annual letters of intent, and are generally required to make payment upon delivery of each shipment. Other customers are asked to prepay for their orders. In pricing our products, we consider factors such as the prices offered by competitors, the quality and grade of the product, the volume in national and regional coal inventory build-up and forecasted future trends for coal and coke prices. The remaining portion of our sales is derived from purchase orders placed by customers throughout the year when they require additional coal and coke products.

We have a flexible credit policy, and adjust credit terms for different types of customers. Depending on the customer, we may allow open accounts, or require acceptance bills or cash on delivery. We consider the creditworthiness and the requested credit amount of each customer when determining the appropriate payment arrangements and credit terms, which generally do not exceed a period over 90 days. We evaluate the creditworthiness of potential new customers before entering into sales contracts and reassesses customer creditworthiness on an annual basis. For customers without an established history, we require immediate settlement of accounts upon delivery.

Coke Sales. Our annual coke sales for the years ended June 30, 2009, 2010 and 2011, in volume, dollar amount and as a percentage of our total revenue, and the weighted average selling price per metric ton for each fiscal year, are as follows:

	Coke Sales
Fiscal Year	Annual Sales* (metric tons)		Annual Sales* ($)		% of Revenue			Weighted Average Price Per Metric Ton ($)
2009		154,631	$	30,534,755		59	%	$	197
2010		132,911	$	27,650,175		47	%	$	208
2011		154,553	$	35,970,933		48	%	$	233

Includes sales of metallurgical coke and chemical coke.

Raw Coal Sales. Our annual raw coal sales for the years ended June 30, 2009, 2010 and 2011, in volume, dollar amount and as a percentage of our total revenue, and the weighted average selling price per metric ton for each fiscal year, are as follows:

	Raw Coal Sales
Fiscal Year	Annual Sales* (metric tons)		Annual Sales* ($)		% of Revenue			Weighted Average Price Per Metric Ton ($)
2009		229,480	$	13,151,325		26	%	$	58
2010		369,379	$	22,964,448		39	%	$	62
2011		207,272	$	15,073,052		20	%	$	73

Includes raw coal extracted from Hongchang coal mine and purchased as part of our coal trading activities, and raw coal/medium coal/coal slurry mixtures. Excludes any raw coal we used internally as raw material to produce washed coal and coke.

The weighted average price per metric ton shown in the table above reflects the weighted average price per metric ton of raw coal that we sold in the periods shown. Sales prices per metric ton are influenced largely by the quality and composition of the coal sold. Generally, the thermal value of the coal, together with its chemical composition and other properties such as moisture, ash, sulfur, and other chemical content, affect the price at which we can sell coal. Sale prices for raw coal are also affected by general market conditions, supply and demand.

Washed Coal Sales. Our annual washed coal sales for the years ended June 30, 2009, 2010 and 2011, in volume, dollar amount and as a percentage of our total revenue, and the weighted average selling price per metric ton for each fiscal year, are as follows:

	Washed Coal Sales
Fiscal Year	Annual Sales (metric tons)		Annual Sales ($)		% of Revenue			Weighted Average Price Per Metric Ton ($)
2009		55,360	$	6,538,402		13	%	$	118
2010		55,598	$	7,088,124		12	%	$	127
2011		111,244	$	19,885,495		27	%	$	179

The weighted average price per metric ton shown in the above table reflects the weighted average price per metric ton of washed coal that we sold in the periods shown. Our sales prices per metric ton of washed coal are heavily influenced by the quality and composition of the coal sold. Washed coal prices are also influenced by general market conditions in the washed coal market, such as aggregate supply and demand. As a result of tight coal supply brought on by the mining moratorium, the price of washed coal, irrespective of quality, generally held strong for the year ended June 30, 2011.

Coal Tar Sales. Our annual coal tar sales for the years ended June 30, 2009, 2010 and 2011, in volume, dollar amount and as a percentage of our total revenue, and the weighted average selling price per metric ton for each fiscal year, are as follows:

	Coal Tar Sales
Fiscal Year	Annual Sales (metric tons)		Annual Sales ($)		% of Revenue			Weighted Average Price Per Metric Ton ($)
2009		7,646	$	1,171,510		2	%	$	153
2010		6,182	$	1,324,743		2	%	$	214
2011		13,810	$	3,358,513		5	%	$	243

We produce coal tar as a byproduct of the coking process. However, we currently do not have a separate process for refining and preparing coal tar to create a homogenous coal tar product. Accordingly, the quality and characteristics of coal tar produced varies from time to time (depending on inputs), based on such factors as thermal value, and moisture, ash, sulfur, and other chemical contents, and this affects the price at which we can sell our coal tar. The price of coal tar that we sell is also affected by overall market demand and supply, which is influenced by a variety of factors which may include higher prices for oil and oil derivatives, and stronger demand for construction materials, fertilizers, and related industrial chemicals.

Customers

We sell all of our products within China. Our three biggest customers collectively accounted for approximately 74.6% of our total revenue for fiscal 2011 as follows:

Wuhan Railway Zhongli Group accounted for approximately $28.2 million in revenue, representing approximately 38.00% of total revenue;

Daye Xinye Special Steel Co., Ltd. accounted for approximately $15.8 million in revenue, representing approximately 21.35% of total revenue; and

Wuhan Tieying Trading Co., Ltd. accounted for approximately $12.0 million in revenue, representing approximately 15.22% of total revenue.

By product types, for fiscal 2011:

Wuhan Railway Zhongli Group was our largest coke customer, accounting for 55.41% of total coke sold;

Wuhan Tieying Trading Co., Ltd. was our largest coal customer, accounting for 34.46% of total coal sold (including both raw and washed coal); and

Mr. Fashun Wang, was our largest coal tar customer, accounting for 25.74% of total coal tar sold.

None of these customers are related to or affiliated with us. Our sales personnel conduct routine visits to our customers. We have long-standing relationships with our customers, and management believes that our relationships with them are stable.

Transportation and Distribution

We own and operate a private rail track of 4.5 kilometers in length that connects our current plant to the national railway system at both the East Pingdingshan Railway Station and the Baofeng Railway Station. Industrial loaders load coal and coke from our platform onto railcars to be transported to customers primarily in central and southeastern China in the provinces of Henan, Hubei, Hunan and Fujian. Our private railway allows us to exercise control over the transportation cost and delivery execution of our products. See also “Property, Plant and Equipment – Railway Assets” below.

Customers can also arrange for trucks to take delivery of products from our plant site.

Competitors

We compete primarily with coal and coke producers in the central, eastern and southern regions of China. Coke competitors range from Shanxi Coking Co., Ltd., a national coke producer, to local operations like Hongyue Coke Factory, Dongxin Coke Factory and Hongjiang Coke Factory. We also compete with China Pingmei Shenma Group (“China Pingmei”), a Pingdingshan-based state-owned coke and coal producer with similar product-mix as us. China Pingmei is also the largest regional coal producer and one of Henan’s six state-owned coal mine consolidators, all of whom are our competitors in the coal market. Competitive factors include geographic location, quality (i.e. thermal value, ash and sulfur content, washing and processing, and other characteristics), and reliability of delivery.

Suppliers

We purchase from various suppliers within China. Our three biggest suppliers, none of whom is related to or affiliated with us, collectively accounted for approximately 32.90% of our total purchases from suppliers for fiscal 2011 as follows:

Hongfeng Coal Processing and Coking Co., Ltd., a supplier of raw and processed coal, accounted for approximately 11.47% of total purchases;

Gansu Senbao Coal Co., Ltd., a supplier of raw coal, accounted for approximately 10.96% of total purchase; and

Shanxi Xinsheng Coal Co., Ltd., a supplier of raw coal, accounted for approximately 10.64% of total purchase.

As with our coke and coal sales, we meet our coking coal needs by entering into non-binding annual letters of intent with suppliers that set forth supply quantities, suggested pricing and monthly delivery schedules at the beginning of the year. Subject to changes in delivery quantity and pricing, which is based on the open market price of metallurgical coal at the time of delivery and agreed to by the parties, we generally make payment upon each delivery throughout the year.

In September 2010, we entered into an agreement with Zhengyun Coal Distribution Co., Ltd. (“Zhengyun Coal”) to purchase up to 3 million metric tons of raw and washed coal annually. Zhengyun Coal is a subsidiary and the sales division of Zhengzhou Coal Industry Group, a Shanghai Stock Exchange listed company (ticker 600121) and one of the six state-owned coal mine consolidators in Henan. Since the mining moratorium, Zhengyun Coal’s priority, like all other state-owned coal producers, has been to supply to state-owned coal users like power plants, steel mills and coking factories. We have accordingly halted our purchases from Zhengyun Coal since December 2010, but expect to resume once the mining moratorium lifts and coal supply can normalize to pre-moratorium level.

We believe that we have established stable cooperative relationships with our suppliers. In light of the mining moratorium, we have been sourcing coal from outside of Henan. During the year ended June 30, 2011, about 40% of our coal purchases were from outside Henan.

Our other principal raw materials include water, which is provided without charge in the form of treated underground water by the operator of the nearby Hangzhuang coal mines, and electricity, most of which is generated onsite from our own power stations and which is supplemented from the local state-owned utility as needed. We also require wood and steel for our operations, and source these materials from nearby suppliers on a per purchase order basis. These materials are readily available and there is no shortage of suppliers to choose from.

Employees

The following table sets forth the number of our employees for each of our areas of operations and as a percentage of our total workforce as of June 30, 2011:

	Number of Employees		% of Employees
Coal-related operations		466		67.63	%
Coke-related operations		194		28.16	%
Sales and marketing		6		0.87	%
Administrative (including management)		23		3.34	%
TOTAL		689		100.0	%

Since December 31, 2009, our management made certain changes to personnel job descriptions resulting in a reduction in the number of employees categorized as “administrative or executive.” As we are operating at limited capacity as a result of the mining moratorium, both Hongchang coal mine and the coking plant currently operate year round in two shifts of eight hours per day. Once our coal mines resume full operations, we will operate in three shifts of eight hours per day. In compliance with the Employment Contract Law of PRC, we have written contracts with all of our employees. We consider our relationship with our employees to be good.

Research and Development

As of June 30, 2011, we did not conduct any research and development activities. We do plan to initiate a program focusing on the extraction of chemicals from coal, and the anticipated costs and benefits of the production and sale of such byproducts are being considered.

Intellectual Property

We have no patents, trademarks, in-bound or outbound licenses, franchises, or royalty arrangements.

Relevant PRC Regulations

We operate in an industry that is highly regulated by local, provincial and central government authorities in the PRC. Applicable regulations include those relating to safety, production, environmental, energy use and labor. While it is not practicable to summarize all applicable laws, the following is a list of names of significant laws and regulations that apply to our business:

Laws and regulations concerning safety of coal mines:

Law of the People’s Republic of China on the Coal Industry

Regulation on Work Safety Licenses

Measures for Administration of Coal Production License

Regulations on Administration of Village’s and County’s Coal Mines

Law of Mine Safety

Production Safety Law, which applies to production activities in general

Law of the Coal Industry

Regulations on Coal Mine Safety Supervision and Inspection

Regulations on Coal Mine Explosives Control

Special Provisions for the Prevention of Coal Mine Incidents

Requirements for Basic Production Conditions for Coal Mines

Penalties for Coal Mine Safety Violations

Penalties for Production Safety Violations

Laws and regulations concerning environmental protection and energy conservation:

Law of the Prevention and Control of Solid Waste Environmental Pollution, which applies to entities whose production activities may generate pollutive solid waste

Law of the Prevention and Control of Atmospheric Pollution, which set restrictions in coal burning and emissions that cause air pollution

Mineral Resources Law, which regulates the extraction of mineral resources including coal

Law Regarding the Prevention and Control of Water Pollution, which regulates pollution of underground water caused by mining activities

Land Administration Law, which restricts mining activities on agricultural land

Law of Prevention and Control of Radioactive Pollution, which regulates and prohibits the release of radioactive pollution caused by certain mining activities

Laws of Water and Soil Conservation, which regulates mining activities with the aim of preventing soil erosion

Environmental Protection Law, which contains certain general provisions that apply to the operation of coal mines

Laws and regulations concerning labor:

Labor Law, which protects workers, and contains provisions that apply to a broad range of industries including the mining industry

Labor Contract Law of the People’s Republic of China and its implementation, which protect workers, and contains laws that apply to a broad range of industries including the mining industry

Environmental Protection Measures

We incorporate measures to reduce the environmental impacts of our operations. Our large-sized furnace reduces the frequency of coal loading and trundling, thereby reducing the amount of dust and soot that is generated. We capture coal gas emitted during the coking process to generate electricity which we use in our operations. We also recycle water - water that is used for coal washing is treated to remove phenol and other contaminants, and then re-used in the coal washing operation. We also use recycled water, in the form of treated underground water, to quench coke and for our power stations, which is provided without cost by the nearby Hanzhuang coal mines, which mining rights are owned and operated by unrelated third parties. Additionally, we use sound insulation to reduce noise pollution, and we plant vegetation throughout our plant to help mitigate the environmental impact of our operations.

Safety

Management believes that we are in material compliance with all laws and regulations that are applicable to us, including safety laws and regulations. Our mining operations employ an automatic hazard detection system as required by the PRC government, which includes air monitoring, automatic power shut-down, and underground worker tracking systems. Companies with mining operations are required to report violations or mining incidents and casualties to the government authorities. Since inception, except for ordinary and minor injuries, we have suffered no major accidents and no casualties in connection with our mining operations, and have not suffered any reportable incident. Under PRC law, companies with mining operations are subject to random and periodic safety inspections by government mine regulators. Since inception, we have not been found to be in material violation of any mining regulations. As we have no record of violations or mining incidents, management considers our safety record to be excellent.

Property, Plant and Equipment

The location of Pingdingshan, where we are based, is illustrated below:

The locations of our executive office, current coking plant and coal mines, are all in and around Pingdingshan, and are illustrated below:

Coal Mines and Production Facilities

All four coal mines that we currently control are located at Baofeng County in the central part of Henan Province and are in close proximity to one another as well as to roadways. All of the mines are underground mines, and we utilize room-and-pillar method to extract coal. We plan to conduct exploration and development activities for each mine once its amount of extracted coal approaches its maximum estimate amount of proven and probable reserves.

The principal pieces of equipment used in our mining operations, including a safety system, an underground transportation system and a loading system, are manufactured in the PRC, and they generally have an estimated useful life of 15 years. The estimated total annual cost of operating the four coal mines, based on an average output of 750,000 metric tons per year in the aggregate, is approximately $41.25 million per year, or approximately $55 per metric ton of coal produced.

We intend to transfer all of our coal mining operations to Hongyuan CSG. As of the date of this Report, however, such transfers have not been carried out.

Hongchang Coal Mine

Hongchang coal mine originally consisted of four underground mines: Yongshun mine, Liangshuiquan mine, Zhaoxi secondary mine and Zhaozhuang Tanglishu mine. These mines were positioned adjacent to one another, and although once owned and operated by different parties, these mines made use of common passageways and mine shafts. In June 2005 we acquired Yongshun mine (built in 1996) and Zhaoxi secondary mine (built in 1988) from Quinmin Chen. Also in June 2005, we acquired Liangshuiquan mine (built in 1984) from Minjie Li. In April 2005 we acquired Zhaozhuang Tanglishu mine (built in 1984) from Liuqing He and Jiti Li. We assumed the ongoing mining operations, and initiated the consolidation, of these mines, which consolidation process was completed in 2006. Since acquisition in 2005, we have extracted a total of 1,119,430 metric tons of coal from Hongchang coal mine, and prior to such time, its predecessor owners extracted a total of 345,000 metric tons.

We have been operating Hongchang coal mine at 50% capacity since late June 2010 as a result of the mining moratorium. On August 1, 2011, we received clearance to resume operations of Hongchang coal mine at full capacity from the mining engineers and safety experts of Henan Coal Seam Gas. Hongchang coal mine is currently undergoing operational and safety upgrades and has not resumed full operation as of the date of this Report.

Shuangrui Coal Mine

Shuangrui coal mine originally consisted of five underground mines: Zhaozhuang mine (built in 1970), Longsheng mine (built in 1995), New Zhaozhuang mine (built in 2000), Jinpo mine (built in 1999) and West Zhaozhuang mine (built in 1998). The first on-site geological survey for mining purpose of these mines was conducted in 1950s, with several subsequent surveys carried out from 1960s to 2001. In August 2010, we entered into an agreement to acquire 60% of the mine’s operator, Shuangrui Coal, and the registration for the transfer of such equity interests to Hongli was completed on May 20, 2011. Shuangrui coal mine has had no operations since the mining moratorium and is currently undergoing safety upgrades.

Xingsheng Coal Mine

Xingsheng coal mine originally consisted of No. 2 Qingnian mine (operation started in 2000) and No. 3 Shuangyushan mine (operation started in 1998). The first on-site geological survey for mining purpose of these mines was conducted in 1958. The coal extracted from Xingsheng coal mine is bituminous coal which is suitable for coke production. In August 2010, we entered into an agreement to acquire 60% of the mine’s operator, Xingsheng Coal, and the registration for the transfer of such equity interests to Hongli was completed on May 20, 2011. Like Hongchang coal mine, Xingsheng coal mine was cleared to resume operations on August 1, 2011. Xingsheng coal mine is currently undergoing operational and safety upgrades, and has not resumed operation as of the date of this Report.

Shunli Coal Mine

Shunli coal mine originally consisted of Dongfanghong mine (built in 1995) and Zhenxing mine (built in 1998). The first on-site geological survey for mining purpose of these mines was conducted in 1950s. In May 2011, we entered into an agreement to acquire 100% of the mine’s operator, Shunli Coal, and the registration for the transfer of such equity interests to Hongchang was completed on May 20, 2011. Shunli coal mine has had no operations since the mining moratorium and is currently undergoing safety upgrades.

Additional information regarding these mines is listed below:

	Hongchang Mine (6)		Shuangrui Mine (9)		Xingsheng Mine (12)		Shunli Mine (15)
Background data:
Commencement of construction	1984		1970		1970		1995
Commencement of commercial production	1987		1970		1998		1998
Coalfield area (square kilometers)	0.65		0.47		0.19		0.08
Reserve data:(1)
Total in-place proven and probable reserves (metric tons) (2)	2,479,000	(7)	1,674,000	(10)	2,475,000	(13)	1,373,300	(16)
Recoverable reserves (metric tons) (3)	1,215,100		1,539,000		2,233,000		1,122,000
Coal washing recovery rate (%) (4)	75		75		75		75
Depth of mining (meters underground)	10 – 210		40 - 270		80 - 90		100 - 130
Average thickness of main coal seams (meters)	Seam B1: 1.14 Seam A4: 5.50 (8)		6.78		Seam A4: 0.70 – 1.08 Seam B1: 4.50 – 14.40 (14)		Seam A4: 2.0 Seam A6: 1.6 Seam B1: 6.5 – 10.2 (17)
Type of coal	Thermal/Metallurgical		Thermal/Metallurgical		Thermal/Metallurgical		Thermal/Metallurgical
Leased/owned	Owned		Owned		Owned		Owned
Assigned/unassigned (5)	Assigned		Assigned		Assigned		Assigned
Sulfur content (%)	Seam B1: 2.64 Seam A4: 0.55		Seam B1: 0.55 (11)		Seam A4: 4.90 Seam B1: 0.55		Seam A4: 1.50 Seam A6: 0.87 Seam B1: 0.55
Water content (%)	Seam B1: 0.83 Seam A4: 1.5		Seam B1: 1.5		N/A		Seam A4: 1.50 Seam A6: 1.08 Seam B1: 1.50
Ash content (%)	Seam B1: 15.3 Seam A4: 14.0		Seam B1: 14		Seam A4: 18.64 Seam B1: 14.00		Seam A4: 16 Seam A6: 33.44 Seam B1: 15
Volatility content (%)	Seam B1: 32.5 Seam A4: 29.0		Seam B1: 29		Seam A4: 38.45 Seam B1: 33.15		Seam A4: 32 Seam A6: 20.59 Seam B1: 29
Thermal Value (megajoules per kilogram)	31.9		28.5		31.2		Seam A4: 30.10 Seam A6: 18.56 Seam B1: 31.30
Production data: (metric tons)
Designed raw coal production capacity (per year)	150,000		150,000		150,000		150,000
Raw coal production:
2009	260,938		150,000		150,000		150,000
2010	242,878		150,000		150,000		150,000
2011	186,226		1,020		67,981		0
Cumulative raw coal production as of June 30, 2011	690,042		301,020		367,981		300,000

(1)

The reserve data including (i) total in-place proven and probable reserves, (ii) mining and coal preparation plant recovery rates; (iii) depth of mine; and (iv) average thickness of main coal seam are based on the relevant information from the mining report of each mine issued by our provincial mining authorities, the Regional Geological Survey Team of the Henan Bureau of Geology and Mineral Exploration and Development, and records of the Company. Non-accessible reserves are defined as the portion of identified resources estimated to be not accessible by application of one or more accessibility factors within an area. We note that the degree of assurance between what would meet the definition of “proven reserves” on the one hand, and “probable reserves” on the other hand, cannot be readily defined. Accordingly, pursuant to the SEC’s Industry Guide 7 – Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations, in the table above we report proven and probable reserves on a combined basis.

(2)

In-place reserves refer to coal in-situ prior to the deduction of pillars of support, barriers or constraints.

(3)

Recoverable reserves refer to identified coal reserves that are technologically and economically feasible to extract prior to the deduction of losses during extraction. We note that the estimated recoverable reserves is a government estimate created and used by local mining authorities to determine permissible extraction rates, the duration of our mining license, and to approve mine designs and that it is subject to revision. We also utilize this estimate for accounting purposes, to amortize our mining rights. Currently estimated recoverable coal may not necessarily be consistent with the results of future mining, engineering and feasibility studies or reports.

(4)

Coal washing recovery rate refers to the rate of recovery of coal in the production of our washed coal products.

(5)

“Assigned” reserves refer to coal which has been committed to a particular mining complex (mine shafts, mining equipment, and plant facilities), and all coal which has been leased by the company to others. “Unassigned” reserves refer to coal which has not been committed, and which would require new mineshafts, mining equipment, or plant facilities before operations could begin on the property.

(6)

The mining report of Hongchang coal mine is dated November 2005 (the “Hongchang Mining Report”).

(7)

According to the Hongchang Mining Report, Hongchang coal mine was initially found to have total estimated reserves and resources of 2.81 million metric tons. 334,000 metric tons were removed during exploration, leaving approximately 2.47 million metric tons of estimated reserves and resources.

(8)

Hongchang coal mine contains two major economically exploitable coal seams, referred to in this table as the “Seam B1” and the “Seam A4”.

(9)

The mining report of Shuangrui coal mine is dated February 17, 2006 (the “Shuangrui Mining Report”).

(10)

According to the Shuangrui Mining Report, Shuangrui coal mine was initially found to have total estimated reserves and resources of 4 million metric tons. 2.33 million metric tons were removed during exploration, leaving approximately 1.67 million metric tons of estimated reserves and resources.

(11)

Shuangrui Ming contains one major economically exploitable coal seam, referred to in this table as the “Seam B1.”

(12)

The mining report of Xingsheng coal mine is dated April 10, 2006 (the “Xingsheng Mining Report”).

(13)

According to the Xingsheng Mining Report, Xingsheng coal mine was initially found to have total estimated reserves and resources of 2.74 million metric tons. 260,000 metric tons were removed during exploration, leaving approximately 2.48 million metric tons of estimated reserves and resources.

(14)

Xingsheng coal mine contains two major economically exploitable coal seams, referred to in this table as the “Seam A4” and the “Seam B1.”

(15)

The mining report of Shunli coal mine is dated March 2, 2006 (the “Shunli Mining Report”).

(16)

According to the Shunli Mining Report, Shunli coal mine was initially found to have total estimated reserves and resources of 1.44 million metric tons. 647,000 metric tons were removed during exploration, leaving approximately 1.37 million metric tons of estimated reserves and resources.

(17)

Shunli coal mine contains three major economically exploitable coal seams, referred to in this table as the “Seam A4”, the “Seam A6”, and the “Seam B1.”

Mining Rights

Like all coal mines in the PRC, the four mines that we control, including the mine sites and the underlying coal and other minerals, are state-owned. Accordingly, the amount of coal that we can extract from each of mine is based on the mining permit issued to the mine’s operator by the Henan Province Bureau of Land and Resources (the “Henan Land Resources Bureau”). For example, we extract coal from Hongchang coal mine based on the permit issued to Hongchang Coal. Each permit is issued pursuant to a reserves appraisal report submitted by government authorized mining engineers, and upon approval of such report by the Henan Land Resources Bureau. The amount of coal that can be extracted under the permit represents what we can economically and legally extract under applicable PRC law and as determined by the Henan Land Resources Bureau.

The table below lists our current mining permits:

	Hongchang coal mine	Shuangrui coal mine	Xingsheng coal mine	Shunli coal mine
Issuance date	July 6, 2007	June 4, 2007	May 30, 2007	November 17, 2009
Expiration date (unless extended)	September 6, 2013	October 4, 2011 (1)	July 30, 2012	September 2011 (1)
Permitted mining amount (metric tons per year)	150,000	150,000	150,000	150,000
Exhaustion date (2)	2013	2016	2020	2013

(1) We intend to apply for extension of these permits once the mines have received clearance to resume operations.

(2) We calculate the exhaustion date for each mine based on the estimated recoverable reserves as stated in the reserves appraisal report for such mine and at the permitted extraction rate of 150,000 metric tons per year per mine.

Under our current mining permits, we are theoretically allowed to extract up to 8,001,300 metric tons of coal from the four coal mines, representing their aggregate estimated in-place proven and probable reserves. Out of such proven and probable reserves, 6,109,100 metric tons are recoverable according to the reserves appraisal reports for these mines.

We are also required to pay for the amount of coal that we wish to extract under each mining permit, generally determined on a per metric ton basis based on proven and probable reserves (rather than actual recoverable coal), as well as prevailing market prices as determined by the Henan Land Resources Bureau. In the event that further exploration results in an increase of estimated proven and probable reserves (and we desire to extract such additional reserves), or if we desire to continue mining beyond a mining permit’s expiration date, we must obtain an additional permit from the Henan Land Resources Bureau and may be subject to additional fees to acquire such permit or to modify an existing permit. We expect that the cost of further exploration in and around the four coal mines would be borne by us. We have been conducting additional geological studies around Hongchang coal mine, and expect to report our findings to the local mining authority. We note that the estimated 6,109,100 metric tons of recoverable reserves for the four coal mines in the aggregate is a government estimate created and used by local mining authorities to determine permissible extraction rates and the duration of our mining permits, and to approve mine designs, and is subject to revision. Currently estimated recoverable coal may not necessarily be consistent with the results of future mining, engineering and feasibility studies or reports.

In August 2007, we made a partial payment of approximately $0.6 million (RMB 4.46 million) to extract from Hongchang coal mine its 2,479,000 metric tons of total reserves. A final payment of approximately $0.4 million (RMB 2.7 million) is anticipated to become due when charged by the Henan Land Resources Bureau. The exact amount of this final payment, however, will depend on market prices as determined by, and our negotiations with, the Henan Land Resources Bureau.

Payments in connection with the mining permits for Shuangrui coal mine, Shunli coal mine and Xingsheng coal mine were made in full in 2005 by their then owners.

Railway Assets

Currently, we have rail assets consisting of approximately 4.5 kilometers of special purpose transportation railway tracks that serve to facilitate the transportation of coal and coke from our site to the national railway system, and ultimately to our customers. We do not own any railcars and locomotives, but instead pay access fees to the Ministry of Railways for the use of government-owned and operated railcars and locomotives. These railcars are loaded with coal and coke products at our yard for delivery through the national railway system.

ITEM 1A.

RISK FACTORS

The reader should carefully consider the risks described below together with all of the other information included in this Annual Report on Form 10-K (“Form 10-K”). The statements contained in or incorporated into this Form 10-K that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and an investor in our securities may lose all or part of their investment.

Risks Related To Our Business

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

The principal source of our revenue is from the sale of coal and coke within China, thus the business and operating results are highly dependent on domestic Chinese demand for coal and coke. The Chinese coal and coke markets are cyclical and exhibit fluctuation in supply and demand from year to year. They are subject to numerous factors beyond our control, including, but not limited to, general economic conditions in the PRC and fluctuations in industries with high demand for coal, such as the power and steel industries. These factors are also linked to or influenced by global economic conditions. Fluctuations in supply and demand for coal and coke affect their prices, which in turn affect our operating and financial performance. We have seen substantial price fluctuations in these commodities in the past and believe that such fluctuations may continue. The demand for coal and coke are primarily influenced by the pace of domestic economic growth and development, and the demand for coal and coke from the power, steel, and construction industries. The supply of coal and coke, on the other hand, are primarily affected by the geographic location of coal mines, the volume of coal and coke produced by the domestic and international coal suppliers, tariffs duties and trade controls, value-added taxes imposed on imports, international freight costs, and the quality and price of competing sources of coal and coke. Alternative fuels, such as natural gas, oil and nuclear power, and alternative energy sources, such as hydroelectric power, wind, geothermal and solar, also have influences on the market demand for coal and coke. Excess supply of coal or coke or significant reduction in the demand for our coal or coke by domestic power or steel producers may have an adverse effect on their prices, which would in turn cause a decline in our profitability. In addition, any significant decline in PRC domestic coal or coke prices could materially and adversely affect our business and results of operations.

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

Our mining and coking operations are inherently subject to changing conditions that can affect levels of production and production costs for varying lengths of time and can result in decreases in profitability. We are exposed to commodity price risk related to the purchase of diesel fuel, wood, explosives and steel. In addition, weather and natural disasters (such as earthquakes, landslides, flooding, and other similar occurrences), unexpected maintenance problems, key equipment failures, fires, variations in thickness of the layer, or seam, of coal, amounts of overburden, rock and other natural materials, variations in rock and other natural materials and variations in geological conditions can be expected in the future to have, a significant impact on our operating results. Prolonged disruption of production at the 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 and coke that could result in decreases in our profitability include:

sustained high pricing environment for 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, safety, labor and environmental requirements;

labor shortages; and

changes in the coal and coke market and general economic conditions.

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

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

exploration, exploitation and mining rights and licensing;

rehabilitation of mining sites after mining is completed;

recovery rate requirements;

industry-specific taxes and fees;

target of our capital investments;

pension funds appropriation; and

environmental and safety standards.

We believe that our operations are in compliance with applicable legal and regulatory requirements. However, there can be no assurance that the central, provincial or local governments in the PRC will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures by us to comply. We may face significant constraints on our ability to implement our business strategies or to carry out or expand business operations. We may also be materially and adversely affected by future changes in certain regulations and policies of the PRC government in respect of the coal or coke industry. New legislation or regulations may be adopted that may materially and adversely affect our operations, our cost structure or 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 Henan Province Pingdingshan Municipal Bureau of Land and Resources is requiring coking factories with a furnace height of less than 4.3 meters to phase out their operations in the next two to three years. As our existing coking furnace's height is 3 meters, we plan to upgrade and retrofit our coking furnace to 5.5 meters in height in the next two years, and we are buildings our new coking facility to have furnaces that exceed these regulatory standards.

We may not be able to resume our coal mining operations in the near future.

With the PRC government’s increasing concern regarding mine safety issues, particularly in light of several recent accidental explosions in coal mines (operated by other companies) due to inadequate internal safety measures, and the implementation of the State Council’s Regulation on Phase-out of Small Coal Mines, industry-wide coal mine safety inspections have been ongoing in Henan since June 2010. During the course of these inspections, all coal mines in Henan have been shut down, although we have been operating Hongchang caol mine at 50% capacity. On August 1, 2011, Hongchang coal mine and Xingsheng coal mine received clearance from mining engineers and safety experts of Henan Coal Seam Gas to resume coal production. Both mines are currently undergoing operational and safety upgrades and have not resumed full operations as of the date of this Report. We are also preparing Shuangrui coal mine and Shunli coal mine to meet government-set requirements on, among other things, coal mines’ conditions, coal reserve volume and mining equipment. However, we do not know when we can obtain clearance to resume operations at these mines.

This and future interruptions to our coal mining operations, albeit temporary, may have a material effect on our financial results and operations. 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 customers’ ability to use coal and may require our customers to significantly change operations or to incur substantial costs.

Our future success may depend substantially upon our ability to complete and operate the new coking plant.

A central element of our business plan involves the construction and operation of our new coking plant. We entered into several contracts with contractors and suppliers and commenced construction of this new plant and related facilities on March 3, 2010. As of the date of this Report, construction has not yet been completed. As of June 30, 2011, the total amount due under the above-described contracts for the plant construction was approximately $40,915,000, of which approximately $30,102,000 has been paid, and the remaining $10,813,000 will be paid based on construction progress. While we believe new operations resulting from the successful completion of the plant’s construction as planned will be profitable, prior to completion there can be no assurance that we will be able to operate the new plant profitably. The future profitability of our coking operations will also depend on our ability to secure washed coal on a cost-effective basis.

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

As a producer of coal and coke 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 environmental regulations or government orders, requiring such facilities to comply or cease operations.

Our 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 and coke if customers switch to sources of fuel with lower carbon dioxide emissions, which in turn could reduce the revenues of our businesses and have a material adverse effect on results of operations.

Demand for coal and coke and their respective prices are closely linked to consumption patterns of the power and steel industries in China. Any changes in consumption patterns could affect our operations and profitability.

Demand for coal and coke and the prices that we will be able to obtain for these products are closely linked to consumption patterns of the power generation and steel industries in China. These consumption patterns are influenced by factors beyond our control, including the demand for electricity; demand for steel; government regulation; technological developments and the location, availability, quality and price of competing sources of coal and coke; alternative fuels, such as natural gas, oil and nuclear power, and alternative energy sources, such as hydroelectric power, wind, geothermal and solar. Any reduction in the demand for coal or coke by the domestic power and steel industries may cause a decline in demand and revenue from our products which would reduce our profitability.

If transportation for our coal or coke becomes unavailable or uneconomic for our customers, our ability to sell our products 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 our products a less competitive source of energy or could make some of our offerings less competitive than other sources of coal or coke. We rely upon trucking, national, provincial and local highways and roadways, and the national railway system to transport our products. Regulation of, and the overall cost of using these forms of transportation may be outside of our control. Further changes in the accessibility and cost of these forms of transportation could affect our ability to deliver our products to our customers, and which, in turn, could affect the attractiveness of our products relative to competing alternatives. In addition, these modes of transportation depend upon the support of the national, provincial and local governments for their maintenance and operation, and their reliability will depend on the actions and resources of these governments.

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 for varying lengths of time. These conditions include weather and natural disasters (such as earthquakes, landslides, flooding, and other similar occurrences), unexpected maintenance problems, key equipment failures, fires, variations in thickness of the layer, or seam, of coal, amounts of overburden, rock and other natural materials, variations in rock and other natural materials and variations in geological conditions.

As with all companies that have coal mining operations, 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 coal output or the temporary suspension 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, our operations, like other coal mining and coking companies, could experience accidents that cause property damage and personal injuries. Although we have implemented safety measures at our operations, and provide on-the-job training for our employees, and, in accordance with relevant laws set aside approximately 9.6% of employees’ total remuneration for employees’ health insurance, there can be no assurance that industry-related accidents will not occur in the future.

We currently do not maintain fire, or other property insurance covering our properties, equipment or inventories. 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. Any uninsured losses and liabilities incurred by us could have a material adverse effect on our financial condition and results of operations. For instance, if it occurred, a major mining accident could prompt government-mandated closure of some or all of our mining operations, which would then require us to spend significant resources on remediation which could consume our available capital resources. Further, until such remediation is completed, we would be required to obtain our raw coal inputs from other third party suppliers at a higher price, which would adversely affect our gross margins on coal and coke products. Although the likelihood of a major mining accident is extremely difficult to predict, we note that we have never suffered a casualty or major mining-related accident since inception, we have never been found to be out of compliance with government safety standards, and management believes our mining operations are safer than the industry average in China.

Our ability to operate effectively could be impaired if we loses key personnel or fails to attract qualified personnel.

Our business is managed by a number of key personnel, the loss of any of which could have a material adverse effect on operations. In addition, as 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 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 employ our key personnel on an at-will basis, which means that either the Company or the employee may generally terminate the employment relationship at any time for any reason. Accordingly, if we are not able to effectively fill vacancies of departing key persons, our business may be impaired. Further, we note that our management is heavily dependent on the skills, experience, contacts, and business relationships of our founder and chief executive officer, Mr. Jianhua Lv. Accordingly, the loss of Mr. Lv could cause significant impairment to the business of our Company.

A downturn in global economic conditions may materially adversely affect our business and results of operations.

Our business and results of operations are affected by international, national and regional economic conditions. Financial markets in the United States, Europe and Asia have experienced significant disruption in the past year, including among other things, heightened volatility in security prices, constrained liquidity and credit availability, rating downgrades of certain investments and declining values of others. We are unable to predict the likely duration and severity of the current disruptions in financial markets, credit availability, and adverse economic conditions throughout the world. These economic developments affect businesses in a number of ways that could result in unfavorable consequences to the Company. Adverse global economic conditions, including within the PRC, could negatively affect commodity prices, or may cause our current or potential customers to delay or reduce purchases which could, in turn, result in reductions in sales volumes or prices, materially and adversely affecting results of operations and cash flows. Volatility and disruption of global financial markets could limit our customers' abilities to obtain adequate financing to maintain operations and proceed with planned or new capital spending initiatives, leading to a reduction in sales volume that could materially and adversely affect results of operations and cash flow. In addition, a decline in our customers' abilities to pay as a result of an economic downturn may lead to increased difficulties in the collection of accounts receivable, higher levels of reserves for doubtful accounts and write-offs of accounts receivable, and higher operating costs as a percentage of revenues.

Certain of our shareholders control a significant amount of our common stock.

Approximately 31.7% of our outstanding common stock is controlled by one holding entity, of which our founder and chief executive officer, Mr. Jianhua Lv, is a director and beneficiary. Accordingly, Mr. Lv presently has significant relative voting power and influence over any action requiring shareholder approval, including the election of our directors.

Our acquisitions may disrupt or have a negative impact on our business.

We could have difficulty integrating personnel and operations of Shuangrui Coal, Xingsheng Coal and Shunli Coal with our own. In addition, their key personnel may not be willing to work for us. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

the effect of any government regulations which relate to the business acquired;

delays and waiting periods associated with required safety inspections, as well as government licensing or permitting procedures;

difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;

difficulties in maintaining uniform standards, controls, procedures and policies;

the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;

potential unknown liabilities associated with acquired businesses and the associated operations, or the need to spend significant amounts to retool, reposition or modify the existing operations; and

the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to the acquisition.

For instance, as a required part of the process of consolidating mines in China, a consolidator is required to undergo safety inspections which apply to its existing and operating mines as well as acquired mines. These government inspections, as well as the required permitting and permitting process, may require substantial time to complete, and this may cause interruptions our coal mining operations. While Xingsheng Coal has received clearance to resume operations, Shauangrui Coal and Shunli Coal have not, and we do not know when such clearance will be issued, if at all. Further, if safety issues are identified by government mine inspection authorities, we may be required to undertake costly and time-consuming remedial measures in order to restore production.

Our business could be impaired to the extent that management is unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract the management and employees, increase our expenses and adversely affect our results of operations.

A large portion of our current revenue is derived from relatively few customers.

We depended on three major customers for a substantial portion of our revenue in fiscal 2011. Nonrenewal or termination of our arrangements with these customers may have a materially adverse effect on our revenue. In the event that any one of our major customers does not renew or terminates its arrangement with us, there can be no assurance that we will be able to enter into another arrangement similar in scope. Additionally, there can be no assurance that our business will not remain largely dependent on a limited customer base accounting for a substantial portion of revenue.

Risks Related to Our Corporate Structure

If the Chinese government determines that the contractual arrangements through which we control Hongli do not comply with applicable regulations, our business could be adversely affected. If the PRC regulatory bodies determine that such agreements do not comply with PRC regulatory restrictions on foreign investment, we could be subject to severe penalties. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business.

There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between Hongyuan and Hongli. Although we have been advised by our PRC counsel that based on their understanding of the current PRC laws, rules and regulations, the contractual arrangements with Hongli and its owners, as well our ability to enforce our rights thereunder, comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable. In addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements that may be applicable to our contractual arrangements.

The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

If we, Hongyuan or Hongli are determined to be in violation of any existing or future PRC laws, rules or regulations or fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

revoking the business and operating licenses of Hongli and/or voiding the contractual arrangements;

discontinuing or restricting the operations of Hongli;

imposing conditions or requirements with which we or Hongyuan or Hongli may not be able to comply;

requiring us to restructure the relevant ownership structure or operations;

restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or

imposing fines or other forms of economic penalties.

As we do not have direct ownership of Hongli, the imposition of any of these penalties may have a material adverse effect on our financial condition, results of operations and prospects.

Our contractual arrangements with Hongli and its owners as well as our ability to enforce our rights thereunder may not be as effective in providing control over Hongli as direct ownership.

We have no equity ownership interest in Hongli, and rely on contractual arrangements to control the company. We cannot assure you that the owners of Hongli will always act in our best interests, and these contractual arrangements may not be as effective in providing control over the company as direct ownership. For example, Hongli could fail to take actions required for our business despite its contractual obligation to do so. If Hongli fails to perform under its agreements with us, we are required by the terms of these agreements to enforce our rights by arbitration before The China International Economic and Trade Arbitration Commission (CIETAC). According to the Rule of CIETA, to initiate such proceeding, we must first prepare and submit an arbitration request to CIETAC for its acceptance. Once accepted, CIETAC will form an arbitration tribunal to hear the matter, set a hearing date and notify Hongli of the proceeding. Hongli will have 45 days from the receipt of such notice to prepare its statement of defense. While we have been advised by our PRC counsel that current CIETAC rules requires a decision to be rendered within six months from the selection of the arbitration tribunal, the passage of any prolong period of time without resolution may disrupt and negatively affect our business operations. Further, we must borne half of CIETAC’s fees in addition to our own expenses incurred to prepare for such proceeding, which fees may become prohibitively expensive as the arbitration must take place in Shanghai and be conducted in Chinese. As we are also contractually bound by CIETAC’s decision, in the event such decision is unfavorable to us, we may effectively lose our control over Hongli, which could materially and adversely affect our business, financial conditions and results of operations.

Management members of Hongli have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.

Mr. Jianhua Lv, our chief executive officer, is also the chairman of Hongli and owns 85.4% of its equity ownership interests. Conflicts of interests between their respective duties to our company and Hongli may arise. As our director and executive officer, he has a duty of loyalty and care to us under U.S. law when there are any potential conflicts of interests between our company and Hongli. We cannot assure you, however, that when conflicts of interest arise, he will act completely in our interests or that conflicts of interests will be resolved in our favor. For example, he may determine that it is in Hongli’s interests to sever the contractual arrangements with Hongyuan, irrespective of the effect such action may have on us. Because Hongli is our sole operating business and we derive our income entirely from the contractual arrangements, and we would have no or minimal operations and assets if these contractual arrangements are severed. In addition, he could violate his legal duties by diverting business opportunities from us to others, thereby reducing the amount of payment that Hongli is obligated to remit to us under the consulting services agreement.

In the event that you believe that your rights have been infringed under the U.S. securities laws or otherwise as a result of any one of the circumstances described above, it may be difficult or impossible for you to bring an action against Hongli or our officers or directors who are also members of Hongli’s management, and all of whom reside within China. Even if you are successful in bringing an action, the laws of China may render you unable to enforce a judgment against the assets of Hongli and its management, all of which are located in China.

Our principle shareholder may be subject to registration requirements under current regulations relating to offshore investment activities by PRC residents, the non-compliance of which may subject us to fines and sanctions that could adversely affect our business.

In October 2005, the State Administration of Foreign Exchange (“SAFE”) promulgated the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, that states that if PRC citizens residing in the PRC, or PRC residents, use assets or equity interests in their PRC entities as capital contributions to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they must register with local SAFE branches with respect to their overseas investments in offshore companies. They must also file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations. Under this regulation, their failure to comply with the registration procedures set forth in such regulation may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on the capital inflow from the offshore entity to the PRC entity.

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 PRC government.

The political environment in the PRC and the policies of the PRC government may adversely affect our business operations. The PRC has operated as a socialist state since 1949. In recent years, however, the government has introduced economic 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. 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 PRC 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 if this were to occur, we could be required to divest the interests we then hold in Chinese properties or joint-ventures. Any such developments could have a material adverse effect on our business, operations, financial condition and prospects.

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

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

The RMB is not a freely convertible currency at present. We receive all of our revenue in RMB, which may need to be converted to other currencies, primarily U.S. dollars, in order to be 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 SAFE, 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 “current account transactions.” 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 RMB 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 PRC government will not restrict us from freely converting Renminbi in a timely manner.

We may be unable to enforce our rights due to policies regarding the regulation of foreign investments in China.

The PRC’s legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China’s regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that we will not be able to achieve our business objectives. There can be no assurance that we will be able to enforce any legal rights we may have under our contracts or otherwise.

We depend upon the acquisition and maintenance of licenses to conduct our business in the PRC.

In order to conduct business in the PRC, we need licenses from the appropriate government authorities, including general business licenses and licenses and/or permits specific to our industry. The loss or failure to obtain or maintain these licenses in full force and effect will have a material adverse impact on our ability to conduct our business and on our financial condition. Mining licenses in China are generally subject to periodic renewal, and license fees associated with renewal may be subject to negotiation between the Company and the relevant government authorities. The government may in the future decide to increase these fees, or impose levies or surcharges on coal mine and mining rights. No assurance can be given regarding the timing or magnitude of these types of government actions.

Price controls may affect both our revenues and net income.

The laws of the PRC provide the government broad power to fix and adjust prices. Although coal and coke are not presently subject to direct price controls by the PRC government, we cannot give any assurance that these products will not be made subject to such controls in the future. To the extent that these products are subject to price controls, our revenue, gross profit, gross margin and net income may be adversely affected since the revenue we derive may become limited and we may face no limitation on our costs. In such a scenario, we may not be able to pass on any increases in costs to our customers. Further, if price controls affect both the revenue and the costs, our ability to operate profitably and the extent of the profitability will be effectively subject to determination by the applicable PRC regulatory authorities.

Since our officers and directors reside outside of the United States, it may be difficult for you to enforce your rights against them or enforce United States court judgments against them in the PRC.

Our directors and executive officers reside in the PRC and all of our assets are located in the PRC. It may therefore be difficult or impossible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws. Further, there are no extradition treaties now in effect between the United States and the PRC, which may limit the effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securites law or otherwise.

Since we may not be able to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.

At present, business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment.

Since our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds we deposit in PRC banks. Depending upon the amount of money we maintain in a PRC bank that fails, our inability to have access to cash could impair operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging In bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which SinoCoking might be held responsible. If our employees or other agents are found to have engaged in such practices, SinoCoking could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in the exchange rate could have an adverse effect upon our business and reported financial results.

We conduct our business in RMB, thus our functional currency is the RMB, while our reporting currency is the U.S. dollar. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, the political situation as well as economic policies and conditions. On July 21, 2005, the PRC government changed its decade old policy of pegging its currency to the U.S. currency. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximate 21.2% appreciation of the RMB against the U.S. dollar between July 21, 2005 and September 12, 2011. However, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. To the extent any of our future revenues are denominated in currencies other than the United States dollar, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results since operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings.

Our PRC subsidiaries and controlled entities are subject to restrictions on making payments to us, which could adversely affect our cash flow and our ability to pay dividends on our capital stock.

We are a holding company incorporated in the State of Florida and do not have any assets or conduct any business operations other than our investment in our operating subsidiaries in China. As a result of our holding company structure, we rely entirely on contractual payments or dividends from our PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends, loans or advances. We anticipate that in the foreseeable future our PRC subsidiaries will need to continue to set aside 10% of their respective after-tax profits to their statutory reserves. Further, Hongyuan and our VIEs in China may in the future, incur debt on its or their own, the instruments governing such debt may restrict such subsidiary’s ability to make contractual or dividend payments to any parent corporation or other affiliated entity. If we are unable to receive all of the funds we require for our operations through contractual or dividend arrangements with our PRC subsidiaries, we may not have sufficient cash flow to fund our corporate overhead and regulatory obligations in the United States and may be unable to pay dividends on our shares of capital stock.

Risks Related to an Investment in Our Securities

The rights of the holders of common stock may be impaired by the potential issuance of dilutive securities, namely preferred stock, convertible debt, and additional common stock.

Our board of directors has the right, without shareholder approval, to issue other dilutive securities with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of our common stock. These additional securities could be issued with the right to more than one vote per share, and/or could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of the common stock. Although we have no present intention to issue any additional dilutive securities for financing purposes, we may issue such shares in the future.

Under our charter and relevant corporate and securities law, the board of directors may approve the issuance of common stock in connection with certain types of transactions such as of acquisitions of other companies or mining assets, without obtaining shareholder approval. As a result, additional securities may be issued in the event of such transactions, resulting in dilution of the holdings of all pre-transaction shareholders, even though one or more of our shareholders may disagree with our decision to acquire a target or assets.

Our stock price may be affected by our failure to meet projections and estimates of earnings developed either by us or by independent securities analysts.

Our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be materially adversely affected.

The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.

The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:

actual or anticipated fluctuations in our quarterly operations results;

changes in financial estimates by securities research analysts;

conditions in foreign or domestic coal or coke markets;

changes in the economic performance or market valuations of other meat processing companies;

announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint-ventures or capital commitments;

addition or departure of key personnel;

fluctuations of exchange rates between the RMB and the U.S. dollar;

intellectual property litigation; and

general economic or political conditions in China.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.

If we were to become subject to the penny stock rules, it may have difficulty in selling our common stock.

Listed companies with a stock price trading at less than $5.00 per share will be subject to the SEC’s penny stock rules, which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. As we have become subject to these rules, these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own. According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

Boiler room practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

Our common stock is a relatively new listing, has a limited public float, and a short trading history. As a result, in the near future and beyond, liquidity in our shares may be limited, and you may be unable to sell at or near the purchased price or at all if you need to sell your shares or otherwise liquidate your holdings.

We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock became listed on NASDAQ in February 2010, and our shares have only a limited amount of trading history. In addition, our common stock has a limited public float, and we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. As a consequence, there have been and may be periods of several days or more when trading activity in the shares is or will be minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot provide any assurance that a broader or more active public trading market for our common stock will develop or be sustained in the future, or that any particular level of trading volume in our stock will be sustained.

The market for our common stock is expected to be characterized by significant price volatility when compared to seasoned issuers, and we anticipate that our share price will continue to be more volatile than a seasoned issuer for some time. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you. Volatility in share prices is attributable to a number of factors. In the near future, our common stock is expected to be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on our share price. The following factors also may add to the volatility in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes; additions to or departures of key personnel, as well as other items discussed under this Risk Factor section, as well as elsewhere in our reports, filings and public disclosures. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain any particular trading price, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the then prevailing market price.

Volatility in our common stock price may subject SinoCoking to securities litigation.

The future market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect our share price will be more volatile than a seasoned issuer for the indefinite future. There are periods during which the trading volume of our stock is relatively low, which may exacerbate volatility and result in exaggerated price changes in the common stock. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of our securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

We have incurred and will continue to incur increased costs as a public company which may affect our profitability.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. We are subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect that if we undertake compliance with these new rules and regulations we will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, we are required to maintain independent board committees and adopt policies regarding internal controls and disclosure controls and procedures. For example, management may need to increase compensation for senior executive officers, engage senior financial officers able to adopt financial reporting and control procedures, allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting and compliance costs will affect our financial results.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and shareholders could lose confidence in our financial reporting.

Internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Under current SEC regulations, we are required to include an auditor’s report on internal controls over financial reporting in our annual 10-K reports with the SEC. Failure to achieve and maintain an effective internal control environment, could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. The report issued by our auditors, which report is included in this 10-K, identifies several material weaknesses and deficiencies and concludes that our internal controls are not effective for the fiscal year ended June 30, 2011.

Generally, we have not paid any cash dividends to our shareholders and no cash dividends will be paid in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future and it may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide or may be unable to pay any dividends. We intend to retain all earnings for our operations.

Past activities during the period prior to our Share Exchange on February 5, 2010 relating to our prior business then known as “Ableauctions.com, Inc.” may lead to future liability.

Prior to our acquisition of Top Favour Limited (the BVI holding company for our business) on February 5, 2010, the Company, then known as “Ableauctions.com, Inc.,” engaged in businesses unrelated to our current operations. Although certain previously controlling shareholders of Ableauctions.com and its related liquidating trust have provided certain indemnifications against any loss, liability, claim, damage or expense arising out of or based on any breach of or inaccuracy in any of their representations, warranties and covenants made regarding such acquisition, including a $1 million reserve fund set aside by a liquidating trust for purposes of paying any indemnification claims by us, any liabilities relating to such prior business against which we are not completely indemnified may have a material adverse effect on us (and indirectly our shareholders) may not be able to benefit from any funds in reserve.

Reverse takeover transactions of the type conducted between the Company (then known as Ableauctions.com) and Top Favour are often heavily scrutinized by the SEC and we may encounter difficulties or delays in obtaining future regulatory approvals.

Historically, the SEC and the U.S. national exchanges have not generally favored transactions in which a privately-held company merges into a public reporting company with listed securities. On June 29, 2005, the SEC adopted rules dealing with private company mergers into dormant or inactive public companies. Although our Company was not a dormant inactive public company at the time of the reverse takeover transaction, we anticipate that the Company will be scrutinized carefully by the SEC and possibly by the Financial Industry Regulatory Authority. Further, the SEC or other regulatory authority may unexpectedly assert a different interpretation of its rules, than the interpretation relied upon, used by, or considered reasonable the Company and its advisors, and by other companies conducting similar or analogous transactions, which could increase the cost of, or adversely affect our ability to, file and achieve effectiveness for our registration statements, or interfere with or negate the ability of the Company its shareholders to rely upon Rule 144 or similar rules.

Future sales of shares of our common stock may decrease the price for such shares.

Actual sales, or the prospect of sales by our shareholders, may have a negative effect on the market price of the shares of our common stock. We may also register certain shares of our common stock that are subject to outstanding convertible securities, if any, or reserved for issuance under our stock option plans. Once such shares are registered, they can be freely sold in the public market upon exercise of the options. At any given time, if any of our shareholders either individually or in the aggregate cause a large number of securities to be sold in the public market, or if the market perceives that these holders intend to sell a large number of securities, such sales or anticipated sales could result in a substantial reduction in the trading price of shares of our common stock and could also impede our ability to raise future capital.

The elimination of monetary liability against our directors, officers and employees under state law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.

Our articles of incorporation contain specific provisions that eliminate or limit the liability of directors for monetary damages to us and our shareholders, and we are prepared to give such indemnification to our directors and officers to the extent permissible under state law. We may also maintain or enter into, from time to time, contractual agreements that obligate us to indemnify our officers under employment agreements, and similar contractual agreements with our directors. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, in the event of actions against our officers and directors, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against the directors and officers even though such actions, if successful, might otherwise benefit the Company and its shareholders.

We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.

We believe that our current cash and cash equivalents, anticipated cash flow from operations, availability of borrowings under the new loan, and the net proceeds from our previous financing will be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain additional credit. The sale of additional equity securities could result in additional dilution to our shareholders. Incurring indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to it, if at all.

The registration and potential sale, either pursuant to our prospectus or pursuant to Rule 144, by certain selling security holders of a significant number of shares could encourage short sales by third parties.

There may be significant downward pressure on our stock price caused by the sale or potential sale of a significant number of shares by certain of selling security holders pursuant to our effective registration statement on Form S-1 and prospectus or under Rule 144, which could allow short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock. If the selling security holders sell a significant number of shares of common stock, the market price of our common stock may decline. Furthermore, the sale or potential sale of the offered securities pursuant to the prospectus and the depressive effect of such sales or potential sales could make it difficult for us to raise funds from other sources.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

The following table lists certain information our current facilities.

Location	Approximate Floor Area (Square Meters)	Ownership Status	Principal Uses
Kuanggong Road and Tiyu Road, 10/F, Xinhua District, Pingdingshan, Henan Province, China	600	Leased	Corporate principal executive office (1)
1235-1237/12 F Beichen Century Center, East Beichen Street, Chaoyang District, Beijing, China	455	Leased	Office (2)
1601-16/F, SPD International Finance Center, Jinshui Road, Jinshui District, Zhengzhou, Henan Province, China	455	Leased	Zhonghong’s office (3)
Zhaozhuang Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	95,013	Owned	Coking plant, operational office, rail track, coal washing, power generation
Zhaozhuang Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	371,628	Owned	New coking plant (4)
Zhaozhuang Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	310,000	Owned (5)	Hongchang coal mine
Liping Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	470,000	60% Owned (5)	Shuangrui coal mine
Southwest Zhaozhuang Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	190,000	60% Owned (5)	Xingsheng coal mine
West Zhaozhuang Village, Daying Town, Baofeng, Pingdingshan, Henan Province, China	80,000	Owned (5)	Shunli coal mine

(1)

Our principal executive office is in downtown Pingdingshan, approximately 60 kilometers from our current plant, which houses our executive and administrative staff and oversees our operations. We entered into a lease for the premises with the Pingdingshan Rural Cooperative Bank in June 2008, for an annual rent of approximately $8,760 (RMB 66,900). The lease is generally renewable upon expiration and requires an upfront payment of the annual rent.

(2)

On April 16, 2010, we entered into a lease agreement to lease three office units in Beijing from June 15, 2010 to June 14, 2013 with monthly lease payment of $21,960 (RMB 145,529) and monthly management fee of $3,875 (RMB 25,681). In August 2010, we entered into another lease agreement to lease three different office units in the same building replacing the original lease from August 14, 2010 to June 14, 2013, with monthly lease payment of $10,497 (RMB 69,565) and monthly management fee of $1,852 (RMB 12,276).

(3)	Zhonghong is leasing an office unit in Zhengzhou from February 25, 2011 to August 24, 2013 with monthly lease payments of $5,595 (RMB 37,075).

(4)

For the year ended June 30, 2011, we prepaid (through Hongli) a total of approximately $9.0 million (RMB 58.05 million) to acquire the land use rights to approximately 371,628 square meters of residential land adjacent to our current plant, as the site for our new coking plant. Such prepayments were paid to the land’s former occupants and are not refundable. We expect to acquire the land use rights by December 31, 2011 at an estimated total cost of $10,682,625 (RMB 70,050,000). We also anticipate paying an additional $1.9 million (RMB 12.45 million) for administrative fees related to land reconfiguration for industrial use. As of the date of this Report, plant construction has not been completed, although we currently expect to do so by December 2011.

(5)	We do not own the mines (as all mineral resources are state-owned), but we control the mining permits to extract coal from these mines through our ownership of the operators of these mines.

ITEM 3.

LEGAL PROCEEDINGS

We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.

ITEM 4.

RESERVED

PART II

ITEM 5.

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

Market Information

Our common stock has been trading on the NASDAQ Capital Market under the symbol “SCOK” since February 17, 2010. Our common stock previously traded on the NYSE Amex (formerly the American Stock Exchange) under the symbol “AAC” until February 5, 2010. The following table sets forth the high and low bid information for our common stock on the NYSE Amex through February 5, 2010 and on the NASDAQ Capital Market since February 17, 2010 for the periods indicated:

	The Nasdaq Capital Market Price per Share (1)				The NYSE Amex Price per Share (2)
	High		Low		High		Low
2011
Quarter ended June 30, 2011		9.19		4.50		N/A		N/A
Quarter ended March 31, 2011		14.37		8.15		N/A		N/A

2010
Quarter ended December 31, 2010	$	12.98	$	7.75	$	N/A	$	N/A
Quarter ended September 30, 2010		18.46		7.30		N/A		N/A
Quarter ended June 30, 2010		31.61		11.22		N/A		N/A
Quarter ended March 31, 2010		53.70		6.25		1.40		0.71
1-for-20 reverse stock split effected on February 5, 2010

2009
Quarter ended December 31, 2009	$	N/A	$	N/A	$	15.80	$	8.40
Quarter ended September 30, 2009		N/A		N/A		18.80		8.40

(1)

From February 17, 2010 forward.

(2)

Through February 5, 2010.

Holders

As of September 6, 2011, there were approximately 618 record holders of the our common stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

Dividends

Other than the distribution of our pre-Acquisition assets of to the Liquidating Trust, and the assumption by the Liquidating Trust of our pre-Acquisition liabilities, the Company has not paid dividends on its common stock since inception. The decision to pay dividends on common stock is within the discretion of the board of directors. It is our current policy to retain any future earnings to finance the operations and growth of our business.

Securities Authorized for Issuance under Equity Compensation Plans

Please see the discussion in Item 12 titled “Equity Compensation Plan Information” below.

Stock Performance Graph

The following graph compares the cumulative shareholder return on our common stock versus the total cumulative return on the NASDAQ Composite Index and on our industry under SIC Code 3312 (Steel Works, Blast Furnaces Rolling Mills (Coke Ovens)). The comparison assumes $100 was invested as of December 31, 2005 and all dividends were reinvested.

ITEM 6.

SELECTED FINANCIAL DATA

The following selected consolidated income statement data for the years ended June 30, 2011, 2010 and 2009, and the selected consolidated balance sheet data as of June 30, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this Report. These consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this Report. Our selected consolidated income statement data for the years ended June 30, 2008 and 2007, and the selected consolidated balance sheet data as of June 30, 2009, 2008 and 2007 have been derived from our audited financial statements which are not included in this Report. The historical results presented below are not necessarily indicative of the results that may be expected in any future period.

	Years Ended June 30,
	2011		2010		2009		2008		2007
	(In thousands, except per share amounts)
Selected Income Statement Data:
Revenue	$	74,288	$	59,027	$	51,396	$	58,623	$	30,079
Gross profit		27,021		22,450		23,873		30,872		7,899
Income from operations		23,497		19,621		21,234		26,971		3,569
Net income		39,908		38,934		16,968		17,665		603
Earnings per share
Basic		1.90		2.49		1.29		1.35		0.05
Diluted		1.90		2.44		1.29		1.35		0.05

	June 30,
	2011		2010		2009		2008		2007
	(In thousands)
Selected Balance Sheet Data:
Current assets	$	72,654	$	57,383	$	15,789	$	11,107	$	4,410
Long term assets		117,215		56,792		31,699		26,327		26,042
Current liabilities		9,961		21,304		12,281		19,770		32,850
Long-term loans		55,692		—		—		—		—
Equity		118,647		62,435		35,207		17,664		(2,398	)

	June 30,
	2011		2010		2009		2008		2007
Selected Operating Data:
Production capacity (metric ton)
Coke		240,000		240,000		240,000		240,000		240,000
Coal tar		13,991		5,239		7,510		10,870		7,330
Raw coal		24,000		18,000		12,000		12,000		12,000
Washed coal		1,000,000		1,000,000		1,000,000		1,000,000		1,000,000
Metric tons produced
Coke		156,785		106,917		154,648		225,922		150,164
Coal tar		13,991		4,818		7,510		10,870		7,330
Raw coal		132,449		188,593		245,773		200,188		103,832
Washed coal		107,527		186,248		243,958		297,120		208,317
Metric tons sold
Coke		154,553		132,911		154,631		225,779		152,049
Coal tar		13,810		6,182		7,646		10,756		7,330
Raw coal		207,272		369,379		229,480		20,737		44,636
Washed coal		111,244		55,598		55,360		1,860		45,734

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of our operations and financial condition for the fiscal years ended June 30, 2011, 2010 and 2009 should be read in conjunction with the Selected Financial Data, our financial statements, and the notes to those financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

Forward-Looking Statements

The statements in this discussion that are not historical facts are “forward-looking statements.” The words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “continue”, the negative forms thereof, or similar expressions, are intended to identify forward-looking statements, although not all forward-looking statements are identified by those words or expressions. Forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. Actual results, performance or achievements may differ materially from those expressed or implied by forward-looking statements depending on a variety of important factors, including, but not limited to, weather, local, regional, national and global coke and coal price fluctuations, levels of coal and coke production in the region, the demand for raw materials such as iron and steel which require coke to produce, availability of financing and interest rates, competition, changes in, or failure to comply with, government regulations, costs, uncertainties and other effects of legal and other administrative proceedings, and other risks and uncertainties. We are not undertaking to update or revise any forward-looking statement, whether as a result of new information, future events or circumstances or otherwise.

Overview

We are a vertically-integrated coal and coke producer based in Henan Province, China. We use coal that we extract and buy to produce basic and value-added coal products including raw (unprocessed) coal, washed coal, medium coal and coal slurries (by-products of the coal-washing process), and coke products including chemical and metallurgical coke and coal tar (a by-product of the coke manufacturing process).

Our business operations are conducted through Henan Province Pingdingshan Hongli Coal & Coke Co., Ltd. (“Hongli”), a PRC company that we control by a series of contractual arrangements between Hongli and Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd. (“Hongyuan”). Hongyuan is a PRC company wholly-owned by Top Favour Limited, a British Virgin Island company and our wholly-owned subsidiary.

Presently, our coke related activities are carried out by Hongli’s branch operation, Baofeng Coking Factory (“Baofeng Coking”), coal related activities by four of Hongli’s subsidiaries, namely Baofeng Hongchang Coal Co., Ltd. (“Hongchang Coal”), Baofeng Shuangrui Coal Mining Co., Ltd. (“Shuangrui Coal”), Baofeng Xingsheng Coal Mining Co., Ltd. (“Xingsheng Coal”) and Baofeng Shunli Coal Mining Co., Ltd. (“Shunli Coal”), and electricity generation by another Hongli subsidiary, Baofeng Hongguang Environment Protection Electricity Generating Co., Ltd. (“Hongguang Power”).

The coal-related activities for the periods discussed below are those of Hongchang Coal only, as our other three coal mine companies have halted operations since the provincial-wide mining moratorium was imposed in June 2010. It is our intention to transfer all coal related activities from all four companies to the joint-venture established with Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”), a state-owned enterprise and qualified provincial-level coal mine consolidator. The joint-venture, Henan Hongyuan Coal Seam Gas Engineering Technology Co., Ltd. (“Hongyuan CSG”), has been established, although our planned transfer of coal related activities to Hongyuan CSG has not been carried out as of the date of this Report.

Our interests in Hongyuan CSG are held by Henan Zhonghong Energy Investment Co., Ltd. (“Zhonghong”), a company established in December 2010 and which equity interests are presently held on Hongli’s behalf and for its benefits by three nominees pursuant to share entrustment agreements.

Results of Operations

General. Our revenue in fiscal 2011 increased approximately 26% from a year ago. Sales of coke and coal products (other than raw coal) increased in response to market demands. However, we had to reduce our raw coal sales in light of the ongoing provincial mining moratorium. The resulting tight coal supply situation is reflected in the breakdown of our revenue by product type, with 53% of total revenue in fiscal 2011 from coke products, as compared to 49% in fiscal 2010, and 47% from coal products in fiscal 2011, as compared to 51% in fiscal 2010.

On a macro level, management has observed the following trends, which may have a direct impact on our operations in the near future: (1) the continuing effects of the ongoing mine consolidation in Henan on the availability of metallurgical coal in the region, and on the prices of coal and coke products in the short- and mid-term; (2) the acceleration of government-mandated closure of small-sized and less-efficient coking facilities; and (3) the central government’s continuing efforts to provide economic stimulus to maintain momentum and growth in domestic consumption.

Comparison of Years ended June 30, 2011and 2010

Revenue. Revenue for fiscal 2011 was $74,287,993, an increase of $15,260,503 or 25.85% as compared to fiscal 2010. Such increase resulted from increased coke and washed coal sales, offset in part by a 25% decrease in raw coal sales from a year ago.

Revenue and quantity sold by product type for fiscal 2011 and 2010 are as follows:

	Revenues
	Coke Products			Coal Products			Total
Revenue
Fiscal Year 2010	$	28,974,918		$	30,052,572		$	59,027,490
Fiscal Year 2011		39,329,446			34,958,547			74,287,993
Increase (decrease) in $	$	10,354,528		$	4,905,975		$	15,260,503
% Increase (decrease) in $		35.74%	%		16.32	%		25.85	%
Quantity Sold (metric tons)
Fiscal Year 2010		139,093			424,977			564,070
Fiscal Year 2011		168,363			318,516			486,879
Increase (decrease)		29,270			(106,461	)		(77,191	)
% Increase (decrease)		21.04	%		(25	)%		(13.68	)%

Coke products include finished coke, a key raw material for producing steel, and coal tar, a byproduct of the coke manufacturing process which can be used for various industrial applications. Coal products include both washed and raw coal, which is used by customers primarily for electricity generation and heating applications. As used in this discussion and analysis, the “raw coal” category includes both thermal and metallurgical coal that is unwashed and relatively unprocessed, in addition to coal washing byproducts such as coal slurry.

Average selling prices per metric ton for our four principal product categories during fiscal 2011 and 2010 are as follows:

Average Selling Prices	Coke			Coal Tar			Raw Coal			Washed Coal
Fiscal Year 2010	$	208			214			62			127
Fiscal Year 2011		233			243			73			179
Increase (decrease) in $		25			29			11			52
% Increase (decrease) in $		12.02	%		13.55	%		17.74	%		40.94	%

Generally, our selling prices are driven by a number of factors, including the particular composition and quality of the coal or coke we sell, their prevailing market prices locally and throughout China, as well as in the global marketplace, timing of sales, delivery terms, and our relationships with our customers and our negotiations of their purchase orders. Management believes that the changes in average selling prices from fiscal 2010 to fiscal 2011 were primarily driven by increased demand for all coal-related products and the general lack of coking coal supply in Henan which was caused by the provincial-wide mining moratorium.

We generally sell our raw coal inventory and other coal products when prices are stable at seasonally high levels, or at levels that are considered above historical norms. The average price of the raw coal was calculated based on the weighted average price of unprocessed coal, coal byproducts and mixed thermal coal. We note that the average selling prices for coal products were also influenced by changes in the coal mixtures (with different grades and heat content) that we sold to our customers.

Revenue and quantity sold by coke product categories for fiscal 2011 and 2010 are as follows:

	Coke Products
	Coke			Coal Tar			Total
Revenue
Fiscal 2010	$	27,650,175			1,324,743			28,974,918
Fiscal 2011		35,970,933			3,358,513			39,329,446
Increase in $		8,320,758			2,033,770			10,354,528
% Increase in $		30.09	%		153.52	%		35.74	%
Quantity Sold (metric tons)
Fiscal 2010		132,911			6,182			139,093
Fiscal 2011		154,553			13,810			168,363
Increase		21,642			7,628			29,270
% Increase		16.28	%		123.39	%		21.04	%

Revenue from coke for fiscal 2011 increased by 30.09% from a year ago as a result of increased demand by domestic steel manufacturers, which drove up both sales volume and average selling price. Strong market demand from chemical manufacturers also boosted our coal tar revenue for fiscal 2011, an increase of 153.52% from a year ago.

Revenue and quantity sold by coal product categories for fiscal 2011 and 2010 are as follows:

	Coal Products
	Raw Coal			Washed Coal			Total
Revenue
Fiscal 2010	$	22,964,448			7,088,124			30,052,572
Fiscal 2011		15,073,052			19,885,495			34,958,547
Increase (decrease) in $		(7,891,396	)		12,797,371			4,905,975
% Increase (decrease) in $		(34.36	)%		180.55	%		16.32	%
Quantity Sold (metric tons)
Fiscal 2010		369,379			55,598			424,977
Fiscal 2011		207,272			111,244			318,516
Increase (decrease)		(162,107	)		55,646			(106,461	)
% Increase (decrease)		(43.89	)%		100.09	%		(25.05	)%

Revenue from raw coal for fiscal 2011 decreased by 34.36% from a year ago, in spite of the 17.74% increase in the average selling price of raw coal. As a result of the mining moratorium, we were unable to produce or purchase sufficient raw coal to sell.

Revenue from washed coal for fiscal 2011 increased by 180.55% from a year ago, as we sold some of our inventory to take advantage of the 40.94% increase in the average selling price of washed coal that resulted from the increase in raw coal prices.

Cost of Revenue. Cost of revenue for fiscal 2011 increased from $36,577,438 to $47,267,309 as compared to fiscal 2010. Despite the drop in raw coal sales, sales of all other products increased. In addition, our weighted average purchase cost of raw materials increased due to higher coking coal and washed coal prices in fiscal 2011 as compared to a year ago.

Gross Profit. Gross profit for fiscal 2011 increased by $4,570,632 or 20.36%, to $27,020,684, from $22,450,052 for fiscal 2010, reflecting our higher revenue year over year.

Operating Expenses. Operating expenses, which consist of selling expenses and general and administrative expenses, increased by $693,939 or 24.52% in fiscal 2011 as compared to the fiscal 2010. Selling expense decreased by $178,280 due to the relative consistency of our customer composition, which reduced our customer relations and related expenses. On the other hand, general and administrative expense increased by $872,219. While our legal expense decreased by $313,885 from fiscal 2010, when we incurred certain listing and financing related expenses, in fiscal 2011 our salary expense increased by $346,598, (primarily from management compensations), rental expense increased by $363,130 (due to the leases on our Beijing and Zhengzhou offices), and travel expense increased by $337,706 (primarily from management travels to the United States).

Other Income and Expense. Other income and expense includes finance expense, income and expense not related to our principal operations, and change in fair value of warrants.

Finance expense, which consists of interest expense, increased by $1,213,716, or 413.97% from $293,190 for fiscal 2010 to $1,506,906 for fiscal 2011. This is largely due to our $54.9 million (RMB 360 million) loan from Bairui Trust Co., Ltd. (“Bairui Trust”) in April 2011.

We had expense not related to our principal operations of $152,879 in fiscal 2011, incurred in connection with our $54.9 million loan from Bairui Trust. We also recorded income not related to our principal operations of $107,799 for fiscal 2011, which represent our recovery of uncollectible accounts which was charged to bad debt expense in fiscal 2010.We additionally recorded a gain in fair value of warrants of $23,135,827 for fiscal 2011, as compared to $24,016,417 for fiscal 2010. As a result, we had other income of $21,476,042 in fiscal 2011, as compared to $23,831,016 in fiscal 2010.

Provision for Income Taxes. Provision for income taxes increased by $548,356 for fiscal 2011 from fiscal 2010, due primarily to our increased operational income before tax of $23,497,198 for fiscal 2011, as compared to $19,620,505 for fiscal 2010.

Net income. Net income, including the change in fair value of warrants, was $39,907,860 for fiscal year 2011, as compared to $38,934,497 for fiscal 2010.

We use non-GAAP adjusted net income to measure the performance of our business internally by excluding non-cash charges related to warrants, and believe that the non-GAAP adjusted financial measure allows us to focus on managing business operating performance because the measure reflects the Company’s essential operating activities and provides a consistent method of comparison to historical periods. We believe that providing this non-GAAP measure that the Company uses internally is useful to investors for a number of reasons. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related charges. In addition, it allows investors to evaluate the Company’s performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment regarding which charges are excluded from the non-GAAP financial measure. However, we compensate for these limitations by providing the relevant disclosure of the items excluded.

The following table provides a non-GAAP financial measure and a reconciliation of that non-GAAP measure to the GAAP net income:

	Fiscal
	2010			2011
Net income	$	38,934,497		$	39,907,860
Change in fair value of warrant liabilities		(24,016,407	)		(23,135,827	)
Adjusted net income	$	14,918,090		$	16,772,033

Earnings per share- basic	$	2.49		$	1.90
Earnings per share- diluted	$	2.44		$	1.90

Adjusted earnings per share – basic	$	0.95		$	0.80
Adjusted earnings per share – diluted	$	0.94		$	0.80

Weighted average number of common shares - basic		15,623,823			20,962,091
Weighted average number of common shares - diluted		15,942,451			21,021,255

Excluding non-cash gains, adjusted net income for fiscal 2010 and 2011 were approximately $15 million and $17 million, respectively, and resulted in $0.95 and $0.80 basic earnings per share, and $0.94 and $0.80 diluted earnings per share for the fiscal 2010 and 2011, respectively.

Comparison of Years ended June 30, 2010 and 2009

Revenue. Our revenue increased by $7,631,498 or 14.85%, in fiscal 2010, to $59,027,490, as compared to $51,395,992 in fiscal 2009.

Such increase was caused primarily by a strong increase in coal product sales revenue, offset by a moderate decrease in revenue from coke sales. Starting from the second quarter of fiscal 2010, the Henan province government started its consolidation process for all local private coal mines which included the temporary closure of coal mines so that safety inspections could take place. Such closures resulted in a decrease in the available coal supply in the market and prices for coal increased accordingly. In response, we started to increase our coal products sales in order to maintain our profitability. In the second half of the fourth quarter of fiscal 2010, the adverse impact of the Chinese government’s policy of slowing down the domestic economy began affecting the demand for our coke products, and thus our revenue from coke sales decreased. In the fiscal 2010, we increased our coal product revenue by 52.63% as compared to the same period ending June 30, 2009. In the second half of the calendar year 2009, the market demand for coke products rebounded, and the market prices for coke also began to recover, peaking at $230 per metric ton in December 2009. Shortly after the end of 2009, local market prices for coke products began to moderate, fluctuating between $200 and $230 per metric ton. In response to these trends, in the first calendar quarter in 2010, we resumed coke production and sales, increasing production significantly though not to the levels achieved in the same period in 2009. However, in the fourth quarter of fiscal 2010, weak demand for coke affected our coke sales, and thus the contribution of coke sales to our total revenues was less than in fiscal 2009. However, the coke market, after June 30, 2010, subsequently recovered due to the decreased supply of coal material, and therefore both the demand and the price of coke increased. Management anticipates that this trend will continue, and the coke market will recover in the near future. At the same time, as further discussed below, we continued to increase our sales of coal products in response to market prices for coal that were considered favorable by management.

Our revenue and quantity sold for fiscal 2010 and 2009, respectively, categorized by product type, are as follows:

	Revenues
	Coke Products			Coal Products			Total
Revenue
Fiscal Year 2009	$	31,706,265		$	19,689,727		$	51,395,992
Fiscal Year 2010		28,974,918			30,052,572			59,027,490
Increase (decrease) in $	$	(2,731,347	)	$	10,362,845		$	7,631,498
% Increase (decrease) in $		(8.61	)%		52.63	%		14.85	%
Quantity Sold (metric tons)
Fiscal Year 2009		162,277			284,840			447,117
Fiscal Year 2010		139,093			424,977			564,069
Increase (decrease)		(23,184	)		140,137			116,952
% Increase (decrease)		(14.29	)%		49.20	%		26.16	%

Average sale prices for our four principal products for fiscal 2010 and 2009, respectively are as follows,

Average Sale Prices	Coke			Coal Tar			Raw Coal			Washed Coal
Fiscal Year 2009	$	197		$	153		$	58		$	119
Fiscal Year 2010		208			214			62			127
Increase in $		11			61			4			8
% Increase in $		5.60	%		39.87	%		6.90	%		6.72%

As noted below in this discussion, we changed the composition of the coal mixtures for our coal products sold in the three and twelve month periods ending June 30, 2010, specifically, due to relatively strong demand for thermal coal, which enabled us to sell coal mixtures of lower thermal grade without major reductions in price per ton.

Revenue and quantity sold by coke product category for fiscal 2010 and 2009, respectively, are as follows:

	Coke Products
	Coke			Coal Tar			Total
Revenue
Fiscal 2009	$	30,534,755		$	1,171,510		$	31,706,265
Fiscal 2010		27,650,175			1,324,743			28,974,918
Increase (decrease) in $		(2,884,580	)		153,233			(2,731,347	)
% Increase (decrease) in $		(9.45	)%		13.08	%		(8.61	)%
Quantity Sold (metric tons)
Fiscal 2009		154,631			7,646			162,277
Fiscal 2010		132,911			6,182			139,093
Decrease		(21,720	)		(1,464	)		(23,184	)
% Decrease		(14.05	)%		(19.15	)%		(14.29	)%

In fiscal 2010, our revenue from the sales of coke products decreased by 9.45%, as compared to the year ending June 30, 2009. The decrease for fiscal 2010 was mainly due to the soft demand for coke in the fourth quarter of fiscal 2010, although the sales price stayed at the same level. In the first quarter of calendar year 2010, the Chinese coke market started to recover and thus we increased our coke production and expected further growth to occur in the following months. However, starting in the second quarter of calendar year 2010, affected by the steel production controls by the Chinese government, the demand for coke weakened, and the contribution of coke sales to our total revenues for the entire fiscal 2010 was less than management’s expectation, and total sales revenue of coke for fiscal 2010 decreased. With the current shortage of supply in coal market, and with the pending closing of the unqualified small scale coking factories in China, the demand for coke in the market has slightly recovered since late July 2010, and management believes that such recovery will continue in the coming months.

Coal tar revenue increased by 13.08% in fiscal 2010, or $153,233, as compared to $1,171,510 for fiscal 2009. This increase was primarily driven by an increase in the unit sales price of coal tar, from $153 in fiscal 2009 to $214 in fiscal 2010. The increase in unit sales price was mainly due to an increase in the quality of coal tar sold, and prices for fossil-fuel-related products also generally rebounded in fiscal 2010.

Coal product revenue and quantity sold by coal product category for the fiscal 2010 and 2009 are as follows:

	Coal Products
	Raw Coal			Washed Coal			Total
Revenue
Fiscal 2009	$	13,151,325			6,538,402		$	19,689,727
Fiscal 2010		22,964,448			7,088,124			30,052,572
Increase in $		9,813,123			549,722			10,362,845
% Increase in $		74.62	%		8.41	%		52.63	%
Quantity Sold (metric tons)
Fiscal 2009		229,480			55,360			284,840
Fiscal 2010		369,379			55,598			424,977
Increase		139,899			238			140,137
% Increase		60.96	%		0.43	%		49.20	%

We sharply increased our sales, both in terms of revenue and volume, of coal products in fiscal 2010, as compared to the year ending June 30, 2009. During this period, raw coal and washed coal market prices trended upward in the months leading up to the end of 2009, due to colder weather which led to higher demand for thermal coal. Management viewed this period in 2009 as a favorable environment for coal trading. During the period from late calendar year 2009 to early calendar year 2010, we sold thermal coal (included under the “raw coal” category) to our customers at prices above seasonal and annual norms, during winter months when the market supply for thermal coal was low. We sold coal inventory consisting of both coal acquired from third party suppliers, as well as coal extracted from our own mines. In fiscal 2010, we also sold lower grade mixtures of thermal coal, at a lower average price per metric ton. We sold 369,379 metric tons of various mixtures and composites of raw coals and realized more than $22 million in revenue in fiscal 2010, resulting in a 74.62% increase in revenue from the sale of raw coal as compared to the previous year. We also sold approximately 55,600 metric tons of washed coal in fiscal 2010, resulting in revenues of approximately $7 million.

Our results for fiscal 2010 reflect our strategy of selling a larger volume of coal products relative to coke products. During that time period, we increased our inventory of raw coal (especially thermal coal) from both our mining operations and open market purchases, which we anticipated during the winter months. We sold approximately 55,598 metric tons of washed coal during fiscal 2010, most of which were sold in the first 6 months of fiscal 2010. Since the beginning of calendar year 2010, inventories of washed coal were already considered to be low, and rather than sell the washed coal, we opted to maintain a minimum level of washed coal in inventory that was considered by management to be sufficient to ensure an adequate buffer of supplies for our coking operations. In 2009, as discussed, we increased our coal trading activities, and began buying and selling more coal products in order to boost revenue and maintain cash flow and profitability. In the quarter ending September 30, 2009, we sold a significant amount of washed coal, however, during the third fiscal quarter ended March 31, 2010, we did not sell any washed coal as we began to utilize all of our stock of washed coal to increase coke production. Management anticipated that the consolidation conducted by the Henan provincial government would have a significant negative impact on the coal product market, and thus we kept our washed coal inventory to maintain our coking operation.

Cost of Revenue. Cost of revenue increased from $27,523,329 for fiscal 2009 to $36,577,438 for fiscal 2010. The increase in cost of revenue was primarily a result of a sharp increase of coal product sales, especially our coal trading activity, offset by a reduction in coke product sales. In order to meet customer demand for coke products, we increased our purchase of raw coal from external suppliers, resulting in a higher cost of inputs compared to raw coal sourced from our own coal mines.

Gross Profit. Gross profit decreased by $1,422,611 or 5.96%, to $22,450,052 in fiscal 2010 from $23,872,663 in fiscal year 2009. The main reason for the decrease of the gross profit was the decrease of our coke sales and the increase in the cost of revenue.

Operating Expenses. Operating expenses, which consisted of selling expenses and general and administrative expenses, increased by $190,658, or 7.22% in fiscal 2010 as compared to fiscal 2009. The selling expense decreased by $237,959 because we changed our selling policy, which, in turn, led to a decrease in transportation expenses. The Share Exchange and equity financing expense increased our overall general and administrative expenses over $1.2 million, and the maintenance fee for listing as a U.S. public company increased total general and administrative expense in the amount of approximately $1.2 million. At the same time, the expenses for our business operations decreased approximately $0.9 million due to the following reasons: (a) our bad debt accrued decreased by approximately $290,000 in fiscal 2009; (b) the expense for the new coking facility project decreased by approximately $240,000, and (c) the expense for pollution prevention decreased by approximately $130,000 because no payment was required by the government in fiscal 2010.

Other Income and Expense. Other income and expense includes finance expense, net, income and expense not directly related to our main operations, and change in fair value of warrants.

Finance expense decreased by $620,882, or 67.92% from $914,072 for fiscal 2009 to $293,190 for fiscal 2010. This decrease was mainly driven by lower average outstanding loan balances during 2010. We paid off our bank loans during the first two quarters of fiscal 2010, Even though we borrowed $14.73 million at end of May 2010, the loan interest expense was lower than the prior year. In addition, the majority of the related party loans were paid before June 30, 2009 and we imputed interest expense of $490,274 relating to loans borrowed from the related parties in fiscal 2009 while we only imputed an interest expense of $67,269 in fiscal 2010.

We had net other income of $107,799 in fiscal 2010 as compared to $139,823 in fiscal 2009, a decrease of $32,024, or 22.9%. We received $140,000 in government grant in fiscal 2009. Net income of current year represented the recovery of uncollectible accounts which was charged to bad debt expense in prior years.

Change in fair value of warrants amounted to $24,016,417 for the year ended June 30, 2010. We had no such gain in prior year. In connection with our private placement equity financing in 2010, we issued warrants exercisable for 4,039,636 shares of our common stock on February 5, 2010 and March 11, 2010. As a result of the Share Exchange, our functional currency changed from U.S. dollar to RMB starting from February 5, 2010, the completion date of the transaction. Our warrants are not considered indexed to our own stock, and as such, all future changes in the fair value of those warrants need to be recognized currently in earnings and the warrants were recorded as derivative instruments. We used the Cox-Ross-Rubinstein binomial model to value the warrants issued in relation to the equity financing, amounting to in $94,605,650 on the warrant issuance dates. Gross cash proceeds from this equity financing was approximately $44 million and 100% allocated to the warrants issued. The exceeded value of warrants of $40,153,156 was reflected as a loss due to a change in fair value of warrants. This loss was offset by the change of value of warrants between June 30, 2010 and the issuance date of $64,169,573, resulting in the net gain on change fair value of warrants of $24,016,417.

Provision for Income Taxes. Provision for income taxes increased by $1,025,434, for fiscal 2010, as compared to the same period ending June 30, 2009, due primarily from receiving more tax exemptions in fiscal 2009 as compared to fiscal 2010.

Net income. Net income, including the change on fair value of warrants, was $38,934,497 for fiscal year 2010, as compared to $16,967,935 for fiscal 2009.

The following table provides a non-GAAP financial measure and a reconciliation of that non-GAAP measure to the GAAP net income.

	Fiscal
	2010			2009
Net income	$	38,934,497		$	16,967,935
Change in fair value of warrant liabilities		( 24,016,407	)		-
Adjusted net income	$	14,918,090		$	16,967,935