UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549








FORM 10-K


(Mark One)




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


For the fiscal year ended
December 31, 2008




or


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




For the
transition period from __________ to __________




Commission file number:
01-31937





SHENGDATECH,
INC.


(Exact
name of registrant as specified in its charter)




Nevada
            
            26-2522031(State
      or other jurisdiction
              of
      incorporation or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





Youth
Pioneer Park


Taian
Economic and Technological Development Zone


Tai’an
City, Shandong Province 271000


People’s
Republic of China


(Address
of Principal Executive Offices)




(86-538) 856-0668


(Registrant’s
Telephone Number, Including Area Code)




Not
Applicable


(Former
Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)





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





Title
      of Each Class:
            
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, par value $.00001
            
            The
      NASDAQ Global Select 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 oNo þ





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 oNo þ




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 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 þ No o




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





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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):


Yes oNo þ





The
aggregate market value of the 28,119,324 shares of voting and non-voting
common equity stock held by non-affiliates of the registrant was $ 279,224,887
as of June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, based on the last sale price of the
registrant’s common stock on such date of $9.93 per share, as reported by The
NASDAQ Stock Market, Inc.





As
of March 30, 2009, there were 54,202,036 shares of common stock of
ShengdaTech, Inc. outstanding.








SHENGDATECH,
INC.


(A
Nevada Corporation)





TABLE
OF CONTENTS




PagePART
      IItem
      1
                Business
                
                3Item
      1A
                Risk
      Factors
                
                17Item
      1B
                Unresolved
      Staff Comments
                
                35Item
      2
                Properties
                
                35Item
      3
                Legal
      Proceedings
                
                36Item
      4
                Submission
      of Matters to a Vote of Security Holders
                
                36PART
      IIItem
      5
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                36Item
      6
                Selected
      Financial Data
                
                38Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                
                39Item
      7A
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                50Item
      8
                Financial
      Statements and Supplementary Data
                
                51Item
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                
                51Item
      9A
                Controls
      and Procedures
                
                51Item
      9B
                Other
      Information
                
                53PART
      IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                
                53Item
      11
                Executive
      Compensation
                
                56Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                58Item
      13
                Certain
      Relationships and Related Transactions, and Director
      Independence
                
                59Item
      14
                Principal
      Accounting Fees and Services
                
                59PART
      IVItem
      15
                Exhibits
      and Financial Statement Schedules
                
                59







PART
I








Item
1. Business





Our
Industry





Overview





We are a
leading and fast growing Chinese manufacturer of specialty additives. Our nano
precipitated calcium carbonate (“NPCC”) products are
used as functional additives in various products due to their special chemical
and physical attributes. As a market leader of high-grade NPCC products, we use
advanced processing technology to convert limestone into high quality NPCC
products, which are sold to our customers in the tire, polyvinyl chloride (PVC)
building materials, ink, paint, latex, adhesive, paper and polyethylene (PE)
industries. Prior to November 2008, we also manufactured, marketed and sold
coal-based chemical products, namely, ammonium bicarbonate, liquid ammonia,
methanol and melamine. We marketed and sold coal-based chemical products mainly
as chemical fertilizers and raw materials for the production of organic and
inorganic chemical products, including formaldehyde and pesticides.





Our
Reorganization and Corporation Structure





We were
organized as a Nevada corporation on May 11, 2001 under the name Zeolite
Exploration Company for the purpose of acquiring, exploring and developing
mineral properties. We conducted no material operations from the date of our
organization until March 2006. On March 31, 2006, we consummated a share
exchange pursuant to a Securities Purchase Agreement and Plan of Reorganization
with Faith Bloom Limited, a British Virgin Islands company, and its
stockholders. As a result of the share exchange, we acquired all of the issued
and outstanding capital stock of Faith Bloom in exchange for a total of
50,957,603 shares of our common stock. The share exchange is accounted for as a
recapitalization of Zeolite and resulted in a change in our fiscal year end from
July 31 to December 31. Faith Bloom Limited was deemed to be the accounting
acquiring entity in the share exchange and, accordingly, the financial
information included in this annual report reflects the operations of Faith
Bloom, as if Faith Bloom had acquired us.





Faith
Bloom was organized on November 15, 2005 for the purpose of acquiring from
Eastern Nanomaterials Pte. Ltd., a Singapore corporation, all of the capital
shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical
Co., Ltd., which are Chinese corporations engaged in the manufacture, marketing
and sales of a variety of NPCC products and coal-based chemicals for use in
various applications. On December 31, 2005, Faith Bloom acquired all of the
capital shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng
Chemical Co., Ltd.





As a
result of the transactions described above, Shandong Haize Nanomaterials Co.,
Ltd and Shandong Bangsheng Chemical Co., Ltd. are wholly-owned subsidiaries of
Faith Bloom, and Faith Bloom is a wholly-owned subsidiary of Zeolite. On April
4, 2006, Faith Bloom formed a wholly-owned subsidiary in Shaanxi, China to run
the  NPCC facility in Shaanxi. Effective January 3, 2007, Zeolite
changed its name to ShengdaTech, Inc.  On July 1, 2008, Faith Bloom
formed a wholly-owned subsidiary in Zibo, Shandong to operate our new NPCC
facility in Zibo, which is currently under construction.  Our
corporate structure is depicted in the following chart:











3




Market
Opportunity




The
NPCC Markets in china




NPCC
refers to ultrafine nano precipitated calcium carbonate, a synthetic industrial
material made from limestone, which has an average particle diameter of less
than 100 nanometers or 0.1
micron.  The nanoparticle is smaller than the wavelength of visible
light and provides characteristics such as narrow distribution range of
grain-size and improved decentrality, which make the compounds suitable for many
applications.  In the filler and additive industry, traditional
fillers, including precipitated calcium carbonate, have been used for years as a
means to reduce material costs by replacing a portion of higher cost
materials.  The main functions of the traditional fillers are to
occupy the space and act as cheap diluents of more
expensive materials.  NPCC is an emerging product in the
functional filler and additive industry with numerous possibilities of new
applications, many of which are yet to be developed.  As functional
additives, NPCC offers more additional benefits than traditional
fillers.  Due to its low cost and special chemical properties, NPCC
has been widely used in the rubber, plastic, paint, ink, paper and adhesive
manufacturing industries to improve product quality while maintaining or
reducing costs.  It can be used solely as an additive which
contributes to the processing features of end products, or it can also be
applied together with other fillers such as precipitated calcium carbonate,
titanium oxide and silicon dioxide.




Compared
to traditional fillers, NPCC offers a broad range of advantages when used as
functional additives.  These advantages include the
following:




·
            Enhanced
      performance of end products, including but not limited to improved
      durability, increased tensile strength, improved heat resistance and
      better stabilization; and





·
            Reduced
      product cost through substitution of NPCC for more expensive
      materials.




While
research into and manufacturing of NPCC in China began in the early l980s, the
NPCC industry only recently experienced strong growth, resulting from increased
awareness of its ability to replace other more expensive materials and its
functionality to enhance the performance of various end products.  In
China, NPCC products are primarily used as functional additives in feedstock
materials to the automobile, construction and consumer
sectors.  Typical feedstock materials that use NPCC include tires,
PVC, PP and PE plastic materials, ink, paints and paper.  China’s
fast-growing economy and on-going nationwide urbanization progress have fueled
the rapid development of the automobile, construction and consumer sectors,
which in turn have driven the increasing demand for NPCC products in
China.  Driven by the consumption upgrade trend in China, an
increasing number of manufacturers intend to use NPCC as a substitute for
certain fillers or additives to improve the quality of their end products and to
reduce production cost without sacrificing product quality.  We
believe that high-quality NPCC products will continue to benefit from the
on-going and rapid development of the construction, automotive and printing
industries.  According to a NPCC Market Report by Frost & Sullivan
dated November 10, 2008, the total sales volume of NPCC in China reached 340,000
metric tons in 2007 and the demand for NPCC is anticipated to increase at 21.1%
(CAGR) until the year 2012.  As a result of the continued research
efforts and development of a broader range of applications of NPCC products, we
believe that demand for NPCC in China will continue to grow.




NPCC
products have been primarily used in the following industries:




Tire
and Rubber




NPCC,
when treated by a surface coating agent to improve compatibility, can fill the
spatial structure in rubber and enhance the properties of certain rubber
products, such as tires and latex.  NPCC can be applied solely as an
additive or used together with other fillers such as precipitated calcium
carbonate, clay and carbon black to reduce expensive rubber content and to
improve certain properties of the rubber products.  NPCC is a rubber
strengthening additive that can enhance the flexibility, break elongation, tear
resistance, abrasion resistance and  anti-aging performance of rubber
and the use of NPCC provides a 10-20% overall improvement in performance
measured by increased traction wave resistance, tear resistance, break
elongation, tensile strength and aging resistance.  In addition, NPCC
can also partially substitute for certain more expensive materials such as
carbon black and silicon dioxide, thus reducing the overall cost of
manufacturing without negative impact on reinforcing and whitening
features.




4


China’s
demand for automobile tires is expanding quickly, driven by the rapid
development of the Chinese automobile industry.  Currently, China is
the world’s second largest automobile producer after the United
States.  According to the National Bureau of Statistics, China
produced 9.3 million vehicles in 2008, up 5.5% year over year.  In
addition, the shrinking average life cycle for tires in China is creating
additional demand.  According to an article published by China Automotive Review in
March 2008, Chinese car owners have shortened their average tire use period from
5 years to 2.5 years, which, in some developed areas, has decreased to as low as
2 years.  The frequency of tire changes in China has been steadly
increasing, supported in part by a growing automotive aftermarket.  In
addition, multinational tire producers are beginning to establish worldwide
production centers and export bases in China, which should support incremental
tire demand. We believe our NPCC product will obtain a larger market share in
the rubber and tire fields.




Plastic
Materials




Plastic
materials, including PVC, PE and PP, are a significant end market for NPCC
products.  When modified with a surface coating agent, NPCC particles
become compatible with organic substances which facilitate their use as a
functional additive in plastic materials.  Modified NPCC
particles can be used in plastics such as PVC building materials to increase
their tensile strength, flexibility, durability and heat resistance, to
stabilize their dimensions and to improve color fastness and
glossiness.  In addition, NPCC can be used as a substitute for more
expensive materials, such as silicon dioxide, which may considerably reduce the
total cost of the end product.




China’s
plastics industry has been growing at double-digit rates annually since 2000,
supported by the nationwide urbanization progress, which is expected to continue
through the next decade.  The development plans for China’s
countryside, as laid out by the central government in China’s 11th Five-Year
Plan (2006-2010), requires large amounts of film, pipes and house surfacing
products, which should drive future demand for PVC, PE and PP synthetic plastic
materials.  According to China Plastic Industry Yearbook
2007, the output of PVC increased from 2.5 million metric tons in 2000 to
7.9 million metric tons in 2006 with a CAGR of 21.6%, the output of PE increased
from 3.1 million metric tons in 2000 to 6.0 million metric tons in 2006 with a
CAGR of 12.0% while the output of PP increased from 3.0 million metric tons in
2000 to 5.8 million metric tons in 2007 with a CAGR of 11.5%.




Paper




We
believe that China’s paper industry represents large untapped market
opportunities for domestic NPCC manufacturers.  NPCC can be used as a
functional additive for newsprint paper, coating paper and specialty paper
products.  NPCC can improve the glossiness, whiteness, opacity and
printability of paper products, while reducing the requirement for more
expensive titanium dioxide or kaolin.  China’s paper industry is currently
migrating from acid sizing to alkaline sizing in the production
process.  This migration increases the market opportunity for NPCC,
which can only be applied in the alkaline papermaking
process.  According to the National Bureau of Statistics, China’s
paper industry experienced rapid growth with paper and paperboard production
increasing from 37.8 million metric tons in 2001 to 77.4 million metric tons in
2007, representing a CAGR of 12.7%.  With improving standards of
living and the advancement of domestic papermaking technologies, China’s paper
industry is expected to continue to develop and migrate to higher value-added
products, which should create incremental demand and increase the range of
applications for NPCC products.




Paints,
Ink and Adhesives




NPCC
products have a range of other applications in the construction and automotive
industries, including surface coatings, oil-based paints, adhesives and
sealants.  NPCC has also been widely used as an additive in oil-based
printing inks.  When used as a substitute of certain more expensive
materials such as titanium dioxide or kaolin, NPCC can reduce component cost as
well as maintain or reinforce the features of the end products.  China
is currently experiencing a wave of personal consumption upgrades and an
in-depth reform in housing policies, which will result in incremental demand for
diversified and improved paints, coatings and adhesives.  According to
the EconTrends sector reports published by ISI Emerging Markets in 2007, coating
manufacturing sector revenue increased from RMB 40.9 billion in 2003 to RMB 92.9
billion in 2006 with a CAGR of 31.4% and ink sector revenue increased from RMB
6.3 billion in 2003 to RMB 13.2 billion in 2006 with a CAGR of
28.0%.




5




The
Coal-based Chemical Markets in China




Prior to
November 2008, our coal-based chemical products included ammonium bicarbonate,
liquid ammonia, methanol and melamine.




Ammonium
bicarbonate is primarily used as a type of nitrogenous
fertilizer.  According to the National Bureau of Statistics, the
production of nitrogenous fertilizer is spread over 31 provinces around
China.  Shandong Province currently ranks as the top province in terms
of fertilizer production output.  The nitrogenous fertilizer industry
in China is highly fragmented.  According to an analysis report on the
Chinese fertilizer industry, published in February 2008 by SunFaith, a market
research institute, China currently has over 1,000 fertilizer production
companies, including nearly 600 companies manufacturing nitrogenous
fertilizer.  Small to mid-scale factories account for half of total
production and most focus on their respective regional markets due to the high
cost of transportation.




Methanol
is a major raw material used in the manufacture of coal-based organic
chemicals.  Methanol output in China has grown rapidly in recent
years.  According to a report by China Securities Journal
dated March 19, 2008, China’s methanol production increased from 1.99 million
metric tons in 2000 to 8.75 million metric tons in 2007, representing a CAGR of
23.6%.  China is currently the world’s second largest market for
methanol consumption.  According to the Chinese
government’s Mid to
Long-term Development Plan for China Coal-based industries, methanol
output in China is projected to reach 16 million metric tons, 38 million metric
tons and 66 million metric tons in the year of 2010, 2015 and 2020,
respectively.




The
methanol industry is also expected to benefit from increasing demand for
dimethyl ether (“DME”), as methanol is the major raw material for manufacturing
DME.  DME is an alternative fuel which has experienced significant
interest due to the rise in worldwide oil prices and the rise in global demand
for energy.  The development of new DME facilities in China has
resulted in an increase in demand for methanol.




Liquid
ammonia is mainly used as a raw material for pesticides, compound fertilizers
and refrigerant.  Melamine is used in the manufacturing of melamine
xylenol-formaldehyde resin.





Our
Business





Overview




We are a
leading and fast growing manufacturer of specialty additives in China and, prior
to November 2008, a coal-based chemical products manufacturer in Tai’an City,
Shandong Province. Prior to November 2008, we operated in two primary business
segments:




NPCC.  Our NPCC
products are used as functional additives in various products due to their
chemical and physical attributes. As a market leader of high-grade NPCC
products, we use advanced processing technology to convert limestone into high
quality NPCC products, which are sold to our customers in the tire, polyvinyl
chloride (PVC) building materials, ink, paint, latex, adhesive, paper and
polyethylene (PE) industries.  Based upon manufacturing capacity, we
are the largest and a fast growing NPCC manufacturer in China.  In
2008, we generated 55.2% of our net revenue
from sales of NPCC products.




Coal-Based
Chemicals.  Prior to November 2008, we manufactured, marketed
and sold coal-based chemical products, namely, ammonium bicarbonate, liquid
ammonia, methanol and melamine primarily for use as chemical fertilizers and raw
materials for the production of organic and inorganic chemical products,
including formaldehyde and pesticides.  In 2008, we generated 44.8% of
our net revenue from sales of coal-based chemical products.  We
ceased production of current products of our coal-based chemical facility on
October 31, 2008.




Nano
Precipitated Calcium Carbonate


6




We
commenced our NPCC operations in 2001 with the installation of our first NPCC
production line, which had an annual production capacity of 10,000 metric tons,
in Tai’an, Shandong Province.  Since then, we have rapidly increased
our total NPCC production capacity to 190,000 metric tons as of December 2008
with a new facility in Xianyang, Shaanxi Province and have started construction
of a new facility in Zibo, Shandong Province with a projected capacity of
240,000 metric tons.  We are currently the largest Chinese
manufacturer of NPCC products in terms of production capacity, according to
China Chemical News
Weekly.  We estimate that we produced approximately 47.4% of
the total NPCC products manufactured in China in 2008.  We also
believe that we are the only NPCC manufacturer that supplies significant
quantities of NPCC products to the tire industry in China.




We
established a research and development center in Pudong, Shanghai, which is
dedicated to the research and development of NPCC applications.  Our
research and development center has attracted NPCC researchers and scholars with
advanced degrees in chemistry and materials science who primarily focus on
improving the quality of our existing NPCC products and developing innovative
NPCC products for new applications.  As an example, we recently
developed new NPCC products for use in the paper and PE industries and began
receiving orders from paper manufacturers in 2007 and from PE customers in
February 2008.  In addition, we expect to begin selling our newly
developed NPCC products to the asphalt and PVC plastic glove markets in the near
future.




We
currently sell our NPCC products in Shandong Province, the Yangtze River Delta
and other parts of China through resident sales
representatives.  Internationally, in 2008, we sold our NPCC products
to nine countries including Singapore, Thailand, South Korea, Malaysia, Vietnam,
the Philippines, Iran, India and Israel. International sales accounted for 10%
of the total NPCC sales revenue in 2008.  We intend to continue to
broaden our geographical revenue base both within China and
overseas.




Coal-Based
Chemicals




In 2000,
our affiliate, Shandong Shengda Technology Co., Ltd., acquired a coal-based
chemical facility from a state-owned enterprise, brought it to profitability
and, in 2005, the coal-based chemical business was integrated into the
Company.  This coal-based chemical facility was located in Tai’an,
Shandong Province and had been in operation for over 30 years.  On
June 16, 2008, the Tai’an City Government, as part of China’s strengthening of
environmental law enforcement reform, issued a notice directing our coal-based
chemical facility in Tai’an City ("Bangsheng Chemical Facility") to
cease production due to the close proximity of the Bangsheng Chemical
Facility to residential and non-manufacturing business properties.  In
accordance with the Tai’an City Government’s notice, we ceased
production at Bangsheng Chemical Facility on October 31, 2008.




Prior to
November 2008, we sold our coal-based chemical products directly to end
customers, including chemical plants, trading companies and farmers, the
majority of which are located in Shandong Province.




Revenue
and Net Income




Our
combined revenue and net income have increased steadily since
2006.  In 2008, our revenue was $149.4 million and our net income was
$40.0 million.





Our
Competitive Strengths




We
believe that our following competitive strengths enable us to compete
effectively and to capitalize on the growth opportunities in the NPCC
market:




Leading
market position in the NPCC industry







·
            Significant
      production capacity: We are currently the largest manufacturer of NPCC
      products in China with production capacity of 190,000 metric tons per year
      and with plans to increase our production capacity to 250,000 metric tons
      per year in 2009 with the addition of a new facility with an initial
      production capacity of 60,000 metric tons per year in Zibo, Shandong
      Province, which is currently under construction.  Our new
      facility in Zibo has an ultimate plant capability of 240,000 metric tons
      per year, which would increase our NPCC capacity to 430,000 metric tons
      per year.  Many of our NPCC customers engaged in tire
      manufacturing require large volumes of NPCC (up to 5,800 metric tons of
      NPCC per year). Due to our large production capacity, we believe we are
      strongly positioned to retain existing customers and attract new
      customers.





7


·
              Advanced
      production technology and facilities: At our facility in Xianyang, Shaanxi
      Province, we employ a proprietary membrane-dispersion technology
      co-developed with Tsinghua University and we have an exclusive right to
      use this patent.  Our new facility in Zibo, Shandong will employ
      the same technology.  This advanced technology enables us to
      manufacture NPCC products of higher quality and at lower costs than NPCC
      products produced using the ultra gravity precipitation technology
      widely used in the industry.
                
                In
      cooperation with Qingdao University of Science and Technology, we have
      developed proprietary formulas for modifying NPCC products to suit
      particular end products.  With these formulas, we have developed
      NPCC products for the tire, PVC building material, ink and paint
      industries.
                
                We
      utilize stainless steel equipment for the production of 60,000 metric tons
      per year in our NPCC production lines in Xianyang, Shaanxi Province, which
      commenced production in April 2008 and
      have an annual capacity of 160,000 metric tons.  Our new
      facility in Zibo, Shandong will utilize the same stainless steel
      equipment.  In addition to yielding improved purity of NPCC
      products, these stainless steel lines require one-third less maintenance
      time than carbon steel lines, and have an expected life of 30 years
      compared to 10 years for carbon steel
lines.





·
            Strong
      customer relationships: We have formed strong relationships with our
      existing NPCC customers through the process of customer development, which
      generally takes four to six months or longer and involves intensive sample
      testing.  For example, as of the end of 2008, we had retained 24
      out of our top 30 NPCC customers in 2007, which 24 customers accounted for
      46.3% of our total NPCC sales for the twelve months ended December 31,
      2008.  In general, we have enjoyed good relationships with our
      customers, which we believe is based on our high product quality and
      strong cooperative relations and communications with
      customers.  We believe that the high cost of switching NPCC
      providers provides a strong barrier to new market
  entrants.




Low-cost
production base and scalable NPCC manufacturing capacity




We
believe we are a low-cost producer of NPCC products.  Our location in
China provides us with access to low-cost utilities, rent, expert research and
reduced labor costs.  In addition, our close proximity to a limestone
quarry in Xianyang, Shaanxi Province enables us to minimize transportation cost
for limestone.




We have
the ability to scale our production facilities to cost-effectively manufacture
NPCC in large volumes.  We commenced commercial NPCC operations in
2001 with the opening of our first NPCC line located in Tai’an City, Shandong
Province with a manufacturing capacity of 10,000 metric tons per
year.  We have since expanded our total NPCC production capacity to
190,000 metric tons as of December 2008, and we are constructing a new facility
in Zibo, Shandong Province, in the Zibo High-Tech Development Zone, with a total
projected capacity of 240,000 metric tons.




Broad
and diverse NPCC customer base




Our NPCC
customer base has increased from 53 in 2003 to 136 in the fourth quarter of
2008.  We continue to focus on broadening and diversifying our
customer base.  Our continuing marketing efforts through exhibitions,
e-business platforms and our sales office network have enabled us to
develop and serve customers quickly and efficiently.  Referrals from
existing customers are one of our major marketing sources.  We are
actively engaged in exploring and securing opportunities in a variety of
markets, including the paper and paint industries within China and
internationally. In 2008, we completed sample testing of our NPCC products with
approximately 54 new sales leads and have initiated testing with 23 sales leads
in a broad range of products and applications, such as PP, PE, rubber, adhesive,
latex and coatings.  We generally convert approximately 50% of these
leads into revenue producing customers, which further diversifies our customer
base.




Strong
NPCC research and development capability




8





·
            In-house research and development
      center: We own a research and development center in Pudong,
      Shanghai, which is exclusively used for NPCC research and
      development.  We employ 13 research and development staff with
      advanced degrees and specializations in NPCC development.  Our
      research team primarily focuses on improving the quality of our existing
      NPCC products as well as developing innovative NPCC products for new
      applications.





·
            Strategic alliances with
      universities: We have a strong track record of working in
      partnership with various universities to develop new NPCC technologies and
      products.  In collaboration with Tsinghua University, we jointly
      developed the membrane-dispersion technology for producing NPCC, which was
      patented in November 2007.  We have an exclusive right to use
      this patent until September 2025.  We will continue to consider
      working with external institutions on a selective basis to further develop
      our NPCC products.




Experienced
management team




We have
an experienced management team with a proven track record of developing and
expanding our operations.  Mr. Xiangzhi Chen, our President and Chief
Executive Officer, is a pioneer in the NPCC industry in China and has led the
sales growth of the Company from $30.4 million in 2003 to $149.4 million in 2008
while enhancing profitability.  Most of our senior management have
worked together as a team for over seven years and have extensive experience in
the NPCC industry.  Our management team’s strong industry expertise
and execution capabilities have enabled us to significantly ramp up our NPCC
production within a short period of time.





Our
Strategies




We are
primarily focused on the development, manufacture and marketing of NPCC products
to capitalize on the rising demand of these products within a broad range of
industries and applications.  We strive to become the market leader of
NPCC products worldwide and plan to implement the following specific strategies
to achieve our goal:




Expand
production capacity and capitalize on economies of scale




We
currently have an installed annual NPCC production capacity of 190,000 metric
tons.  Demand for NPCC products in China is expected to increase to
750,000 metric tons by 2010.  We plan to expand our NPCC capacity and
have started constructing a new facility in Zibo, Shandong Province with a total
projected capacity of 240,000 metric tons.  We believe
that capacity expansion will provide us with improved economies of scale in
purchasing raw materials and strengthen our position in negotiations with
various suppliers.  In addition, we believe that we will also enjoy
improved government incentives as we expand our business to new locations given
our established leadership position in the NPCC industry.




Continue
to focus on research and development







·
            Improve product
      quality: The membrane-dispersion technology, jointly developed by
      us and Tsinghua University and deployed at our new NPCC facility in
      Xianyang, Shaanxi Province, improves our production stability and yield of
      nano particles.  Our Tai’an NPCC facility was ISO 9001 certified
      in 2003 for a period of three years and our NPCC products were awarded
      “Shandong Top Brand” at the end of 2006.  Our new NPCC facility
      in Xianyang, Shaanxi Province was ISO 9001 certified in 2008 and is now in
      the process of passing reevaluation for the year 2009.  Our
      research and development team is focused on continuously improving the
      quality of our NPCC products, reducing production costs and enhancing
      value for our customers.





·
            Develop innovative NPCC
      products for application in new end markets: We have developed NPCC
      products for various end markets using our proprietary technology for
      particle modification.  This technology enables us to modify the
      property of a particular NPCC product so that it integrates well with, and
      improves the general property of, a particular end product to which
      the NPCC product serves as a functional additive.  We will
      continue to focus significant research and development efforts on
      developing new NPCC products for new markets to contribute to our
      long-term sustainable growth.




9




Strengthen
sales and marketing efforts




We have
established long-standing relationships with a broad base of customers in
China.  We believe that demand for our NPCC products will continue to
grow with the strength of our current end markets in combination with the
addition of new markets and applications.  Our sales and marketing
staff systematically target new industries where our NPCC products can add value
to potential customers.  Our sales and marketing materials are
especially designed to clearly outline the features of our NPCC products and
demonstrate the value of NPCC products for selected end markets.  We
also deploy our sales staff in strategic locations, which allows quick responses
to customer inquiries and customized assistance.  We intend to continue to
increase our sales in overseas markets by establishing overseas sales offices
and utilizing appropriate e-business platforms to promote our NPCC products in
international markets.  We are also exploring options to sell our NPCC
products to overseas markets through third party distributors.




Seek
selective acquisitions and strategic investments




We are
actively seeking selective acquisitions and strategic investment opportunities
in the NPCC and chemical businesses, with the goal of integrating acquisitions
into our existing businesses.  We will be opportunistic in expanding
our operations by acquiring underperforming enterprises at reasonable valuations
or undertaking new projects.  We seek transactions that will add scale
to our existing business lines, broaden our distribution reach and product
offerings, and help us to develop a stronger market presence.





Our
Products




Prior to
ceasing production at our coal-based chemical facility on October 31, 2008,
we primarily operated in two business segments: NPCC and coal-based
chemicals.  Our key products within each segment and their respective
end markets are as follows:







NPCC Applications
                      Primary UseRubber
                      Additive
      for tiresPlastic
                      Additive
      for PVC building materials and polyethylene (PE)Paint
      and ink
                      Additive
      for ink and water-based and oil-based paintsLatex
                      Additive
      for latex glovesAdhesive
                      Additive
      for high-grade silicone adhesive and polysulfide
sealantPaper
                      Additive
      for coating paperCoal-based Chemicals
                      Primary UseAmmonium-Bicarbonate
                      FertilizerLiquid
      ammonia
                      Raw
      material for pesticides, compound fertilizers,
  refrigerantMethanol
                      Raw
      material in the manufacture of organic chemicalsMelamine
                      Raw
      material in the manufacture of melamine xylenol-formaldehyde
      resin




10


Our NPCC
business focuses on the production of high-quality and low-cost NPCC
products.  We plan to increase our sales volume and gain market share
in NPCC products.  Our NPCC business has strong positions in the tire
and PVC building materials markets, and has expanded into ink, paint, latex
and adhesives.  To further diversify our customer base, we plan to
gain share in the paper and polyethylene markets, which are currently relatively
underserved by the NPCC industry.




Prior to
November 2008, our coal-based chemicals business focused on serving its local
and regional markets with high-quality products.




We have
established effective quality assurance systems for our NPCC
products.  Our Tai’an NPCC facility was ISO 9001 certified in 2003 for
a period of three years and our NPCC products were awarded “Shandong Top Brand”
at the end of 2006.  Our NPCC facility in Xianyang, Shaanxi Province
was ISO 9001 certificated in 2008 and is now in the process of passing its
reevaluation for the year 2009 .





Intellectual
Property




We
jointly own a patent with Tsinghua University for advanced NPCC particle
production technology based on membrane-dispersion techniques.  This
patent was officially issued in November 2007 and will expire on September 9,
2025.




We also
utilize a proprietary technique for NPCC chemical modification to tailor our
NPCC particles to the end product and add value to our customers.




We
utilize a trademark for our NPCC products, which is licensed by our related
party and registered with the Trademark Office of the State Administration for
Industry and Commerce of China, relating to the Chinese words “盛科
(Shengke)”  As approved by our related party, we have permanent, free
rights to use this trademark.




The
trademark for our coal-based chemical products, relating to the Chinese words
“泰丰 (Taifeng),” is
also registered with the Trademark Office of the State Administration for
Industry and Commerce of China.





Research
and Development Efforts




We
currently have 13 members in our research and development team.  Among
them, six hold Ph.D. degrees and five hold Masters degrees and most have worked
in the NPCC research field for more than four years.  Mr. Zhude Xu,
our Director of Research and Development, graduated from the University of
Southern California with a Ph.D. in Chemistry and once served as a professor at
Zhejiang University.  Mr. Xu is leading our effort to develop and
improve the proprietary technology for chemical modification in NPCC
products.  This new technology can be used to modify the property of a
specific NPCC product to fit a particular end product and, in addition, improve
the property of such end product.  Recently, much progress has been
made in the applications in paper, PE and asphalt products. With this new
technology, tires, PVC building materials, paints, adhesives and paper of equal
or better quality can be made at a lower cost.  We are also
developing NPCC products for other applications, such as asphalt and epoxy
resin, and developing other modifying preparation methods.




Our
research and development activities are a three-stage process.  During
the first stage, we apply surface coating agents to NPCC according to different
pre-designed formulas for comparative studies.  The modified NPCC is
tested for mass, size, oil absorbance and other traits to determine if it
displays the appropriate features.  During the second stage,
approximately two kilograms of NPCC product is produced with lab equipment using
a formula selected at the first stage.  The NPCC product produced is
applied to an end product such as a tire, paint or ink.  The end
product is then tested for a set of properties and other parameters to determine
if they meet expectations.  If the formula is successful at the second
stage, it will be further tested.  During the third stage, several
tons of the NPCC products are manufactured at the NPCC facility using the
formula that passed the second test and is sent to potential customers for an
industrial scale test.  Our research and development staff is
dispatched to such customers’ sites to assist with the test.




11


We are
focused on further developing and improving our core manufacturing technologies
so that we can expand our product lines and reduce overall costs.  In
2008, we completed samples testing of our NPCC products with approximately 54
companies in various industries, such as PVC, rubber, adhesive, latex and
coating.  Of all these 54 companies, 46 companies have begun or are
ready to purchase after the first round of testing and 8 companies have
indicated interest in further testing, and we consider most of them to be
potential new customers. As of December 31, 2008, we had 8 potential
customers in the final stage of our sample testing process.




We had
previously entered into joint development agreements with Tsinghua University
and Qingdao University of Science and Technology to develop new NPCC
technologies.  Under the agreement with Qingdao University of Science
and Technology, we have exclusive ownership to any technology developed. Under
the agreement with Tsinghua University, we jointly own any technology developed
and have an exclusive right to use such technology.  Our joint program
with Tsinghua University has produced a membrane-dispersion patent which was
granted by the Patent Office of the State Intellectual Property Office of China
in November 2007.




In
addition, we have adopted advanced membrane-dispersion technology in the
production process at our new Xianyang, Shaanxi facility and will adopt the same
technology in our new Zibo, Shandong facility, which is currently being
constructed.  This technology not only reduces production cost, but
also enables us to have better control of the size and consistency of the
nano-particles, which greatly improves our NPCC product quality. We purchased a
research and development center in Shanghai with a total investment cost of
$1.6 million. The center is the base for training research and technical
personnel and developing proprietary technologies.  We believe that
this research and development center is sufficient to meet our current research
and development needs and we are in a good position to attract qualified
research personnel at a reasonable cost.  Thus, we are currently
conducting our research and development internally, and have terminated our
research and development cooperation with Tsinghua University and Qingdao
University of Science and Technology.





Sales
and Marketing




Our sales
team consists of 43 employees, 37 in the NPCC business, 11 of which are devoted
to international NPCC sales, and 6 in our previous coal-based chemical division
which have currently been allocated to our related party, Shandong Shengda
Technology Co,.Ltd, and may be assigned to our NPCC sales team in the
future.  To expand distribution channels and increase our market
share, we regularly attend industry fairs and exhibitions, and we have become a
member of www.alibaba.com.cn, the largest business-to-business Internet portal
in China.




Through
our sales and marketing efforts, we have successfully established our leadership
in the NPCC industry in China, particularly for applications in the tire and PVC
building materials markets.  Recently, we have successfully entered
the oil-based paint and paper industries.  We are now actively
marketing our NPCC products to the PP, PE and asphalt industries.  We
have successfully completed sampling and testing of our products with a number
of companies in these industries and have received small orders from PE
customers.  We expect to begin supplying our products to PP and
asphalt manufacturers in the near future.




At
present, our NPCC products are primarily sold and marketed directly by our sales
and marketing staff.  Our NPCC products are mainly sold in Shandong
Province, Yangtze River Delta and several other provinces in northern and
eastern China.  We are actively expanding our NPCC marketing network
into other parts of China and have resident sales representatives in multiple
locations in China including Shanghai, Xi’an, and Dongying, Shandong
Province.  We have also successfully expanded into the international
market for NPCC; we have sold our NPCC products to nine countries, including
Singapore, Thailand, South Korea, Malaysia, Vietnam, the Philippines, Iran,
India and Israel.  Additionally, our products are being tested by
customers in North America.




Prior to
November 2008, we were also a major supplier of coal-based chemicals in Tai’an
City, Shandong Province.  All of our coal-based chemical products were
sold in local and regional markets to chemical plants and farmers
directly.





12


Suppliers




In 2008,
the cost of raw materials accounted for approximately 65.2% of our total production
cost.  Soft coal, modification agents, anthracite and limestone are
the major raw materials for producing NPCC products, while anthracite and urea
were the key raw materials for producing our coal-based chemical
products.




We have
multiple suppliers for all of our major raw materials, except for modification
agents.  All of soft coal, anthracite and urea are in abundant supply
in China with a large number of suppliers.  We are currently
considering increasing our supplier partners for modification agents or
potentially producing them internally.




Given
the importance of certain key raw materials such as coal and limestone to our
business, we have established company procedures involving control of raw
material procurement.




Supplier
Management System




Although
most of our key raw materials are widely available in China, the price for
certain raw materials such as coal has been fluctuating greatly in the past few
years, which has affected our profit margin.  We have adopted measures
to reduce risks in raw material supply costs, including establishing long-term
relationships with suppliers, diversifying supply sources, and seeking long-term
contracts with suppliers.




Purchasing
Procedures with View to Quality and Stability of Suppliers




Purchasing
activities are conducted in accordance with our standard purchasing
procedures.  Potential suppliers are provided with our quality
standards for the raw material and are invited to make initial offers, which are
compared objectively according to relevant quality guidelines.  After
validating various suppliers’ services and capabilities for quality and stable
supply, we select the qualified supplier with the lowest price.  Our
finance department has also established an oversight process by appointing
individuals to conduct independent market research of key raw material prices
periodically.  We have implemented a standard procedure to insure that
all purchasing requirements are strictly adhered to.





Major
Suppliers





The table
below lists our major suppliers as of December 31, 2008.





Major Suppliers for NPCC
Business


Suppliers
                                
                                Amount
                                  Purchased
      in
                                  2008
                                  (USD
                                  million)
                                
                                %
      of Total
                                  Purchases
      in
                                  2008Soft
      Coal
                                Shandong
      Taifeng Minerals Co.
                                
                                
                                1.9
                                
                                6.0
                                %Soft
      Coal
                                Xianyang
      Chuangfa Trading Co., Ltd.
                                
                                
                                6.5
                                
                                20.6
                                %Modification
      agent
                                Qingdao
      Siwei Chemical Co. Ltd.
                                
                                
                                8.1
                                
                                .
                                  25.8
                                %Anthracite
                                Feicheng
      Longxin Supply Storage & Transport Co.
                                
                                
                                0.9
                                
                                2.7
                                %Total
                                
                                
                                
                                
                                
                                55.1
                                %





13


Major
Suppliers for Coal Based Chemical Business Prior to November
2008





Suppliers
                                
                                Amount
                                  Purchased
      in
                                  2008
                                  (USD
                                  million)
                                
                                %
      of Total
                                  Purchases
      in
                                  2008Anthracite
                                Gaoping
      Xingjie Trading Co., Ltd.
                                
                                2.1
                                
                                
                                7.0
                                %Anthracite
                                Jincheng
      Qinshui Road Coal Sales Co.
                                
                                2.8
                                
                                
                                9.2
                                %Anthracite
                                Jincheng
      Riyuejiu Trading Co., Ltd.
                                
                                2.6
                                
                                
                                8.5
                                %Anthracite
                                Feicheng
      Tongyun Coal Co.
                                
                                2.2
                                
                                
                                7.3
                                %Anthracite
                                Feicheng
      Longxin Supply Storage & Transport Co.
                                
                                2.3
                                
                                
                                7.7
                                %Urea
                                Shandong
      Feicheng City Fertilizer Factory
                                
                                4.1
                                
                                
                                13.7
                                %Urea
                                Shandong
      Feida Chemical Technology Co.
                                
                                2.8
                                
                                
                                9.3
                                %Total
                                
                                
                                
                                
                                
                                62.7
                                %





Our
Major Customers




We sell
our NPCC products to customers in the tire, PVC building materials, ink, paint,
latex, adhesive, paper and PE industries, which are mainly located in Shandong
Province, the Yangtze River Delta and other parts of northern and eastern
China.  Most of our top NPCC customers are large-scale manufacturers
of tires and PVC building materials.  Our coal-based chemical products
were sold to chemical plants and farmers primarily located in Shandong
Province.  We have long-term relationships with most of our customers
in the NPCC business..




For the
fiscal year ended December 31, 2008, sales to our top five NPCC customers
accounted for 14.5% of total NPCC sales, while sales to our top five coal-based
chemical customers accounted for 11.9% of our total coal-based chemical
sales.  For the same period, approximately 10.0% of our NPCC sales
were to overseas markets, while all sales of our coal-based chemical products
were made within China.





Major
Customers of our NPCC Products


Name
                              
                              Industry
                              
                              Amount
      of
                                Sale
      in 2008
                                (USD
                                million)
                              
                              Percentage
      of
                                Total
      SalesTriangle
      Tire
                              
                              
                              Tire
                              
                              2.7
                              
                              
                              7.3
                              %Zhaoyuan
      Liao
                              
                              
                              Tire
                              
                              2.6
                              
                              
                              6.9
                              %Double
      Star Tire
                              
                              
                              Tire
                              
                              2.6
                              
                              
                              7.0
                              %Zhengjiang
      Suhui
                              
                              
                              Tire
                              
                              1.7
                              
                              
                              4.7
                              %Total
                              
                              
                              
                              
                              
                              
                              
                              25.9
                              %Dalian
      Jinyuan
                              
                              
                              PVC
                              
                              2.7
                              
                              
                              9.8
                              %Yiyuan
      Ruifeng
                              
                              
                              PVC
                              
                              1.9
                              
                              
                              6.9
                              %Quanzhou
      Lida
                              
                              
                              PVC
                              
                              1.3
                              
                              
                              5.5
                              %Total
                              
                              
                              
                              
                              
                              
                              
                              22.2
                              %





14




Major Customers of Our Coal Based
Chemicals Prior to November 2008


Name
                                
                                Product
                                
                                Amount
      of
                                  Sale
      in 2008
                                  (USD
                                  million)
                                
                                Percentage
      of
                                  Total
      SalesJiulong
      Experiment Chemical
                                
                                Liquid
      Ammonia
                                
                                
                                1.3
                                
                                5.1
                                %Taixin
      Chemical
                                
                                Liquid
      Ammonia
                                
                                
                                1.3
                                
                                5.0
                                %Huayangdier
      Chemical
                                
                                Liquid
      Ammonia
                                
                                
                                1.3
                                
                                4.8
                                %Linyi
      Zhengfa Chemical
                                
                                Liquid
      Ammonia
                                
                                
                                1.3
                                
                                5.1
                                %Laiwu
      Jinjian Chemical
                                
                                Liquid
      Ammonia
                                
                                
                                1.3
                                
                                5.1
                                %Total
                                
                                
                                
                                
                                
                                
                                25.1
                                %Tongfa
      Formaldehyde Factory
                                
                                Methanol
                                
                                
                                0.8
                                
                                6.5
                                %Jinan
      Fushihongxin
                                
                                Methanol
                                
                                
                                0.8
                                
                                6.6
                                %Linyi
      Yongda Formaldehyde Factory
                                
                                Methanol
                                
                                
                                0.8
                                
                                6.5
                                %Xinhua
      Construction Materials
                                
                                Methanol
                                
                                
                                0.6
                                
                                6.4
                                %Total
                                
                                
                                
                                
                                
                                
                                26.0
                                %





Competition




We are
subject to intense competition.  Some of our competitors have greater
financial resources, larger staff, and better established market recognition in
both domestic and international markets than us.




For our
NPCC products, we compete based upon proprietary technologies, manufacturing
capacity, product quality, product cost and ability to produce a diverse range
of products.  Our competitors include NPCC manufacturers both within
China and around the world.  Below is a list of Chinese NPCC
manufacturers based on the markets in which we sell our
products.




NPCC manufacturers in
China


Name
                                                
                                                Production
      Capacity
                                                  (mt/year)ShengdaTech, Inc.
                                                
                                                
                                                190,000Jiawei
                                                
                                                
                                                170,000Tianze
                                                
                                                
                                                100,000Yaohua
                                                
                                                
                                                50,000Guangping
                                                
                                                
                                                30,000CZ
      Calicum Carbonate
                                                
                                                
                                                20,000Keli
                                                
                                                
                                                20,000Perfection
                                                
                                                
                                                15,000BJ
      Chemical Building Material
                                                
                                                
                                                14,000Others
                                                
                                                
                                                125,000




Analysis of the Chinese Nano
Precipitated Calcium Carbonate Market


15




We also
face competition from certain well-established foreign chemical companies,
including Imperial Chemical Industries Limited (ICI). Solvay S.A., Minerals
Technologies Inc., and Shiraishi Calcium Kaisha Ltd.  For example,
competition for our NPCC products in the paper and ink industries primarily
comes from Japanese manufacturers such as Shiraishi Calcium Kaisha, which sells
to Chinese automobile paint makers and Japanese ink makers in
China.




For the
coal-based chemical products, prior to ceasing production at our coal-based
chemical facility on October 31, 2008, we competed on location, product quality,
product price, and manufacturing capacity.  Our competitors were
mainly other coal-based chemical manufacturers located in Shandong
Province.




Competitors
in Coal-based Chemical Business Prior to November 2008







Name
                Production CapacityLuye
      Chemical
                60,000
      MT synthetic ammonia, 240,000 MT ammonium-bicarbonate, 10,000 MT liquid
      ammonia, 10,000 MT methanolShuangfeng
      Chemical
                80,000
      MT ammonia bicarbonate, 130,000 MT urea, l0,000 MT condensed nitrogen
      acid, 50,000 MT compound fertilizerFeida
      Chemical
                100,000
      MT synthetic ammonia, 100,000 MT ammonia bicarbonate, 130,000 MT urea,
      30,000 condensed nitric acid, 50,000 MT compound fertilizer, 30,000 MT
      methanol




Source:
Industry websites





Regulation




The
Chinese government often adopts temporary measures to achieve its short-term
economic goals.  For example, it issued policies that encourage
farmers in China to increase their production of grains in order to boost the
income of Chinese farmers and enhance China’s national security.




Our
business is also regulated by a number of authorities which license the
production of coal-based chemical products such as those we
manufactured.  Prior to the cease of production, Bangsheng Chemical
Facility, our coal-based chemical facility in Tai’an City, had been granted a
Production Safety License from Shandong Bureau of Safe Production
Supervision.  Our NPCC facilities are not required to obtain
Production Safety Licenses.




In China,
waste gas and water discharges in our manufacturing processes are regulated and
must meet certain standards under China’s environmental laws and
regulations.  The local branch of China’s Administration of
Environmental Protection samples and tests our gas and water discharge
regularly.  The specifications of these discharges must be consistent
with the regulations for industrial waste water and gas and relevant laws and
standards, including the Water Pollution Discharge Standard for the Synthetic
Ammonia Industry issued by the China Administration of Environmental
Protection.




Pursuant
to the Environment Impact Assessment Law, which came into effect on September 1,
2003, construction or expansion of our NPCC facilities is subject to environment
impact assessment procedures by local environmental protection authorities in
China, including the acceptance of environment impact assessment reports of each
project by the environmental protection authorities.  We currently
have a total production capacity of 190,000 tons of NPCC per year in Shaanxi and
Shandong, and we have passed environment impact assessment for 20,000 metric
tons NPCC production capacity in our Shaanxi facility and 10,000 metric tons of
NPCC production capacity in our Shandong facility.  The local
environmental regulatory department in Qian County, where our Shaanxi facility
is located, has orally advised us that we could complete the environment impact
assessment procedures after all of our expansions have been completed as our
planned production lines share the same facilities.  However, if the
environmental regulatory department in Xianyang or at a higher level determines
that we are not compliant with the Environment Impact Assessment Law, we may be
subject to fines or other legal sanctions.  Although we have not been
punished by any environmental regulatory department, we cannot assure you that
the government will take the same position in future.





16


Employees




As of
December 31, 2008 we employed 900 full-time employees with 307 in Shandong Haize
Nanomaterials Co., Ltd., 553 in Shaanxi Haize Nanomaterials Co.,
Ltd.  Prior to November 2008, we employed 521 employees in our
coal-based chemical division.  Of our total employees, 11.9% are
management personnel and 4.8% are sales staff members.  We believe
that we maintain a satisfactory working relationship with our employees and we
have not experienced any significant labor disputes or any difficulty in
recruiting staff for our operations.




As
required by applicable Chinese law, we have entered into employment contracts,
which include confidentiality and non-compete provisions prohibiting employees
from disclosing our trade secrets or using trade secrets for purposes other than
benefiting us, with all employees.




Our
employees in China participate in a state pension program organized by Chinese
municipal and provincial governments.  We are required to contribute
to the program at the rate of 20% of the average monthly salary of our
employees.  In addition, we are required by Chinese law to cover
employees in China with other types of social insurance.  Our total
contribution may amount to as much as 30% or more of the average employee
monthly salary.  We have purchased social insurance for all of our
employees.  Social insurance expenses were approximately $410,320 and
$735,440 for fiscal years 2007 and 2008, respectively.




Pursuant
to Chinese laws, our Chinese subsidiaries are required to establish housing
accumulation funds for their employees and to contribute to the funds at a
certain percentage of the monthly salary of each employee.  Failure to
comply with such obligation may subject our Chinese subsidiaries to fines not
exceeding approximately $7,200 for each subsidiary.  We have
established housing accumulation funds for our qualified employees as of
December 2008.





Item
1A. Risk Factors





Cautionary
Statement Regarding Future Results, Forward-Looking Information And Certain
Important Factors




In this
report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing the words or phrases
“will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings with
the Securities and Exchange Commission, news releases, written or oral
presentations made by officers or other representatives made by us to analysts,
stockholders, investors, news organizations and others, and discussions with
management and other of our representatives. For such statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.




Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information
from suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or (ii) the
important factors that could cause our future results to differ materially from
historical results or trends, results anticipated or planned by us, or which are
reflected from time to time in any forward-looking statement.





17


In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include the following:





Risks Related To Our Business and
Operations




We have been
required to cease the production of the current products of our
coal-based chemical production facility.  On June 16, 2008, the
Tai’an City Government, as part of China’s strengthening of environmental law
enforcement reform, issued a notice directing the Company to
cease production at our Bangsheng Chemical Facility in Tai’an City due
to the close proximity of the Bangsheng Chemical Facility to residential and
non-manufacturing business properties.  In accordance with the Tai’an
City Government’s notice, we ceased production of the current
products at our Bangsheng Chemical Facility on October 31,
2008.  For the year ended December 31, 2008, our sales of coal-based
chemical products were approximately $67.0 million, or 44.8% of our total
revenue.  There is no assurance that we will succeed in expanding our
NPCC business or accomplishing strategic acquisitions or investments in the
chemical business going forward, and our revenues and profit could
suffer.




Subsequent to the
cease of  production of the current products of our coal-based
chemical production facility on October 31, 2008, we generate all of our revenue
from sales of our NPCC products and a reduction in revenue from our NPCC
products would cause our revenue to decline
and could materially harm our business.  After we
ceased production of the current products at our Bangsheng Chemical
Facility on October 31, 2008 in compliance with the directive from the Tai’an
City Government, we no longer generate revenue from the sale of coal-based
chemical products and derive all of our revenue from the sale of our NPCC
products.  For the year ended December 31, 2008, our sales of NPCC
products were approximately $82.4 million, or 55.2% of our total
revenue.  Going forward, continued market acceptance of our NPCC
products will remain important to our success, and a reduction in revenue from
the sale of our NPCC products will materially harm our business, financial
condition and results of operations.




We may not
be
able to maintain our lead in NPCC technology.  At present, we
are the largest manufacturer of NPCC products in China in terms of production
capacity.  Our competitive edge depends heavily on the new technology
employed in our NPCC manufacturing process.  We adopted the ultra
gravity precipitation technology in the manufacturing process in our Tai’an
facility.  In our new facility in Shaanxi, we deployed the
membrane-dispersion technology co-developed and co-owned with Tsinghua
University.  The same membrane-dispersion technology will be utilized
in our new facility in Zibo, Shandong, which is currently under
construction.  We currently have the exclusive right to use this
technology.  At this time, other than maintaining our own research and
development center in Shanghai, we are not working in partnership with any
universities or research institutions.  The growth of our business and
development of new technology may require that we seek external collaborative
partners for research and development.  We cannot assure you that we
will be able to enter into agreements with collaborative partners on terms
acceptable to us, if any at all.  In addition, if more advanced
technology is developed for the manufacturing of NPCC by our competitors, we may
lose our competitive advantage and our results of operations may be adversely
affected.




Our NPCC products
have limited application.  We may not be able to increase the market
for our NPCC products.  Presently, our existing NPCC products
are used as functional additives for tires, PVC building materials, ink, paint,
latex, adhesives, paper and PE.  Our products, therefore, depend
heavily on a limited number of industries.  Our growth potential may
be limited if we cannot expand the markets for our existing NPCC products or
develop new products for other industries.  Although we have increased
our research and development efforts to expand the range of applications of our
NPCC products, there is no assurance that we will succeed in our
efforts.




18


We may not be
able to continue to produce high-quality NPCC products, which may negatively
impact our business.  We believe that our NPCC products are in
demand because of their high quality.  We maintain quality control
standard procedures and expect our employees to strictly comply with these
procedures.  We also apply a distribution control system in NPCC
production to ensure process control and stability.  If the quality of
any of our products deteriorates due to any reason such as the failure to
implement our quality control and distribution control systems, delays in
shipments, cancellations of orders or customer returns and complaints, then our
reputation may be harmed.  In addition, we purchase raw materials such
as limestone and modification agents from third-party suppliers.  We
may be unable to exercise the same degree of quality control over these
third-party production facilities as we can over our own
facilities.  Any quality problems associated with the raw materials
produced by these third-party producers or suspension of the supply of
high-quality raw materials may adversely affect our reputation and cause a
decrease in sales of our products and a loss of market share.




Our NPCC business
depends significantly on the tireindustry.  If the composition of tires changes and we fail to develop
formulas that are applicable to a new composition, our NPCC business could be
harmed.  In 2008, our NPCC business derived approximately 43.3%
of revenues from sales to tire manufacturers.  If these customers
cease or decrease their orders of NPCC products from us, our NPCC business could
be adversely affected.  In addition, our modified NPCC products can be
used in tire production to obtain desired properties since the current tire
composition allows for calcium carbonate as an additive.  If the
composition of tires changes in the future, modified NPCC products may not be
compatible with the change.  As a result, our NPCC business could be
adversely affected.




We have not
obtained certain
required verification from the local Development and Reform Commission for our
operations, which could limit our ability to further expand our operations in
the future and adversely affect our business.  According to the
Provisional Measures for Verification for Foreign Investment Project, or
Verification Measures, effective as of October 9, 2004, any project with foreign
investment shall apply for and obtain verification from National Development and
Reform Commission of China or NDRC or a local branch of the NDRC, depending
on certain numerical criteria such as the total investment amount of the
project.  In addition, any material changes of the scope of a project
that has been verified by the NDRC or its local branches shall also be subject
to verification by the NDRC or its local branches.  Failure to comply
with such regulations may prevent the project owner from obtaining other
approvals or completing registrations necessary for conducting business
including, among other things, approval from local branches of the Ministry of
Commerce and registration with local branches of the State Administration for
Industry and Commerce, the State Administration of Taxation, Customs, and the
State Administration of Foreign Exchange.




At the
present time, our Shaanxi NPCC facility has filed with the local branch of the
NDRC of Qian County, Shaanxi Province, for the production capacity of 120,000
metric tons and is in the process of applying for the production capacity of
40,000 metric tons for our second phase.  Since the Verification
Measures require verification by the local NDRC with jurisdiction prior to the
commencement of projects, the filings made by our Shaanxi facility to the local
branch of NDRC of Qian County, Shaanxi Province, may not be
sufficient.  However, our Shaanxi NPCC facility has obtained other
approvals and completed registrations necessary for its operation.




Although
we have not been subject to any administrative penalties for the lack of the
verifications from the local branches of the NDRC as of the date hereof, we
cannot assure you that the NDRC will not take such measures against us in the
future.  If the NDRC or its local branches determine that our failure
to obtain the required verifications is not compliant with the Verification
Measures, our ability to continue or further expand our operation may be
adversely affected.




Prior to ceasing
production of the current products of our coal-based chemical facility on
October 31, 2008, our coal-based chemical
manufacturing business involved the controlled use of potentially harmful and
hazardous materials and chemicals.  Our coal-based chemical
manufacturing process produced exhaust gas and waste water which may pollute the
environment.  If an accident occurred in our coal-based chemical
plant, toxic gas and other pollutants may  have leaked and caused
serious pollution problems and we may become liable to pay damages or fines or
undertake other liabilities under the Environmental Protection Law of the PRC,
the Safety Administration Regulations for Hazardous Chemicals and other relevant
rules and regulations.  Moreover, most of our coal-based chemical
products are flammable, explosive, and hazardous, and posed a threat to the
health and safely of our employees and residents around our
facility.  If any accident occurred during manufacturing or
transportation of these chemicals, we may be subject to significant monetary
damages and fines.




19


The Chinese
government is tightening its environmental laws and
strengthening its enforcement, which could adversely affect our
business.With increased environmental awareness among Chinese
citizens, the Chinese government is beginning to tighten environmental laws and
regulations.  The measures include adopting new laws and regulations
such as Urban and Rural Planning Law and Regulation on National General Survey
of Pollution Sources, and amending existing laws and regulations such as Law of
the PRC on the Prevention and Control of Water Pollution.  Some of
these laws and regulations govern the level of fees payable to government
entities providing environmental protection services and the prescribed
standards relating to the discharge of solid or liquid wastes and
gases.  Recently, the Chinese government has stepped up its
enforcement efforts due to the occurrence of several significant environmental
disasters.  If we fail to comply with the PRC environmental protection
laws and regulations or if any new or revised environmental laws and regulations
are promulgated, we may have to increase capital investments to build or upgrade
environmental protection facilities or incur the risk of being subject to fines,
and, in either scenario, our business, results of operations and prospects may
be adversely affected.




We, our suppliers
and our customers are vulnerable to natural disasters which could severely
disrupt the normal operation of our business and adversely affect our business,
financial condition and operating results.  We operate multiple
facilities and source products from companies that operate facilities, which may
be damaged or disrupted as a result of natural disasters such as earthquakes,
floods, and heavy rains, technical disruptions such as electricity or
infrastructure breakdowns, computer outages and electronic
viruses.  Such events may lead to the disruption of information
systems and telecommunication services for sustained periods.  Such
natural disasters also may make it difficult or impossible for our employees to
reach our business locations.  Damage or destruction that interrupts
our provision of products could adversely affect our reputation, our
relationships with clients, or cause us to incur substantial additional
expenditure to repair or replace damaged equipment or facilities.  We
may also be liable to our customers for disruption in service resulting from
such damage or destruction.  Furthermore, the operations of our
suppliers could be subject to natural disasters and other business disruptions,
which could cause shortages and price increases in various materials essential
for the manufacturing of our products or result in shortage of our
products.  If we are unable to procure an adequate supply of raw
materials that are required to manufacture our products, our revenue and
operating results would be adversely affected.




Our business,
financial condition and operating results depend on our customers’future success
with their products, which may fail to achieve the results we and our customers
expect.Currently, we supply the tire, PVC building materials, ink,
paint, latex, adhesive, paper and PE industries with our NPCC
products.  The potential for growth and success of our NPCC business
largely depends on our customers’  future success in their products.
 If our customers are not successful in developing their products, their
demand for our NPCC products may decrease and our NPCC business may be adversely
impacted as a result.




The sales cycle
for our products is difficult to predict, which may make it
difficult to plan our expenses and forecast our operating results and could have
an adverse effect on our financial results and share price.  If
our sales cycle lengthens, our quarterly operating results may become less
predictable and more volatile.  Due to the relatively large size of
some orders, a delayed sale could have a material adverse effect on our
quarterly revenue and operating results. If our projected revenue does not meet
our expectations, we are likely to experience a shortfall in our operating
profit relative to our expectations.  As a result, we believe that
period- to-period comparisons of our historical results of operations are not
necessarily meaningful and that you should not rely on them as an indication for
future performance.  It is also possible that our quarterly results of
operations may be below the expectations of public market analysts and
investors.  If this occurs, the price of our common stock will likely
decrease.




We may not be
able to achieve and maintain an effective system of internal control over
financial reporting, a failure of whichmay prevent us
from accurately reporting our financial results or detecting and preventing
fraud.  We are subject to reporting obligations under the U.S.
securities laws.  We are required to prepare a management report on
our internal control over financial reporting containing our management’s
assessment of the effectiveness of our internal control over financial
reporting.  In addition, our independent registered public accounting
firm must report on the effectiveness of our internal control over financial
reporting.  Our management may conclude that our internal control over
our financial reporting is not effective.  Moreover, even if our
management concludes that our internal control over financial reporting is
effective, our independent registered public accounting firm may conclude that
our internal control over financial reporting is not effective.  Our
reporting obligations as a public company may place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future.




20


In May
2008, our consolidated financial statements for the year ended December 31, 2007
were restated to correct an overstatement of advances paid to suppliers and
an understatement of property and equipment.  In January 2007, our
consolidated financial statements were restated to correct an overstatement of
revenues and selling expenses for the years ended December 31, 2003, 2004, and
2005.  Also, our December 31, 2003 consolidated financial statements
were restated to correct an overstatement of general and administrative expenses
and an understatement of cost of sales and selling expenses.  Our
restatements of our prior consolidated financial statements may have exposed
us to risks associated with litigation, regulatory proceedings and
government enforcement actions.  We are unable to predict what action,
if any, the SEC or other regulatory bodies may pursue or what consequences such
an action may have on us.  We are also unable to predict the
likelihood of or potential outcomes from litigation, other regulatory
proceedings or government enforcement actions, if any, relating to the need to
restate our historical consolidated financial statements.  The
resolution of these matters could be time-consuming and expensive, and further
distract management from other business concerns and harm our
business.  Furthermore, if we were subject to adverse findings in
litigation, regulatory proceedings or government enforcement actions,
we could be required to pay damages or penalties or have other remedies
imposed, which could harm our business and financial condition.




Although
the restatements we have made did not result in material changes to our
previously reported revenues and profits, we cannot assure you that our
financial statements will not be restated in a way that causes material changes
to our reported revenues and profits in the future.




We have
identified material weaknesses in our internal control over financial reporting
as of December 31, 2008.  The identified material weaknesses relate to




(i)
              the
      lack of adequate policies and procedures and lack of personnel
      possessing adequate technical accounting expertise to ensure that
      transactions are properly accounted for and disclosed in our consolidated
      financial statements; and
  (ii)
              we
      did not design and maintain effective policies and procedures to ensure
      adequate maintenance of tax records, timely reconciliation of income tax
      amounts and adequate analyses and review of deferred tax calculations. As
      a result, we did not maintain effective internal control over the
      accounting for income taxes and related financial statement
      disclosures.







We may notbe
able to successfully carry out our strategic acquisition and investment
strategy.  Our future success depends in part on our ability to
make strategic acquisitions and investments and failure to do so could have a
material adverse effect on our market penetration and revenue
growth.  We, therefore, intend to make strategic acquisitions and
investments in the chemical business.  We cannot assure you
however that we will be able to successfully make such strategic acquisitions
and investments that will prove to be effective for our business due to
certain uncertainties such as delay in obtaining required governmental approvals
for making such strategic acquisitions.




Strategic
acquisitions and investments could subject us to a number of risks, including
risks associated with shared proprietary information and loss of control of
operations that are material to our business.  Moreover, strategic
acquisitions and investments may be expensive to implement and subject us to the
risk of non-performance by a counterparty, which may in turn lead to
monetary losses that materially and adversely affect our
business.  Strategic acquisition and investment could also divert our
management’s attention as well as other resources away from our core
business.  Finally, a full integration of the acquired companies
into our business may also prove to be difficult, which may hinder or delay our
planned growth.




21


The cost of our
raw materials fluctuates significantly, which may adversely impact our profit
margin and financial
position.  The prices for the raw materials that we use in the
manufacture of our NPCC products and, prior to November 2008, our coal-based
chemical products are subject to market forces largely beyond our control,
including, among other things, the prices of coal and limestone.  Both
our NPCC and coal-based chemical businesses use coal as a raw
material.  In the last few years, coal prices have fluctuated
substantially.  In the period from January 2008 through December 2008,
the highest anthracite price was $173.14 per metric ton and the lowest price was
$100.03 per metric ton.  In 2008, coal accounted for approximately
35.9% and 67.8% of the costs of our NPCC products and coal-based chemical
products, respectively.  In the past two years, the prices of
limestone, another key raw material in our NPCC business, have fluctuated widely
and the highest limestone price was $9.71 per ton and the lowest price was $5.79
per ton.  In December 2008, the price of limestone purchased for our
Tai’an NPCC production facility remained the same as that
of  November 2008, which was $9.71 per ton.  In 2008,
limestone accounted for 4.2% of the cost of our NPCC products.  The
price for coal and limestone may continue to increase in the future due to the
rapid development of the Chinese economy.  If the price for coal and
limestone increases in the future, our profit margin could decrease
considerably.




We are dependent
on our suppliers for key materials such as limestone and modification
agent.  Ifwe cannot secure
such raw materials from our suppliers, our business may be adversely affected.We purchase limestone from suppliers as we do not mine
limestone.  Currently, we purchase limestone from five suppliers for
our NPCC business.  We may experience a shortage or interruption in
the supply of our raw materials in the future and if any such shortage or
interruption occurs, our production capabilities and results of operations could
be materially adversely affected.  At the present time, we
purchase our supply of modification agent used in NPCC production
exclusively from two suppliers.  If these two suppliers are unwilling
or unable to provide us with the modification agent we require in sufficient
quantities and at acceptable prices, we would have to resort to our research and
development center or alternative suppliers for modification agent
supply.  We cannot assure you that our research and development center
would be able to make modification agent in a timely manner and in sufficient
quantities or if alternative suppliers would be able to provide
modification agent at commercially acceptable prices, on satisfactory terms, in
a timely manner, or at all.  Our inability to find or develop
alternative sources could adversely affect our business operations.




We extend
relatively long payment terms for accounts receivable for our NPCC
business.  If any of our customers fails to pay us, our business may
be adversely affected as a result.  As is customary in our
industry in China, we extend relatively long payment terms to our customers of
up to 90 days.  As a result of the size of many of our orders, these
extended terms adversely affect our cash flow and our ability to fund our
operations from operating cash flow.  Also, if our customers place
large orders for our products, requiring fast delivery, our inventory and
working capital may be impacted.  If our customers experience sales
slowdowns or other issues, they may not pay us in a timely fashion, even on our
extended terms.  The failure of our customers to pay us in a
timely manner would negatively affect our working capital, which could in turn
adversely affect our cash flow, revenues and operating results in subsequent
periods.




Expansion of our
business may put added pressure on our
management and operational infrastructure and we may not be able to meet
increased demand for our NPCC products, adversely affecting our operating
results.  Our business plan is to significantly grow our
operations to meet anticipated growth in demand for existing NPCC
products.  Growth in our business may place a significant strain on
our personnel, management, financial systems and other resources.  The
evolution of our business also presents numerous risks and challenges,
including:







·
            the
      continued acceptance of our NPCC products by the tire, PVC building
      materials and other industries;





·
            our
      ability to successfully and rapidly expand sales to potential customers in
      response to potentially increasing
demand;





·
            the
      cost associated with such growth, which is difficult to quantify, but
      could be significant;





·
            rapid
      technological change; and





·
            the
      highly competitive nature of the NPCC
industry.




22


If we are
successful in obtaining rapid market growth of our NPCC products, we will be
required to deliver large volumes of quality products to customers on a timely
basis at a reasonable cost to those customers.  Meeting any such
increased demand will require us to expand our manufacturing facilities, to
increase our ability to purchase raw materials, to increase the size of our work
force, to expand our quality control capabilities and to increase the scale upon
which produce products.  Such demands would require more capital and
working capital than we currently have available.  We cannot assure
you that our current and planned operations, personnel, systems, internal
procedures and controls will be adequate to support our future
growth.




Our business
depends substantially on the continuing efforts ofour executive
officers, research personnel and other key personnel, and our business may be
severely disrupted if we lose their services.  We depend on
key members of our management team, research personnel and other key
personnel.  We do not maintain key employee insurance.  If
one or more of our executive officers and other key personnel are unable or
unwilling to continue in their present positions, we may not be able to replace
them readily, if at all.  Therefore, our business may be severely
disrupted, and we may incur additional expenses to recruit and retain new
officers.  Each of our executive officers, key research personnel and
marketing managers has either entered into a confidentiality and non-competition
agreement with us or is subject to confidentiality and non-competition
obligations under their employment agreements with us.  However, if
any disputes arise between our executive officers, key research personnel and
marketing managers and us. we cannot assure you, in light of uncertainties
associated with the PRC legal system, the extent to which any of these
agreements could be enforced in China, where all of our executive officers
reside and hold substantially all of their assets. See “--Risks Related to Doing
Business in China—Our business is largely subject to the uncertain legal
environment in China and your legal protection could be limited.”




Our business
depends on our ability to protect our intellectual property
effectively.  If any of our patents are not protected or any of our
trade secrets are divulged, our business prospects may be
harmed.  The success of our business depends in substantial
measure on the legal protection of the patents which we are licensed to use and
co-own with Tsinghua University in China and other proprietary rights in
technology we hold.  We hold licensed patents in China and co-own a
patent.  We cannot assure you that our procedures adequately monitor
the infringements of our intellectual property rights, and we cannot be certain
that the steps we have taken will prevent unauthorized use of our intellectual
property in China where it may be difficult to enforce the law to protect our
proprietary rights as compared to the laws of the United States.  The
validity and breadth of claims in patents and trade secrets involve complex
legal and factual issues and, therefore, the extent of their enforceability and
protection is highly uncertain.  Issued patents or patents based on
pending patent applications or any future patent applications or trade secrets
may not exclude competitors from the use of such intellectual propriety or may
not provide a competitive advantage to us.  In addition, patents that
are licensed to us or that have been issued to us may not be held valid if
subsequently challenged and others may claim rights in or ownership of such
patents.  Furthermore, we cannot assure you that our competitors have
not developed, or will not develop similar products, will not duplicate our
products, or will not design around any patents issued to or licensed by
us.




We claim
proprietary rights in various unpatented technologies, know-how, and trade
secrets relating to products and manufacturing processes.  We protect
our proprietary rights in our products and operation through know-how and trade
secrets, especially where we believe patent protection is not appropriate or
obtainable.  Trade secrets, however, are difficult to
protect.  While we use reasonable efforts to protect our trade
secrets, such as nondisclosure agreements, our employees and research partners
may unintentionally or willfully disclose our information to
competitors.  In addition, nondisclosure agreements may not be
enforceable or provide meaningful protection for our trade secrets or other
proprietary information in the event of unauthorized use or
disclosure.  For example, NPCC products are differently formulated for
different applications.  The formulas are maintained as trade secrets and
are revealed only to a small number of technical and management
personnel.  In particular, our trade secrets provide us with a
competitive edge in the tire industry, of which only a very few other NPCC
manufacturers have successfully entered.  If any of our trade secrets
are divulged, we could lose our competitive edge in the tire and other
industries.  In addition, if our competitors independently develop
information that is equivalent to our trade secrets, it will be more difficult
for us to enforce our rights and our business could be harmed.




23


We may have
difficulties in enforcing our intellectual property rights through
litigation. Litigation may be necessary to enforce our intellectual
property rights, protect our trade secrets or determine the validity and scope
of proprietary rights of others. We cannot assure you that the outcome of such
potential litigation will be in our favor.  Such litigation may be
costly and may divert management attention as well as our other resources away
from our business.  An adverse determination in any such litigation
will impair our intellectual property rights and may harm our business,
prospects and reputation . In addition, we have no insurance coverage against
litigation costs and would have to bear all costs arising from such litigation
to the extent we are unable to recover them from other parties.  The
occurrence of any of the foregoing could have a material adverse effect on our
business, results of operations and financial conditions.




We may not be
able to obtain the consent of Tsinghua University for the use of the
membrane-dispersion patent by any future subsidiaries.Pursuant to an
agreement with Tsinghua University, our Shandong and Shaanxi NPCC facilities
have the right to use a membrane-dispersion patent jointly held by Tsinghua
University and us, and any third party use of the patent is prohibited without
the prior consent of Tsinghua University. In the event that any future
subsidiary, including our new NPCC facility in Zibo, Shandong, desires to use
the membrane-dispersion patent, we will be required to enter into additional fee
arrangements with Tsinghua University. However, we cannot assure you that we
will be able to enter into such arrangements with Tsinghua University
allowing the use by such future subsidiaries of the membrane-dispersion patent
under terms and conditions acceptable to us.




Risks
Related To Our Industry





Disruptions
in the capital and credit markets related to the current national and worldwide
financial crisis, which may continue indefinitely or intensify, could adversely
affect our results of operations, cash flows and financial condition, or those
of our customers and suppliers. The
current disruptions in the capital and credit markets may continue indefinitely
or intensify, and adversely impact our results of operations, cash flows and
financial condition, or those of our customers and suppliers. Disruptions in the
capital and credit markets as a result of uncertainty, changing or increased
regulation, reduced alternatives or failures of significant financial
institutions could adversely affect our access to liquidity needed to conduct or
expand our businesses or conduct acquisitions or make other discretionary
investments, as well as our ability to effectively hedge our currency or
interest rate. Such disruptions may also adversely impact the capital needs of
our customers and suppliers, which, in turn, could adversely affect our results
of operations, cash flows and financial conditions.




China’s commitments to
the World Trade Organization may intensify competition.  In
connection with its accession to the World Trade Organization, China made many
commitments including opening its markets to foreign products, allowing foreign
companies to conduct distribution businesses and reducing customs
duties.  As a result, foreign manufacturers may ship their NPCC
products into or establish manufacturing facilities in
China.  Competition from foreign companies may reduce our selling
prices, revenue and profit margins, adversely affecting our
business.




Our failure to
comply with ongoing governmental regulations could hurt our operations and
reduce our market share.  In China, the chemical industry is
undergoing increasing regulations as environmental awareness increases in China
and our coal-based chemical manufacturing facilities are subject to various
pollution control laws and regulations which include Environmental Protection
Law of the PRC, the Law of the PRC on the Prevention and Control of Water
Pollution, Implementation Rules of the Law of the PRC on the Prevention and
Control of Water Pollution, the Law of the PRC on the Prevention and Control of
Air Pollution, Safety Administration Regulations for Hazardous Chemicals, the
Law of the PRC on the Prevention and Control of Solid Waste Pollution, and the
Law of the PRC on the Prevention and Control of Noise Pollution.  The
trend is that the Chinese government toughens its regulations and penalties for
violations of environmental regulations.  New regulatory actions are
constantly changing our industry.  Although we believe we have
complied with applicable government regulations in all material aspects, there
is no assurance that we will be able to do so in the future.




If we cannot
compete successfully for market share against other NPCC product companies, we
may not achieve sufficient product revenues, and our business could
suffer.  The market for our products is characterized by
intense competition and rapid technological advances.  Our products
compete with a multitude of products developed, manufactured and marketed by
others and we expect competition from new market entrants in the
future.  We believe that the principal competitive factors in the
markets for our products are manufacturing capacity, quality of products, price,
research and development capability, and customer base.




24


Risks
Related To Doing Business In China




Changes in
China’s political or
economic situation could harm our business and our operational
results.Economic reforms adopted by the Chinese government
have had a positive effect on the economic development of the country, but the
government could change these economic reforms or any of the legal systems at
any time.  This could either benefit or damage our operations and
profitability.  Some changes that could have this effect
are:




·
            Level
      of government involvement in the
economy;





·
            Control
      of foreign exchange;





·
            Methods
      of allocating resources;





·
            Balance
      of payments position;





·
            International
      trade restrictions; and





·
            International
      conflict.




The
Chinese economy differs from the economics of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many
ways.  The economic reforms in China have been conducted under a tight
control of the Chinese government.  As a result of these differences,
we may not develop in the same way or at the same rate as might be expected if
the Chinese economy were similar to those of the OECD member
countries.




Our business is
largely subject to the uncertain legal environment
in China and your legal protection could be limited.  The
Chinese legal system is a civil law system based on written
statutes.  Unlike common law systems, it is a system in which
precedents set in earlier legal cases are not generally used.  The
overall effect of legislation enacted over the past 20 years has been to enhance
the protections afforded to foreign invested enterprises in
China.  However, these laws, regulations and legal requirements are
relatively recent and are evolving rapidly and their interpretation and
enforcement involves uncertainties.  In addition, the PRC legal system
is based in part on government policies and internal rules (some of which are
not published on a timely basis or at all) that may have a retroactive
effect.  As a result, we may not be aware of our violation of these
policies and rules until some time after the violation.  These
uncertainties could limit the legal protections available to foreign investors,
such as the right of foreign invested enterprises to hold licenses and permits
such as requisite business licenses.  In addition, all of our
executive officers and our directors are residents of China, and substantially
all the assets of these persons are located outside the U.S.  As a
result, it could be difficult for investors to effect service of process in
the U.S., or to enforce a judgment obtained in the U.S. against us or any of
these persons.




The Chinese
government exerts substantial influence over the manner in which we conduct
our
business activities.  China only recently has permitted
provincial and local economic autonomy and private economic
activities.  The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership.  Our ability to operate in
China may be harmed by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property, work safety, labor protection, and other
matters.  We believe that our operations in China are in material
compliance with all applicable legal and regulatory
requirements.  However, the central or local governments may impose
new, stricter regulations or interpretations of existing regulations that
would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations.  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 China or
particular regions thereof, and could require us to divest ourselves of any
interest we hold in Chinese properties.




25


A slowdown or
other adverse developments in the economy of the PRC may materially and
adversely affect our customers, demand for our products andour
business.  All of our operations are conducted in the
PRC.  Although the economy of the PRC has grown significantly in
recent years, we cannot assure you that such growth will continue.  In
the last quarter of 2008, China’s gross domestic product or GDP growth slowed to
6.8% from 11.1% in the same period in 2007.  A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic
developments in the PRC could materially reduce the demand for our products and
materially and adversely affect our business.




Future inflation
in China may inhibit our activity to conduct business in China.In recent
years. the Chinese economy has experienced periods of rapid expansion and high
rates of inflation.  During the past three years, the annual rates of
inflation in China were 2.8% in 2006, 6.5% in 2007 and 7.8% in
2008.  Expansion and inflation have led to the adoption by the Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain
inflation.  Higher inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the end market
for our products.  In addition, due to the tightening of credit, we
may have difficulties in securing funding from financial institutions in China,
which could adversely affect our operations.




Restrictions on
currencyexchange may
limit our ability to receive and use our revenues
effectively.  The majority of our revenues will be settled in
Renminbi and U.S. Dollars, and any future restrictions on currency exchanges may
limit our ability to use revenue generated in Renminbi to fund any future
business activities outside China or to make dividend or other payments in U.S.
dollars.  Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the Renminbi for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents at those banks in
China authorized to conduct foreign exchange business.  In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items.  We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.




The value of our
securities will be affected by the foreign exchange ratebetween U.S.
dollars and Renminbi.  The value of our common stock will be
affected by the foreign exchange rate between U.S. dollars and Renminbi, and
between those currencies and other currencies in which our sales may be
denominated.  For example, to the extent that we need to convert U.S.
dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, our
business, and the price of our common stock may be harmed.  If we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.




We may not be
able to distribute our assets upon liquidation.  Our assets are
predominately located inside China.  Under the laws governing foreign
investment enterprises in China, dividend distribution and liquidation are
allowed but subject to certain procedures under the relevant laws and
rules.  Any dividend payment will be subject to the decision of the
board of directors and subject to foreign exchange rules governing such
repatriation.  Any liquidation is subject to both the relevant
government agency’s approval and supervision as well the foreign exchange
control.  This may generate additional risk for our investors in case
of liquidation.




PRC regulations
relating to the establishment of offshore special
purpose companies by PRC domestic residents and registration requirements for
employee stock ownership plans or share option plans may subject our PRC
resident beneficial owners or the plan participants to personal liability, limit
our abilityto inject capital
into our PRC subsidiaries, limit our subsidiaries’ability to
increase their registered capital or distribute profits to us, or may otherwise
adversely affect us.State Administration for Foreign Exchange or SAFE
issued a circular in October 2005 requiring PRC domestic residents to register
with the local SAFE branch before establishing or controlling any company
outside of China for the purpose of capital financing with assets or equities of
PRC companies, referred to in the circular as an “offshore special purpose
company.”  PRC domestic residents who are stockholders of offshore
special purpose companies and have completed round trip investments but did not
make foreign exchange registrations for overseas investments before November
1, 2005 were retroactively required to register with the local SAFE branch
before March 31, 2006.  PRC resident stockholders are also required to
amend their registrations with the local SAFE branch in certain
circumstances.  We are aware that our PRC domestic resident
stockholders subject to the SAFE registration requirement have registered with
the Shandong SAFE branch and amended their registration upon the share exchange
between us and Faith Bloom Limited.  We cannot provide any assurances
that all of our stockholders who are PRC residents have made all required
amendments and will make or obtain any applicable registrations or approvals
required by these SAFE regulations.  The failure or inability of our
PRC resident stockholders to comply with the registration procedures set forth
therein may subject us to fines and legal sanctions, restrict our cross-border
investment activities, or limit our PRC subsidiaries’ ability to distribute
dividends or limit our PRC subsidiaries’ ability to obtain
foreign-exchange-dominated loans.




26


As it is
uncertain how the SAFE regulations will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future
strategy.  For example, we may be subject to more stringent review and
approval process with respect to our foreign exchange activities, such as
remittance of dividends and foreign currency-denominated borrowings, which may
adversely affect our results of operations and financial
condition.  In addition, if we decide to acquire a PRC domestic
company, we cannot assure you that we or the owners of such company, as the case
may be, will be able to obtain the necessary approvals or complete the necessary
filings and registrations required by the SAFE regulations.  This may
restrict our ability to implement our acquisition strategy and could adversely
affect our business and prospects.




In
December 2006, the People’s Bank of China promulgated the Implementation Rules
of the Administrative Measures for Individual Foreign Exchange, or the
Individual Foreign Exchange Rules, setting forth the respective requirements for
foreign exchange transactions by PRC individuals under either the current
account or the capital account.  In January 2007, SAFE issued
implementing rules for the Individual Foreign Exchange Rules, which, among other
things, specified approval requirements for certain capital account transactions
such as a PRC individuals participation in the employee stock ownership plans or
stock option plans of an overseas publicly-listed company.  On March
28. 2007, SAFE promulgated the Application Procedure of Foreign Exchange
Administration for Domestic Individuals Participating in Employee Stock Holding
Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option
Rule.  Under the Stock Option Rule, PRC individuals who are granted
stock options by an overseas publicly-listed company are required, through a
qualified PRC agent or a PRC subsidiary of such overseas publicly-listed
company, to register with SAFE and complete certain other
procedures.  We and our PRC employees who might be granted stock
options are subject to the Stock Option Rule.  If we or our PRC
optionees fail to comply with these regulations, we or our PRC optionees may be
subject to fines and legal sanctions.




We may be treated
as a resident enterprise for PRC tax purposes under the Enterprise Income Tax
Law and its implementing rules which became effective on January 1, 2008, which
may subject into PRC incometax for any
dividends we receive from our subsidiaries and PRC income tax withholding for
any dividends or interest we pay to our non-PRC stockholders or
noteholders.  Under the Enterprise Income Tax Law of People’s
Republic of China, or the EIT Law, and its implementing rules, all domestic and
foreign investment companies in China will be subject to a uniform enterprise
income tax at the rate of 25%.  In addition, dividends from domestic
companies to their foreign stockholders will be subject to withholding tax
at a rate of 10%, if the foreign investors are considered non-resident
enterprises without any establishment or place of operation within China or if
the dividends payable have no connection with the establishment or place of the
foreign investors within China, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a lower
withholding tax rate.  Moreover, under the EIT Law, enterprises
established under the laws of non-PRC jurisdictions, but whose “de facto
management body” is located in the PRC are treated as resident enterprises for
PRC tax purposes.  Under the implementing rules of the EIT Law, “de
facto management body” is defined as a body that has material and overall
management and control over the business, personnel, accounts and properties of
an enterprise.  Because all of our management is currently based in
China, we may be considered a PRC resident enterprise.




If the
PRC tax authorities determine that we are a “resident enterprise” for PRC EIT
Law purposes, a number of unfavorable PRC tax consequences could
follow.  First, we may be subject to enterprise income tax at a rate
of 25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations.  In our case, this would mean that income such
as non-China source income would be subject to PRC enterprise income tax at a
rate of 25%.  Second, although under the EIT Law and its implementing
rules dividends paid to us from our PRC subsidiaries would qualify as
“tax-exempt income,” we cannot guarantee that such dividends will not be subject
to a 10% withholding tax, as the PRC foreign exchange control authorities, which
enforce the withholding tax, have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes.  The impact of the
imposition of enterprise income tax will be mitigated to the extent we can
obtain a foreign tax credit for such taxes against our U.S. income tax liability
on such income.  Finally, it is possible that the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends or interest we pay to our non-PRC
stockholders or noteholders and with respect to gains derived by our non-PRC
stockholders or noteholders from transferring our shares or our convertible
notes.




27


Our business
benefits from certain PRC government incentives.Expiration of or
changes to, these incentives could have a material adverse effect on our results
of operations.  In accordance with the former PRC Income Tax
Law for Enterprises with Foreign Investment and Foreign Enterprises and the
related implementing rules, and as approved by the relevant tax authorities,
currently, our PRC subsidiaries are subject to an effective enterprise income
tax rate of 15% and a local income tax rate of 1.5%.  Under these
approvals issued by tax authorities, Shandong Haize Nanomaterials Co., Ltd. and
Shandong Bangsheng Chemical Co., Ltd. were exempted from enterprise tax for 2005
and 2006 and were taxed at a reduced rate of 16.5% in 2007 and would be taxed
at 12.5% from 2008 to 2009; and Shaanxi Haize Nanomaterials Co., Ltd.
was exempted from enterprise tax for 2006 and 2007 and would be taxed at a
reduced rate of 12.5% from 2008 to 2010.  As these tax incentives
expire, our PRC subsidiaries income tax rate will increase significantly, and
any increase of our PRC subsidiaries’ income tax rate in the future could have a
material adverse effect on our financial condition and results of
operations.




The EIT
law provides a unified enterprise tax rate of 25% and unified tax deductions
standards will be applied equally to both domestic-invested enterprises and
foreign invested enterprises such as our PRC subsidiaries.  The EIT
law also provides a five-year transition period starting from its effective date
of those enterprises which were established prior to March 16,
2007.  On December 26, 2007, the State Council issued the Notice of
the Slate Council Concerning Implementation of Transitional Rules for Enterprise
Income Tax Incentives, or Circular 39.  Pursuant to Circular 39,
foreign invested enterprises established prior to March 16, 2007 and eligible
for preferential tax treatment, such as our PRC subsidiaries, will continue to
enjoy the preferential tax treatment in the manner and during the period as
former laws and administrative regulations provided until such period
expires.  The unified income tax rate of 25% will be applied to our
PRC subsidiaries after the expiration of the above-mentioned period of
preferential tax treatment.  While the EIT law equalizes the tax rates
for foreign invested enterprises and domestic companies, preferential tax
treatment would continue to be given to companies in certain encouraged sectors
and to those classified as high technology companies enjoying special support
from the state.  We cannot assure you that our PRC subsidiaries who
currently enjoyed their respective tax holidays will continue to qualify for any
preferential tax treatment after transitional period provided by the EIT law,
which could result in a decrease in our profits.  Any increase in our
effective tax rate as a result of the above may adversely affect our operating
results.




Our subsidiaries
in China are subject to restrictions on dividend payments and making other
payments to us or any other affiliated company.  We are
primarily a holding company and do not conduct any business operations other
than our holding of the equity interests in China.  As a result, we
rely on dividends, consulting and other fees paid to us by our subsidiaries in
China.  Our ability to pay dividends and meet our obligations is
partially dependent upon receiving such payments from our subsidiaries in
China.  PRC regulations permit payment of dividends only out of
accumulated profits as determined in accordance with Chinese accounting
standards and regulations.  Our subsidiaries in China are also
required to set aside at least 10% of their after-tax profits, if any, each year
according to Chinese accounting standards and regulations to fund certain
reserve funds, unless such reserve funds have reached 50% of their respective
registered capital.  These reserves are not distributable as cash
dividends.  Furthermore, our subsidiaries are required to allocate
portions of their respective after-tax profits to their enterprise expansion
funds and staff welfare and bonus funds at the discretion of their hoards of
directors or equivalent governing bodies.




Our PRC
subsidiaries are obligated to withhold and pay PRC individual income tax in
respect of the salaries and certain other income received by their
employees who are subject
to PRC individual income tax.  If our PRC subsidiaries fail to
withhold or pay such individual income tax in accordance with applicable PRC
regulations, they may be subject to certain sanctions and other penalties, which
could have a material adverse
impact on its business.  Under PRC laws, our PRC subsidiaries
are obligated to withhold and pay individual income tax in respect of the
salaries and certain other income received by their employees who are subject to
PRC individual income tax.  Our PRC subsidiaries may be subject to
certain sanctions and other liabilities under PRC laws in case of failure to
withhold and pay individual income taxes for their employees in accordance with
the applicable laws.  Sales commission is a component of the salary of
NPCC salesmen and we do not currently deduct or withdraw income tax for this
income. Although we have not received any notice or penalty from PRC tax
authorities, we cannot assure you that such notice or penalty will not occur in
the future. We have subsequently established relevant tax deduction policies and
we believe that such taxes will be effectively deducted or withdrawn in
2009.




28


We have limited
business insurance coverage in China, which could harm our
business.  We are exposed to many risks, including equipment
failures, natural disasters, industrial accidents, power outages, and other
business interruptions.  Furthermore, if any of our products are
faulty, then we may become subject to product liability claims or we
may have to engage in a product recall.  We do not carry business
interruption insurance and as a result, we may be required to pay for financial
and other losses, damages and liabilities, including those caused by natural
disasters and other events beyond our control, out of our own funds, which could
have a material adverse effect on our business, financial condition and results
of operations.




Any future
outbreak of severe acute respiratory syndrome or avian influenza in China, or
similar adverse public health
developments, may severely disrupt our business and
operations.  A renewed outbreak of severe acute respiratory
syndrome, the Avian Flu or another widespread public health problem in China,
where all of our manufacturing facilities are located and where all of our
revenues are derived from, could have a negative effect on our
operations.  In addition, there have been confirmed human cases of
avian influenza in PRC, Vietnam, Iraq, Thailand, Indonesia, Turkey, Cambodia and
other countries which have proven fatal in some instances.  If such an
outbreak or any other similar epidemic were to spread in China, where our
operations are located, it may adversely affect our business and operating
results.




Such an
outbreak could have an impact on our operations as a result of:







·
            quarantines
      or closures of our manufacturing facilities, which would severely disrupt
      our operations,





·
            the
      sickness or death of our key officers and employees,
  and





·
            a
      general slowdown in the Chinese
economy.





Risks
Related To Our Common Stock




The trading
prices of many companies that have business operations only in China have been
volatile, which may result in largefluctuations in
the price of our common stock and losses for investors.The stock market has
experienced significant price and volume fluctuations that have particularly
affected the trading prices of equity securities of many companies that have
business operations exclusively in China. These fluctuations have often been
unrelated or disproportionate to the operating performance of many of these
companies. Any negative change in the public’s perception of these companies
could decrease our stock price regardless of our operating results. The market
price of our common stock has been and may continue to be volatile. We expect
our stock price to be subject to fluctuations as a result of a variety of
factors, including factors beyond our control. These factors
include:




·
            actual
      or anticipated variations in our quarterly operating
    results;




·
            announcements
      of technological innovations or new products or services by us or our
      competitors;




·
            announcements
      relating to strategic relationships or
  acquisitions;





·
            additions
      or terminations of coverage of our common stock by securities
      analysts;





·
            statements
      by securities analysts regarding us or our
  industry;





·
            conditions
      or trends in the our industry; and





·
            changes
      in the economic performance and/or market valuations of other NPCC and
      chemical companies.





29




The
prices at which our common stock trades will affect our ability to raise
capital, which may have an adverse affect on our ability to fund our
operations.





Our common stock
may be considered to be a “penny
stock”and, as such,
the market for our common stock may be further limitedby certain SEC
rules applicable to penny stocks.  To the extent the price of
our common stock remains below $5.00 per share or we have net tangible assets of
$2,000,000 or less, our common shares will be subject to certain “penny stock”
rules promulgated by the SEC. Those rules impose certain sales practice
requirements on brokers who sell penny stock to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000). For
transactions covered by the penny stock rules, the broker must make a special
suitability determination for the purchaser and receive the purchaser’s written
consent to the transaction prior to the sale. Furthermore, the penny stock rules
generally require, among other things, that brokers engaged in secondary trading
of penny stocks provide customers with written disclosure documents, monthly
statements of the market value of penny stocks, disclosure of the bid and asked
prices, disclosure of the compensation to the brokerage firm, and disclosure of
the sales person working for the brokerage firm. These rules and regulations
adversely affect the ability of brokers to sell our common shares and limit the
liquidity of our securities.





We do not intend
to pay cash dividends in the near future.We have never declared
or paid cash dividends on our capital stock and we do not anticipate paying any
cash dividends in the foreseeable future. We currently intend to retain all
available funds and any future earnings for use in the operation and expansion
of our business. In addition, the terms of any future debt or credit facility
may preclude us from paying any dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of potential gain in your
investment for the foreseeable future.





We may incur
increased costs as a result of changes in laws and regulations relating to
corporate governance matters.As a public reporting company, we are
required to comply with the Sarbanes-Oxley Act of 2002 and the related
rules and regulations adopted by the SEC and by The NASDAQ Global Select Market,
including expanded disclosures and accelerated reporting requirements.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other
requirements have increased our costs and require additional management
resources. Additionally, these laws and regulations could make it more difficult
or more costly for us to obtain certain types of insurance, including director
and officer liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers.





We may require
additional capital, which may not be available on commercially reasonable terms,
or at all. 
Capital raised through the sale of equity securities may result in dilution to
our shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. Financing may be unavailable in amounts or on
terms acceptable to us, or at all. Failure to obtain such additional capital
could have an adverse impact on our business strategies and growth
prospects.





If our executive
officers, directors and
principal stockholders choose to act together, they will be able to exert
significant influence over us and our significant corporate decisions and may
act in a manner that advances their best interests and not necessarily those of
otherstockholders. Our executive officers,
directors, and beneficial owners of 5% or more of our outstanding common stock
and their affiliates will beneficially own approximately 44.4% of our
outstanding common stock. As a result, these persons, acting together, will have
the ability to influence significantly the outcome of all matters requiring
stockholder approval, including the election and removal of directors and any
merger, consolidation, or sale of all or substantially all of our assets and
they may act in a manner that advances their best interests and not necessarily
those of other stockholders, including investors, by, among other
things:





30


·
            
            delaying,
      deferring or preventing a change in control of
  us;





·
            
            entrenching
      our management and/or our board of
directors;





·
            
            impeding
      a merger, consolidation, takeover or other business combination involving
      us;





·
            
            discouraging
      a potential acquirer from making a tender offer or otherwise attempting to
      obtain control of us; or





·
            
            causing
      us to enter into transactions or agreements that are not in the best
      interests of all stockholders.






We may incur
substantial additional indebtedness in the future, which could adversely affect
our financial condition and our ability to generate sufficient cash to satisfy
our outstanding and future debt obligations.  We may from time
to time incur substantial additional indebtedness.  If we or our
subsidiaries incur additional debt, the risks that we face as a result of such
indebtedness and leverage could intensify.  The increase in the amount
of our indebtedness could adversely affect our financial condition and our
ability to generate sufficient cash.




For
example, it could:




·
            
            increase
      our vulnerability to adverse general economic and industry
      conditions;





·
            
            require
      us to dedicate a substantial portion of our cash flow from operations to
      servicing and repaying indebtedness, thereby reducing the availability of
      cash flow to fund working capital, capital expenditures, dividend payments
      and other general corporate
purposes;





·
            
            limit
      our flexibility in planning for or reacting to changes in the businesses
      and the industries in which we
operate;





·
            
            place
      us at a competitive disadvantage compared to our competitors which have
      less debt;





·
            
            limit,
      along with the financial and other restrictive covenants of such
      indebtedness, our ability to borrow additional funds;
  and





·
            
            increase
      the cost of additional financing.




Our
ability to generate sufficient cash to satisfy our outstanding and future debt
obligations will depend upon our future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, many of which are beyond our control.  We may not generate
sufficient cash flow to meet our anticipated operating expenses or to service
our debt obligations as they become due.




For the
year ended December 31, 2008, net cash inflow from operating
activities was$38.9million.If
we are unable to service our indebtedness, we will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing existing
indebtedness or seeking equity capital.  These strategies, if
implemented, may not be instituted on satisfactory terms.  Any of
these constraints upon us could materially and adversely affect our ability to
satisfy our obligations under our 6.0% convertible senior notes due
2018.




Future issuances
of shares or equity-related securities may depress the trading price of our
shares.  Any issuance of equity securities could dilute the
interests of our existing stockholders and could substantially decrease the
trading price of our shares. We may issue equity securities in the future for a
number of reasons, including to finance our operations and business strategy
(including in connection with acquisitions, strategic collaborations or other
transactions), to adjust our ratio of debt to equity and to satisfy our
obligations upon the exercise of outstanding warrants or options or for other
reasons.




31


Sales of
a substantial number of shares or other equity-related securities in the public
market could depress the market price of our shares, and impair our ability to
raise capital through the sale of additional equity securities.  We
cannot predict the effect that future sales of our shares or other
equity-related securities would have on the market price of our
shares.  In addition, the price of our shares could be affected by
possible sales of our shares by investors who view our convertible notes as a
more attractive means of obtaining equity participation in our company and by
hedging or arbitrage trading activity by investors that we expect to develop
involving our convertible note.




The market price
for our shares may be volatile.  The market price of our shares
experienced, and may continue to experience, significant
volatility.  For the period from December 31, 2007 to December 31,
2008, the trading price of our shares on the NASDAQ Global Select Market and
previously, on the Nasdaq Capital Market has ranged from a low of US$2.67 per
share to a high of US$15.57 per share.  Numerous factors, including
many over which we have no control, may have a significant impact on the market
price of our shares.




Our articles of
incorporation contain anti-takeover provisions that could have a material
adverse effect on the rights of holders of our shares.  Our
articles of incorporation contain provisions that could discourage, delay or
prevent a merger, acquisition or other change of control of our company or
changes in our board of directors that our stockholders might consider
favorable, including transactions in which you might receive a premium for your
shares.  For example, our board of directors has the authority to
create and issue, without prior stockholder approval, preferred stock that may
have rights senior to those of our common stock and that, if issued, could
operate as a “poison pill” to dilute the stock ownership of a potential hostile
acquirer to prevent an acquisition that is not approved by our board of
directors.  These provisions also could limit the price that investors
might be willing to pay in the future for our shares, thereby depressing
the market price of our shares.  Stockholders who wish to participate
in these transactions may not have the opportunity to do so.  In
addition, we are subject to the provisions of Chapter 78 of the Nevada Revised
Statutes, which may prohibit certain business combinations with stockholders
owning 10% or more of our outstanding voting stock. Any delay or prevention of a
change of control transaction or changes in our board of directors could cause
the market price of our common stock to decline.




You may have
difficulty enforcing judgments obtained against
us.  Substantially all of our assets are located outside of the
United States.  Substantially all of our current operations are
conducted in the PRC.  In addition, most of our directors and officers
are nationals and residents of countries other than the United
Slates.  A substantial portion of the assets of these persons are
located outside the United States.  As a result, it may be difficult
for you to effect service of process within the United States upon those
persons.  It may also be difficult for you to enforce in U.S. courts
judgments obtained in U.S. courts based on the civil liability provisions of the
U.S. federal securities laws against us and our officers and directors, most of
whom are not residents in the United Stales and the substantial majority of
whose assets are located outside of the United States.  In addition,
there is uncertainty as to whether the courts of the PRC would recognize or
enforce judgments of U.S. courts against us or such persons predicated upon the
civil liability provisions of the securities laws of the United States or any
state.  In addition, it is uncertain whether such PRC courts would he
competent to hear original actions brought in the PRC against us or such
persons predicated upon the securities laws of the United States or any
state.




Risks
Related To Our 6.0% Convertible Senior Notes Due 2018




The notes are
unsecured,are effectively
subordinated to all of our existing and future secured indebtedness and are
structurally subordinated to all liabilities of our subsidiaries, including
trade payables.  The notes are unsecured, are effectively
subordinated to all of our existing and future secured indebtedness, to the
extent of the assets securing such indebtedness, and are structurally
subordinated to all liabilities of our subsidiaries, including trade
payables.  As of December 31, 2008, our subsidiaries had no
short-term bank borrowings or long-term bank borrowings to which the notes
would be structurally subordinated.  All of our operations are
conducted through our subsidiaries.  None of our subsidiaries has
guaranteed or otherwise become obligated with respect to the
notes.  Our right to receive assets from any of our subsidiaries upon
its liquidation or reorganization, and the right of holders of the notes to
participate in those assets, is structurally subordinated to claims of that
subsidiary’s creditors, including trade creditors.  Even if we were a
creditor of any of our subsidiaries, our rights as a creditor would be
subordinate to any security interest in the assets of that subsidiary and any
indebtedness of that subsidiary senior to that held by
us.  Furthermore, none of our subsidiaries is under any
obligation to make payments to us, and any payments to us would depend on the
earnings or financial condition of our subsidiaries and various business
considerations.  Statutory, contractual or other restrictions may also
limit our subsidiaries’ ability to pay dividends or make distributions, loans or
advances to us.  For these reasons, we may not have access to any
assets or cash flows of our subsidiaries to make payments on the
notes.




32


We have made
onlylimited covenants in the indenture for the notes, and these limited covenants
may not protect your investment.  The indenture for the notes
does not:




·
            
            require
      us to maintain any financial ratios or specific levels of net worth,
      revenues, income, cash flows or liquidity and, accordingly, does not
      protect holders of the notes in the event that we experience significant
      adverse changes in our financial condition or results of
      operations;





·
            
            restrict
      our subsidiaries’ ability to issue securities that would be senior to the
      shares of our subsidiaries held by
us;





·
            
            restrict
      our ability to repurchase our
securities;





·
            
            restrict
      our ability to pledge our assets or those of our
    subsidiaries





·
            
            restrict
      our ability to make investments or to pay dividends or make other payments
      in respect of our shares, or other securities ranking junior to the notes;
      or


·
              
              restrict
      our ability to incur indebtedness in an amount not exceeding $15
      million.




Furthermore,
the indenture for the notes contains only limited protections in the event of a
change in control.  We could engage in many types of transactions,
such as acquisitions, refinancings or recapitalizations, which could
substantially affect our capital structure and the value of the notes and our
shares but may not constitute a “fundamental change” that permits holders to
require us to repurchase their notes.  For these reasons, the
noteholder should not consider the covenants in the indenture or the repurchase
features of the notes as a significant factor in evaluating whether to invest in
the notes.




Because we have
not registered the notes and the shares issuable upon conversion of the
notes, the noteholders will have a limited ability to resell
them.  We have not registered the notes or the shares issuable
upon conversion of the notes under the Securities Act or any state securities
laws.  Unless they are registered, noteholders may not offer or
sell the notes or the shares issuable upon conversion of the notes except
pursuant to exemptions from the registration and qualification requirements of
federal and state securities law.  Although we have agreed to file and
make effective a registration statement under the Securities Act with respect to
the notes and the shares issuable upon conversion of the notes, we may not be
able to do so by and during the time periods we have agreed to do
so.  In addition, the registration rights agreement we entered into
with the initial purchasers will permit us to prohibit offers and sales of the
notes pursuant to that registration statement for a period of up to an aggregate
of 30 days (or, under certain circumstances, 60 days) in any 90 days period or
an aggregate of 90 days in any 12-month period.  Holders of the notes
must also take certain actions, including completing and submitting a
questionnaire, and undertake certain obligations, before we are required to
register their notes or the shares issuable upon conversion of the
notes.  For these reasons, the noteholder may not be able to resell
their notes or shares issuable upon conversion of the notes.  In
addition, holders who sell their notes under the registration statement we agree
to file may have certain potential liability under the Securities
Act.




The increase in
the conversion rate applicable to notes that holders convert in connection with
a make-whole change of
control may not adequately compensate you for the lost option time value of your
notes that result from that make-whole change of control.  If a
make-whole change of control occurs, we will under certain circumstances
increase the conversion rate applicable to holders who convert their notes
within a specified time frame.  The amount of the increase in the
conversion rate depends on the date when the make- whole change of control
becomes effective and the applicable price described in this offering
memorandum.  Although the increase in the conversion rate is designed
to compensate the noteholder for the lost option time value of their notes as a
result of the make-whole change of control, the increase in the conversion rate
is only an approximation of the lost value and may not adequately
compensate the noteholder for the loss.  In addition, the noteholder
will not be entitled to an increased conversion rate if the applicable price is
greater than US$150 per share or less than US$15 per share (in each case,
subject to adjustment).




33


Our
obligation to increase the conversion rate as described above also could be
considered a penalty, in which case its enforceability would be subject to
general principles of reasonableness of economic remedies.




We maybe
unable to raise the funds to pay interest on the notes, to purchase the notes on
the purchase dates, upon a fundamental change or at
maturity.  The notes initially bear interest semi-annually at a
rate of 6.0%, and we, in certain circumstances, are obligated to pay additional
interest.  On June 1, 2011 and June 1, 2013, holders may require us to
purchase, for cash, all or a portion of their notes, at 100% of their principal
amount, plus any accrued and unpaid interest to, but excluding, that
date.  If fundamental change occurs, holders of the notes may require
us to repurchase, for cash, all or a portion of their notes.  We are
obligated to pay the principal amount of the notes outstanding at the maturity
date.  We may not have sufficient funds for any required repurchase of
the notes or required payment of principal return or interest, and we may have
to refinance our credit facilities in order to make payments under the
notes.  In addition, the terms of any borrowing agreements which we
may enter into from time to time may require early repayment of borrowings under
circumstances similar to those constituting a fundamental
change.  These agreements may also make our repurchase of notes an
event of default under such agreements.  If we fail to pay interest on
the notes or repurchase the notes when required, we will be in default under the
indenture governing the notes.




The conversion
rate of the notes may not be adjusted for all dilutive
events.  The conversion rate of the notes is subject to
adjustment upon the occurrence of certain events, including, but not limited to,
the issuance of share dividends on our shares, the issuance of certain rights or
warrants, subdivisions, combinations, distributions of share capital,
indebtedness or assets, cash dividends and certain issuer tender or exchange
offers.




Such
conversion rate will not be adjusted, however, for other events, such as a third
party tender or exchange offer or an issuance of shares for cash, any of which
may adversely affect the trading price of the notes or our shares.  In
addition, an event that adversely affects the value of the notes may occur, and
that event may not result in an adjustment to the conversion rate.




Certain
significant restructuringtransactions may
not constitute a fundamental change, in which case we would not be obligated to
offer to purchase the notes.  The fundamental change provisions
will only afford protection to holders of the notes upon the occurrence of
certain transactions.  Other transactions such as leveraged
recapitalizations, refinancings, restructurings, or acquisitions initiated by us
may not constitute a fundamental change.  In the event of any such
transaction, the holders would not have the right to require us to purchase the
notes, even though each of these transactions could increase the amount of our
indebtedness, or otherwise adversely affect our capital structure or any credit
ratings, thereby adversely affecting the value of notes.




Because
yourright to require repurchase of the notes is limited, the market price of the
notes may decline if we enter into a transaction that is not a fundamental
change under the indenture relating to the notes.The term
“fundamental change” is limited and may not include every event that might cause
the market price of the notes to decline or result in a decrease in
creditworthiness of the notes.  The term “fundamental change” does not
apply to certain transactions in which at least 90% of the consideration paid
for our shares in a merger or similar transaction is securities traded on a
United States national securities exchange.  Our obligation to
repurchase the notes upon a fundamental change may not preserve the value of the
notes in the event of a highly leveraged transaction, reorganization, merger or
similar transaction.




If you hold
notes, you are not entitled to any rights with respect to our shares, but you
are subject to all changes made with respect to our shares.  If
you hold notes, you are not entitled to any rights with respect to our shares
(including, without limitation, voting rights and rights to receive any
dividends or other distributions on our shares), but you are subject to all
changes affecting the shares.  You will only be entitled to rights on
the shares if and when we deliver shares to you in exchange for your
notes.  For example, in the event that an amendment is proposed to our
certificate of incorporation or articles of association requiring stockholders
approval and the record date for determining the stockholders of record entitled
to vote on the amendment occurs prior to delivery of the shares, you will not be
entitled to vote on the amendment, although you will nevertheless be subject to
any resulting changes in the powers, preferences or special rights that affect
our shares.




34


If an active and
liquid trading market for the notes does not develop, the market price of the
notes may decline and the noteholders may be unable to sell the
notes.  The notes are a new issue of securities for which there
is currently no public market, and no active trading market might ever
develop.  If the notes are traded after their initial issuance, they
may trade at a discount from their initial offering price, depending on
prevailing interest rates, the market for similar securities, the price and
volatility in the price, of our shares, our performance and other
factors.  In addition, we do not know whether an active trading market
will develop for the notes.  To the extent that an active trading
market does not develop, the liquidity and trading prices for the notes may be
harmed.




We have
no plans to list the notes on a securities exchange; however, the notes sold to
qualified institutional buyers pursuant to Rule 144A will be eligible for The
Portal Market at the time of issuance thereof.  Any market-making
activity, if initiated, may be discontinued at any time, for any reason or for
no reason, without notice.




The
liquidity of any market for the notes will depend upon the number of holders of
the notes, our results of operations and financial condition, the market for
similar securities, the interest of securities dealers in making a market in the
notes and other factors.  An active or liquid trading market for the
notes may not develop, and you may be unable to resell your notes or may only be
able to sell them at a substantial discount.




Provisions of the
notes could discourage an acquisition of us by a third
party.  Certain provisions of the notes could make it more
difficult or more expensive for a third party to acquire us.  Upon the
occurrence of certain transactions constituting a fundamental change, holders of
the notes will have the right, at their option, to require us to repurchase all
of their notes or any portion of the principal amount of such notes in integral
multiples of US$1,000.  We may also be required to issue additional
shares upon conversion in the event of certain fundamental changes.




Transfers of the
notes and the shares
issuable upon conversion of the notes will be restricted.  We
are offering the notes and the shares issuable upon conversion of the notes in
reliance upon exemptions from registration under the Securities Act and
applicable state securities laws.  As a result you may transfer or
resell the notes and the shares issuable upon conversion of the notes only in a
transaction registered in accordance with, or exempt from, these registration
requirements.  To the extent a holder receives shares upon conversion
of the notes that are not restricted shares, such shares may be sold over the
Nasdaq Global Select Market without needing to rely on the shelf registration
statement.  Pursuant to the registration rights agreement described
herein, we have agreed to use our commercially reasonable efforts to file a
registration statement with the SEC to register resale of the notes, the
issuance of shares issuable upon conversion of the notes and the resale of such
shares and to cause the registration statement to be effective.  If we
do not comply with our registration obligations with respect to the notes, we
will be obligated to pay additional interest to holders of the
notes.  Selling securityholders who sell notes or shares issuable upon
conversion of the notes pursuant to a shelf registration statement may be
subject to certain restrictions and potential liability under the Securities
Act.




Item
1B. Unresolved Staff Comments





There are
no unresolved comments from the SEC.




Item
2. Properties




All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of 50 years. This period may be renewed at the expiration of the initial
and any subsequent terms. Granted land use rights are transferable and may be
used as security for borrowings and other obligations. We currently lease from
our affiliate, Shandong Shengda Technology Co., Ltd., which has land use rights
to approximately 60,000 square meters of land consisting of manufacturing
facilities, employee quarters, warehouses and office buildings in Tai’an City,
China. We also own approximately 251,285 square meters land in Xianyang, Shaanxi
Province, consisting of manufacturing facilities, employee quarters, warehouses,
kitchens and office buildings. These constitute the basis of our operations as a
manufacturer of NPCC products.




35


On June
16, 2008, the Tai’an City Government, as part of China’s strengthening of
environmental law enforcement reform, issued a notice directing the Company to
cease the production of the current products of our Bangsheng Chemical
Facility in Tai’an City due to the close proximity of the facility to
residential and non-manufacturing business properties.  In accordance
with the Tai’an City Government’s relocation notice, we ceased production at our
Bangsheng Chemical Facility on October 31, 2008.




In August
2006, Shandong Shengda Technology completed the construction of a new NPCC
manufacturing facility with approximately 251,285 square meters in Xianyang
City, Shaanxi Province, China. The designed capacity for this facility is 60,000
metric tons of NPCC in the first phase. In July 2007, we completed an additional
40,000 tons of capacity in the second phase. We added an additional 60,000 tons
of capacity in the second quarter of 2008.  In addition, we have
started construction of the first phase  of a new facility of
approximately 234,487 square meters in the Zibo High-Tech Development Zone in
Zibo, Shandong Province with a total projected capacity of 240,000 metric
tons.




The main equipment and
machinery of our NPCC
business includes ultra gravity reactors, membrane dispersion micro-mix
reactors, carbonators, limestone kilns, slaking equipment, and packaging
machines. The main equipment and machinery of our coal-based chemical business
included boilers, carbonation towers, desulphurization
towers and methanol recycling towers.




We
believe that all our properties and equipment have been adequately maintained,
are generally in good condition, and are suitable and adequate for our
business.  In addition, we believe that the newly completed facility
and the expected additional land use rights will be sufficient for our expansion
efforts.





Item
3. Legal Proceedings





There are
no known pending legal proceedings to which we or our properties are
subject.





Item
4. Submission Of Matters To A Vote Of Shareholders





None.




PART
II





Item
5. Market For Registrant’s Common Equity, Related Shareholder Matters, And
Issuer Purchases Of Equity Securities





MARKET
PRICE INFORMATION




Our
common stock has been quoted on The NASDAQ Global Select Market under the symbol
“SDTH” since January 31, 2008. This was after our common stock had been quoted
on the NASDAQ Capital Market under the symbol “SDTH” since May 24, 2007. There
was no public trading activity in our shares during the two fiscal years through
March 31, 2006. From March 31, 2006 to May 24, 2007 there was some minimal
trading activity in our shares. The following table provides the high and low
sales prices for our common stock for years 2007 and 2008.





Year
      ending December 31, 2007
                
                High
                
                
                LowFirst
      Quarter
                
                $
                5.30
                
                
                $
                3.55Second
      Quarter
                
                $
                6.25
                
                
                $
                3.60Third
      Quarter
                
                $
                6.95
                
                
                $
                3.95Fourth
      Quarter
                
                $
                15.35
                
                
                $
                6.00





36


Year
      ending December 31, 2008
                
                High
                
                
                LowFirst
      Quarter
                
                $
                15.57
                
                
                $
                7.01Second
      Quarter
                
                $
                10.60
                
                
                $
                7.43Third
      Quarter
                
                $
                10.49
                
                
                $
                6.00Fourth
      Quarter
                
                $
                7.15
                
                
                $
                2.67





Year
      ending December 31, 2009
                
                High
                
                
                LowFirst
      Quarter (until March 27)
                
                $
                4.15
                
                
                $
                2.97







On March
27, 2009, the last reported sale price of our common stock on The NASDAQ Global
Select Market was $3.17 per share.





Shareholders




As of
March 27, 2009, we had 54,202,036 outstanding shares of common stock held by
approximately 8,931 shareholders of record.





Recent
Sales of Unregistered Securities





Our Current Reports on Form 8-K dated
May 28, June 3, July 1, and December 3, 2008 are incorporated by reference
herein in their entireties.





Dividend
Policy




To date, we have neither declared nor
paid any cash dividends on shares of our common stock. We presently intend to
retain earnings to finance the operation and expansion of our business and do
not anticipate declaring cash dividends in the foreseeable future.





Repurchases
of Equity Securities




No
repurchases of our common stock were made in the fiscal year covered by this
Form 10-K.




37




Item
6.   Selected Financial Data
  You
should read the following selected consolidated financial data in conjunction
with “Management's Discussion and Analysis of Financial Condition and Results of
Operations,” our consolidated financial statements and related notes, and the
other financial information included in this report.




Year Ended December 31,2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008Consolidated
      Statement of Income Data:Sale
      of productsChemical
                    
                    
                    $
                    37,369,278
                    
                    
                    $
                    43,985,596
                    
                    
                    $
                    50,592,217
                    
                    
                    $
                    53,933,120
                    
                    
                    $
                    67,007,450NPCC
                    
                    
                    
                    12,741,169
                    
                    
                    
                    14,613,733
                    
                    
                    
                    22,007,814
                    
                    
                    
                    46,721,673
                    
                    
                    
                    82,419,689Net
      sales
                    
                    
                    
                    50,110,447
                    
                    
                    
                    58,599,329
                    
                    
                    
                    72,600,031
                    
                    
                    
                    100,654,793
                    
                    
                    
                    149,427,139Cost
      of goods soldChemical
                    
                    
                    
                    28,526,258
                    
                    
                    
                    31,752,100
                    
                    
                    
                    37,924,593
                    
                    
                    
                    39,282,251
                    
                    
                    
                    45,986,499NPCC
                    
                    
                    
                    8,124,449
                    
                    
                    
                    9,264,339
                    
                    
                    
                    13,297,976
                    
                    
                    
                    26,812,587
                    
                    
                    
                    48,316,242Gross
      profit
                    
                    
                    
                    13,459,740
                    
                    
                    
                    17,582,890
                    
                    
                    
                    21,377,462
                    
                    
                    
                    34,559,955
                    
                    
                    
                    55,124,398Selling
      expenses
                    
                    
                    
                    763,186
                    
                    
                    
                    865,338
                    
                    
                    
                    1,260,647
                    
                    
                    
                    1,771,168
                    
                    
                    
                    2,549,721General
      & administrative expenses
                    
                    
                    
                    926,174
                    
                    
                    
                    967,357
                    
                    
                    
                    2,641,474
                    
                    
                    
                    3,232,911
                    
                    
                    
                    4,394,896Impairment
                    
                    
                    
                    230,846
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    3,931,253Operating
      Income
                    
                    
                    
                    11,539,534
                    
                    
                    
                    15,750,195
                    
                    
                    
                    17,475,341
                    
                    
                    
                    29,555,876
                    
                    
                    
                    44,248,528Other
      (expenses) income, net
                    
                    
                    
                    --
                    
                    
                    
                    129,665
                    
                    
                    
                    (89,068
                    )
                    
                    
                    (12,094
                    )
                    
                    
                    (52,833
                    )Gain
      on extinguishment of long-term convertible notes
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    9,018,169Interest
      income
                    
                    
                    
                    22,848
                    
                    
                    
                    82,611
                    
                    
                    
                    140,375
                    
                    
                    
                    274,203
                    
                    
                    
                    235,219Interest
      expense
                    
                    
                    
                    5,331
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    (4,766,681
                    )Earning
      before income taxes
                    
                    
                    
                    11,557,051
                    
                    
                    
                    15,962,471
                    
                    
                    
                    17,526,648
                    
                    
                    
                    29,817,985
                    
                    
                    
                    48,682,402Income
      tax expense
                    
                    
                    
                    4,144,713
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,787,640
                    
                    
                    
                    8,646,951Net
      Income
                    
                    
                    
                    7,412,338
                    
                    
                    $
                    15,962,471
                    
                    
                    $
                    17,526,648
                    
                    
                    $
                    27,030,345
                    
                    
                    $
                    40,035,451Earnings
      per share
                    -Basic
                    
                    
                    0.08
                    
                    
                    $
                    0.25
                    
                    
                    $
                    0.34
                    
                    
                    $
                    0.50
                    
                    
                    $
                    0.74-Diluted
                    
                    
                    0.08
                    
                    
                    
                    0.25
                    
                    
                    
                    0.34
                    
                    
                    
                    0.50
                    
                    
                    
                    0.60Weighted-average
      shares outstanding
                    -Basic
                    
                    
                    87,305,912
                    
                    
                    
                    64,455,210
                    
                    
                    
                    51,900,641
                    
                    
                    
                    54,107,408
                    
                    
                    
                    54,202,036-Diluted
                    
                    
                    87,305,912
                    
                    
                    
                    64,455,210
                    
                    
                    
                    52,022,801
                    
                    
                    
                    54,188,410
                    
                    
                    
                    62,205,660







As of December 31,2004
                                                  
                                                  
                                                  2005
                                                  
                                                  
                                                  2006
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2008Consolidated
      Balance Sheet Data:Cash
                                                  
                                                  $
                                                  10,409,891
                                                  
                                                  
                                                  $
                                                  10,749,300
                                                  
                                                  
                                                  $
                                                  34,684,142
                                                  
                                                  
                                                  $
                                                  26,366,568
                                                  
                                                  
                                                  $
                                                  114,287,073Accounts
      receivable
                                                  
                                                  
                                                  3,761,726
                                                  
                                                  
                                                  
                                                  3,929,082
                                                  
                                                  
                                                  
                                                  5,588,675
                                                  
                                                  
                                                  
                                                  7,889,001
                                                  
                                                  
                                                  
                                                  6,806,066Advances
      to suppliers
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  262,591
                                                  
                                                  
                                                  
                                                  872,289
                                                  
                                                  
                                                  
                                                  2,249,867
                                                  
                                                  
                                                  
                                                  -Inventories
                                                  
                                                  
                                                  1,264,489
                                                  
                                                  
                                                  
                                                  1,478,510
                                                  
                                                  
                                                  
                                                  2,151,613
                                                  
                                                  
                                                  
                                                  1,955,384
                                                  
                                                  
                                                  
                                                  2,647,424Due
      from related parties
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  943,308
                                                  
                                                  
                                                  
                                                  1,601
                                                  
                                                  
                                                  
                                                  1,712
                                                  
                                                  
                                                  
                                                  -Total
      current assets
                                                  
                                                  
                                                  15,437,578
                                                  
                                                  
                                                  
                                                  21,337,652
                                                  
                                                  
                                                  
                                                  43,455,672
                                                  
                                                  
                                                  
                                                  38,476,494
                                                  
                                                  
                                                  
                                                  124,251,388Property,
      plant and equipment, net
                                                  
                                                  
                                                  12,547,242
                                                  
                                                  
                                                  
                                                  8,579,676
                                                  
                                                  
                                                  
                                                  23,479,725
                                                  
                                                  
                                                  
                                                  62,343,416
                                                  
                                                  
                                                  
                                                  99,878,791Total
      assets
                                                  
                                                  
                                                  35,780,306
                                                  
                                                  
                                                  
                                                  29,957,328
                                                  
                                                  
                                                  
                                                  67,029,351
                                                  
                                                  
                                                  
                                                  100,943,938
                                                  
                                                  
                                                  
                                                  243,908,940Total
      current liabilities
                                                  
                                                  
                                                  7,531,303
                                                  
                                                  
                                                  
                                                  5,184,740
                                                  
                                                  
                                                  
                                                  9,900,088
                                                  
                                                  
                                                  
                                                  11,940,753
                                                  
                                                  
                                                  
                                                  11,550,255Long
      Term Convertible Notes
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  95,250,000Total
      shareholders' equity
                                                  
                                                  
                                                  28,249,003
                                                  
                                                  
                                                  
                                                  24,772,588
                                                  
                                                  
                                                  
                                                  57,129,264
                                                  
                                                  
                                                  
                                                  89,003,185
                                                  
                                                  
                                                  
                                                  135,840,577




38
 
 Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of operations
 
 Overview


We are a
leading and fast growing Chinese manufacturer of specialty additives. Our NPCC
products are used as functional additives in various products due to their
special chemical and physical attributes. As a market leader of high-grade NPCC
products, we use advanced processing technology to convert limestone into high
quality NPCC products, which are sold to our customers in the tire, polyvinyl
chloride (PVC) building materials, ink, paint, latex, adhesive, paper and
polyethylene (PE) industries. Prior to November 2008, we also manufactured,
marketed and sold coal-based chemical products, namely, ammonium bicarbonate,
liquid ammonia, methanol and melamine. We marketed and sold coal-based chemical
products mainly as chemical fertilizers and raw materials for the production of
organic and inorganic chemical products, including formaldehyde and
pesticides.





Reorganization




We were
organized as a Nevada corporation on May 11, 2001 under the name Zeolite
Exploration Company for the purpose of acquiring, exploring and developing
mineral properties. We conducted no material operations from the date of our
organization until March 2006. On March 31, 2006, we consummated a share
exchange pursuant to a Securities Purchase Agreement and Plan of Reorganization
with Faith Bloom Limited, a British Virgin Islands company, and its
stockholders. As a result of the share exchange, we acquired all of the issued
and outstanding capital stock of Faith Bloom in exchange for a total of
50,957,603 shares of our common stock. The share exchange is accounted for as a
recapitalization of Zeolite and resulted in a change in our fiscal year end from
July 31 to December 31. Faith Bloom Limited was deemed to be the accounting
acquiring entity in the share exchange and, accordingly, the financial
information included in this annual report reflects the operations of Faith
Bloom, as if Faith Bloom had acquired us.




Faith
Bloom was organized on November 15, 2005 for the purpose of acquiring from
Eastern Nanomaterials Pte. Ltd., a Singapore corporation, all of the capital
shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical
Co., Ltd., which are Chinese corporations engaged in the manufacture, marketing
and sales of a variety of NPCC products and coal -based chemicals for
use in various applications. On December 31, 2005, Faith Bloom acquired all
of the capital shares of Shandong Haize Nanomaterials Co., Ltd and Shandong
Bangsheng Chemical Co., Ltd.





As
a result of the transactions described above, Shandong Haize Nanomaterials Co.,
Ltd and Shandong Bangsheng Chemical Co., Ltd. are wholly-owned subsidiaries of
Faith Bloom, and Faith Bloom is a wholly-owned subsidiary of Zeolite. On April
4, 2006, Faith Bloom formed a wholly-owned subsidiary in Shaanxi, China
to run the new NPCC facility in Shaanxi. Effective January 3, 2007, Zeolite
changed its name to ShengdaTech, Inc. On July 1, 2008, Faithbloom formed a
wholly-owned subsidiary in Zibo, Shandong to operate our new NPCC facility in
Zibo, which is currently under construction.  Our corporate structure
is depicted in the following chart:











Net
Sales




We derive our net sales from the sale
of our NPCC
products.  Prior to November 2008, we derived our sales of products
from two segments: NPCC and coal-based chemicals. The most significant factors
that directly or indirectly affect our sales are as follows:




39


●
              manufacturing
      capacity of NPCC;●
              breakthroughs of
      R&D and applications of NPCC;●
              pricing
      of our NPCC products;●
              actions
      of competitors;●
              industry
      demand; and●
              exchange
      rate





Manufacturing capacity of NPCC.We increased our annual manufacturing capacity of NPCC from 30,000 metric
tons as of December 31, 2003 to 90,000 metric tons as of December 31, 2006, and
to 130,000 metric tons as of September 30, 2007 and to current 190,000 metric
tons as of December 31, 2008. Increasing capacity allows us to provide a
stable supply of NPCC to our existing customers, attract new customers and
increase our sale of products.





Breakthroughs of research and
development and applications of NPCC.In conjunction with
Tsinghua University, we successfully completed the development of the
membrane-dispersion technology for NPCC production, which was officially granted
a patent in November 2007. With the membrane-dispersion patent and the
continuing efforts of our R&D department in developing new NPCC products for
applications in different industries, we believe that we maintain a leading
position in technology for the NPCC market in China.





Pricing of our NPCC products.The pricing of our NPCC products is generally determined by manufacturing
costs, overall market demand, competition and, increasingly, costs associated
with technology. In addition, the pricing of some of our NPCC products depends
on the amount of cost saving that a particular industry or customer can achieve.
For example, with respect to tire and PVC building materials, the pricing of
NPCC products is principally affected by the cost saving benefit our customers
realize by replacing some of the relatively expensive carbon black and silicon
dioxide with less expensive NPCC. With respect to paper, the pricing of NPCC is
principally affected by comparable imports. In the next few years, we may reduce
the selling price in order to compete with relatively small
competitors.




Industry demand.Our business
and sales of products growth depend on the industry demand of NPCC. The
downstream industries we supply are the tire, PVC and PE building materials,
paper, rubber, paints and oil ink industries. Given the diverse application of
our NPCC products and the development of our R&D pipeline to cater to new
end markets, we believe that our business has potential for continued
growth.





Exchange rate.Our sales of
products has been affected by the foreign exchange rate between USD and RMB
because the functional currency of our operating subsidiaries in the PRC is RMB
while our financial statements have been expressed in USD, which is the
functional currency of ShengdaTech, Inc. The accompanying consolidated
statements of income have been translated using the average exchange rates
prevailing during each of the periods presented.





Prior to
November 2008, sales from our coal-based chemical business were derived from
sale of ammonia-based chemicals, namely, ammonium bicarbonate, liquid ammonia,
methanol and melamine, to local farmers and chemical plants located in Shandong
and other surrounding provinces.




On June 16, 2008, the
Tai’an City Government, as part of China’s strengthening of environmental law
enforcement reform, issued a notice directing Bangsheng Chemical
Facility, our coal-based chemical facility in Tai’an City, to cease
production due to the close proximity of our facility to residential and
non-manufacturing business properties.  In accordance with the Tai’an
City Government’s notice, we ceased production at our Bangsheng Chemical
Facility on October 31, 2008.





Our
coal-based chemical business generally experienced a seasonal peak between March
and November of each year, when our ammonium bicarbonate is in high demand due
to the farming season in northern China.  December to February was
typically the low season for our coal-based chemicals business, during which the
price of our ammonium bicarbonate may drop approximately 6 to 8%.




40




Cost
of Goods Sold




Cost of
goods sold for NPCC and, prior to November 2008, coal-based chemicals consists
primarily of (a) consumption of raw materials and auxiliary raw materials (b)
use of water and electricity (c) machinery’s depreciation and (d) workers’
salaries.





The most
significant factors that directly or indirectly affect our cost of goods sold
are as follows:




·
            processing
      technologies for NPCC;·
            cost
      of transporting raw material;·
            supply
      and price of limestone;·
            availability
      and price of coal;·
            supply
      and price of electricity; and fluctuations in the RMB to USD exchange
      rate





Process technologies for NPCC.The advancement of NPCC processing technologies is crucial in order to
deliver value to our clients. In conjunction with Tsinghua University, we
successfully completed the development of a more advanced membrane-dispersion
technology, which was officially granted a patent in November 2007. We and
Tsinghua University each have a 50% ownership share of the technology; we have
the exclusive (100%) right to use the technology under a license agreement with
Tsinghua University for the life of the patent. The new membrane-dispersion
technology will enable us to produce NPCC in a more efficient and cost effective
way.





Supply and price of limestone.Limestone is an important raw material for NPCC. Our Shaanxi facility is
in proximity to a high quality limestone quarry, which enables us to minimize
transportation cost of limestone. We maintain a strong relationship with our
mining contractor which conducts extracting activities for us. In addition, on
June 19, 2008, we entered into an investment agreement with the Zibo High-Tech
Industrial Development Zone Management Committee (the “Management Committee”).
The Management Committee will initially sell to us approximately 150 million
metric tons of supply sources of good quality limestone, with the sale and
transfer of the mining rights to the Company to be completed within 12
months.





Availability and price of coal.Coal is the key raw material used to produce our coal-based chemicals and
is also used in the production of our NPCC products as a key fuel for the
calcination of limestone. We have long-term relationships with our coal
suppliers. We have also developed a network of alternative suppliers for backup
purposes. Coal prices have fluctuated in the past few years. The average price
of coal was approximately $70 per metric ton in 2004 and increased to
approximately $80 per metric ton in 2005 and $90 per metric ton in 2006. In
2007, it was approximately $98 per metric ton and increased to $145 per metric
ton in 2008.





Supply and price of electricity.Electricity from the grid is the primary power source for the production
of NPCC and coal-based chemicals, and, it is currently supplied by the local
government. In the past few years, as the government supports supplies to the
farming industry, for our coal-based chemicals, we have enjoyed a price discount
on electricity of up to a 50% of the price of electricity for industrial users.
As demand for coal-based chemical products increased, the Chinese government
increased the price of electricity for the coal-based chemical industry from
$0.043/kwh in 2007 to $0.047/kwh in 2008, while the price of electricity for the
NPCC industry increased
from  $0.06/kwh in 2007 to $0.08/kwh in 2008.




Fluctuations in the RMB to USD
exchange rate. Our cost of products sold has been affected by the foreign
exchange rate between USD and RMB because the functional currency of our
operating subsidiaries in the PRC is RMB while our financial statements have
been expressed in USD, which is the functional currency of ShengdaTech, Inc..
The accompanying consolidated statements of income and comprehensive income
have been translated using the average exchange rates prevailing during
each of the periods presented.





41


Gross
Profit




Our gross
profit has been, and will be, affected by many factors, including (a) the demand
for our products, (b) the average selling price of our products, which in turn
depends in part on the mix of products sold, (c) new product introductions, (d)
the volume and costs of manufacturing of our products and (e) competitive
activity.




Operating
Expenses




Operating
expenses consist of selling and general and administrative
expenses.  Selling expenses consists primarily of (a) salaries of
sales personnel, (b) sales commissions, (c) travel, lodging and other
out-of-pocket expenses, and (d) other related overhead. We expect our selling
expenses to increase in the future as we further increase our sales. In the
second quarter of 2007, we lowered the commission rate to sales staff from 5% to
3%, as the volume of sales of our NPCC business increased. As a result, we plan
to employ more sales staff and pay more commission based on growing
sales.





General
and administrative expense consists primarily of (a) salaries of administrative
and R& D personnel, (b) labor union fees, (c) insurance fees, (d) lease
payments for housing and property, (e) expenses related to being a public
company and (f) other related expenses. We expect general and administrative
expense to continue to increase. Being a publicly traded company, we will incur
additional expenses related to costs of compliance with securities and other
regulations, including increased audit and legal fees and investor relations
expenses.





Critical
Accounting Policies and Estimates





The
selection of critical accounting policies, the judgments and other uncertainties
affecting application of those policies and the sensitivity of reported results
to changes in conditions and assumptions are factors to be considered when
reviewing our financial statements. Our principal accounting policies are set
forth in detail in Note 2 to our consolidated financial statements included
elsewhere in this annual report. We believe the following critical accounting
policies involve the most significant judgments and estimates used in the
preparation of our financial statements




Revenue Recognition - We
recognize revenues from the sale of products when they are realized and earned.
We consider revenue realized or realizable and earned when (1) it has persuasive
evidence of an arrangement, (2) delivery has occurred, (3) the sales price is
fixed or determinable, and (4) collectability is reasonably assured. Revenues
are not recognized until products have been shipped to the client (except for
our exported products, for which title transfers at the customer’s port), risk
of loss has transferred to the client and client acceptance has been obtained,
client acceptance provisions have lapsed, or we have objective evidence that the
criteria specified in client acceptance provisions have been
satisfied.  We sell all products to end users and recognize revenues,
net with sales rebates and taxes, when the products are shipped. We have no
post-delivery obligations on our products sold.





42




Valuation of Long-lived Assets -The carrying values of our long-lived assets are reviewed for impairment
annually or whenever events or changes in circumstances indicate that they may
not be recoverable. When such an event occurs, we project the undiscounted cash
flows to be generated from the use of the asset and its eventual disposition
over the remaining life of the asset. If projections were to indicate that the
carrying value of the long-lived asset will not be recovered, the carrying value
of the long-lived asset is reduced by the estimated excess of the carrying value
over the estimated fair value. On June 16, 2008, the Tai’an City Government, as
part of China’s strengthening of environmental law enforcement reform, issued a
notice directing Bangsheng Chemical Facility to cease production due to the
close proximity of our coal-based chemical facility to residential and
non-manufacturing business properties.  In accordance with the
Tai’an City Government’s notice, we ceased production at our Bangsheng
Chemical Facility on October 31, 2008.  As a result, our operating
expenses for the year ended December 31, 2008 had an impairment of equipment of
approximately $3.9 million.




Results
of operations
 
 Comparison
for the Years ended December 31, 2007 and 2008
 
 Sales
of Products
 
 For
      the Year Ended December 31,2007
              
              
              2008
              
              
              Period
      to Period ChangeAmount
      ($)
              
              
              %
      of Total Revenue
              
              
              Amount
      ($)
              
              
              %
      of Total Revenue
              
              
              Amount
      ($)
              
              
              %Chemical
              
              
              53,933,120
              
              
              
              53.6
              
              
              
              67,007,450
              
              
              
              44.8
              
              
              
              13,074,330
              
              
              
              24.2NPCC
              
              
              46,721,673
              
              
              
              46.4
              
              
              
              82,419,689
              
              
              
              55.2
              
              
              
              35,698,016
              
              
              
              76.4Net
      sales
              
              
              100,654,793
              
              
              
              100.0
              
              
              
              149,427,139
              
              
              
              100.0
              
              
              
              48,772,346
              
              
              
              48.5


43




The sales
of products of our coal-based chemical business increased by $13,074,330, or
24.2%, for the year ended December 31, 2008 compared to the prior year. The
increase was mainly due to (1) additional revenue of $5,579,085 as a result of
the increased price of ammonium bicarbonate by $35.51 per ton, which was offset
by the decreased sales volume by 28,587.60 tons; (2) additional revenue of
$1,150,553 as a result of the increased price of methanol by $111.57 per ton,
which was offset by the decreased sales volume by 6,376.22 tons; (3) additional
revenue of $5,919,751 as a result of the increased price of liquid ammonia by
$144.27 per ton, which was offset by the decreased sales volume by 14,160.18
tons; (4) additional revenue of $4,617 as a result of the increased price of
ammonia by $16.27 per ton, which was offset by the decreased sales volume by
93.27 tons; (5) additional revenue of $543,401 as a result of the increased
price of melamine by $262.85 per ton, which was offset by the decreased sales
volume by 1,443.22 tons. The decreases in sales volume was due to the fact that
our Bangsheng Chemical Facility was mandated to stop production in October 2008
as it was located in designated residential and non-manufacturing business zones
based on the local government’s enhanced urban safety and environment standard.





The
increase in net sales from our NPCC business was $35,698,016 or 76.4% for the
year ended December 31, 2008 compared to the prior year. The increase was mainly
due to the increase of sales volume and price by 60,062.26 tons and $74.83 per
ton, respectively as a result of our capacity expansion and increase in
demand.




On August
11, 2008, the Company entered into an agreement with Shangdong Shengda, a
related party, to acquire a state-owned company, Jinan Fertilizer Co. Ltd.
(“Jinan Fertilizer”) in an effort to consolidate the Bangsheng Chemical
Facility operations with Jinan Fertilizer. In March 2009, the Company decided
not to pursue the acquisition of Jinan Fertilizer. The agreement expires by its
terms on March 31, 2009 with no liability to the Company. The Company intends to
continue its chemical operations and is currently seeking strategic
opportunities to continue its chemical operations.


Cost
of Goods Sold and Gross Profit





For
      the Year Ended December 31,2007
                                          
                                          
                                          2008
                                          
                                          
                                          ChangeAmount
      ($)
                                          
                                          
                                          %
      of Total
                                            Segment
      Revenue
                                          
                                          
                                          Amount
      ($)
                                          
                                          
                                          %
      of Total
                                            Segment
      Revenue
                                          
                                          
                                          Amount
      ($)
                                          
                                          
                                          (%)Cost
      of Goods SoldChemical
                                          
                                          
                                          39,282,251
                                          
                                          
                                          
                                          72.8
                                          
                                          
                                          
                                          45,986,499
                                          
                                          
                                          
                                          68.6
                                          
                                          
                                          
                                          6,704,248
                                          
                                          
                                          
                                          17.1NPCC
                                          
                                          
                                          26,812,587
                                          
                                          
                                          
                                          57.4
                                          
                                          
                                          
                                          48,316,242
                                          
                                          
                                          
                                          58.6
                                          
                                          
                                          
                                          21,503,655
                                          
                                          
                                          
                                          80.2Total
      Cost of Goods Sold
                                          
                                          
                                          66,094,838
                                          
                                          
                                          
                                          65.7
                                          
                                          
                                          
                                          94,302,741
                                          
                                          
                                          
                                          63.1
                                          
                                          
                                          
                                          28,207,903
                                          
                                          
                                          
                                          42.7Gross
      ProfitChemical
                                          
                                          
                                          14,650,869
                                          
                                          
                                          
                                          27.2
                                          
                                          
                                          
                                          21,020,951
                                          
                                          
                                          
                                          31.4
                                          
                                          
                                          
                                          6,370,082
                                          
                                          
                                          
                                          43.5NPCC
                                          
                                          
                                          19,909,086
                                          
                                          
                                          
                                          42.6
                                          
                                          
                                          
                                          34,103,447
                                          
                                          
                                          
                                          41.4
                                          
                                          
                                          
                                          14,194,361
                                          
                                          
                                          
                                          71.3Total
      Gross Profit
                                          
                                          
                                          34,559,955
                                          
                                          
                                          
                                          34.3
                                          
                                          
                                          
                                          55,124,398
                                          
                                          
                                          
                                          36.9
                                          
                                          
                                          
                                          20,564,443
                                          
                                          
                                          
                                          59.5




The gross
margin of our coal-based chemical business increased by 43.5% (or $6,370,082 in
gross profit), from 27.2% to 31.4%, which was mainly due to the increase in the
sales price of chemical products which was partly offset by the increase in the
prices of anthracite, soft coal and urea by $53.20, $28.32 and $91.72,
respectively.





44




The cost
of goods sold for our NPCC business increased by $21,503,655 or 80.20% for the
year ended December 31, 2008 compared to the prior year. This increase was
mainly due to (i) an additional $16,102,363 because of increased sales volume as
a result of our NPCC capacity expansion; (ii) an additional $5,595,291 from the
increase in the production cost of $93.16 per ton as the result of the increase
in the price of raw materials.




Our gross
margin of NPCC decreased from 42.6% to 41.4%. This was mainly due to an increase
in the products sales cost of $46.40 per ton as the result of the price increase
of anthracite and soft coal by $60.62 and $32.47, respectively. However, there
was an increase of gross profit by $14,194,361 or 71.3% due to the increase in
sales volume.





Operating
Expenses





For
      the Year Ended December 31,2007
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    ChangeAmount
      ($)
                                                    
                                                    
                                                    %
      of Total
                                                      Revenue
                                                    
                                                    
                                                    Amount
      ($)
                                                    
                                                    
                                                    %
      of Total
                                                      Revenue
                                                    
                                                    
                                                    Amount
      ($)
                                                    
                                                    
                                                    (%)Operating
      ExpensesSelling
      Expenses
                                                    
                                                    
                                                    1,771,168
                                                    
                                                    
                                                    
                                                    1.8
                                                    
                                                    
                                                    
                                                    2,549,721
                                                    
                                                    
                                                    
                                                    1.7
                                                    
                                                    
                                                    
                                                    778,553
                                                    
                                                    
                                                    
                                                    44.0
                                                    %General
      and Administrative Expenses
                                                    
                                                    
                                                    3,232,911
                                                    
                                                    
                                                    
                                                    3.2
                                                    
                                                    
                                                    
                                                    4,394,896
                                                    
                                                    
                                                    
                                                    2.9
                                                    
                                                    
                                                    
                                                    1,161,985
                                                    
                                                    
                                                    
                                                    35.9Impairment
      of Property, Plant and Equipment
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    3,931,253
                                                    
                                                    
                                                    
                                                    2.6
                                                    
                                                    
                                                    
                                                    3,931,253Total
      Operating expenses
                                                    
                                                    
                                                    5,004,079
                                                    
                                                    
                                                    
                                                    5.0
                                                    
                                                    
                                                    
                                                    10,875,870
                                                    
                                                    
                                                    
                                                    7.3
                                                    
                                                    
                                                    
                                                    5,871,791
                                                    
                                                    
                                                    
                                                    117.3





Selling
expenses increased by $778,553, or 44.0%, for the year ended December 31, 2008
compared to the prior year. The main reason was sales commission increased by
$765,345 as a result of the increase of sales .





General
and administrative expense increased by $1,161,985 or 35.9% for the year ended
December 31, 2008 compared to the prior year. The main reasons were (i) an
increase of taxes of $85,894 paid in the form of land use tax to the government
as the result of the establishment of our Zibo NPCC facility; (ii) the increase
of $256,648 in the depreciation charge of our R&D Center and an amortization
charge of $101,440 for land use rights newly acquired in Zibo; (iii) an
increase of $108,146 as a result of increase in headcount as well as
salary increases; (iv) an increase of $100,542 in R&D expenses;
(v) charges of $675,690 in compensation for staff as the
result of the cessation of production at our Bangsheng Chemical
Facility; (vi) the increase of $362,294 in listing and professional fees as a
result of changing our auditors and the issuance of our convertible notes and
$70,680 in accrued counsel fee; and (vii) the decrease of operating expenses of
$520,800 due to the cease of production at our Bangsheng Chemical
Facility.




Due to
the cessation of production at our Bangsheng Chemical Facility, the
carrying amount of the plant equipment was reduced to the fair value based on
estimated selling price in the used equipment market. This resulted in an
impairment loss of fixed asset of $3,931,253 for the year ended December 31,
2008.


45




Operating
Income and Earnings before Income Taxes


For
      the Year Ended December 31,2007
                                                                                                                            
                                                                                                                            
                                                                                                                            2008
                                                                                                                            
                                                                                                                            
                                                                                                                            ChangeAmount
      ($)
                                                                                                                            
                                                                                                                            
                                                                                                                            %
      of Total
                                                                                                                              Revenue
                                                                                                                            
                                                                                                                            
                                                                                                                            Amount
      ($)
                                                                                                                            
                                                                                                                            
                                                                                                                            %
      of Total
                                                                                                                              Revenue
                                                                                                                            
                                                                                                                            
                                                                                                                            Amount
      ($)
                                                                                                                            
                                                                                                                            
                                                                                                                            (%)Operating
      Income
                                                                                                                            
                                                                                                                            
                                                                                                                            29,555,876
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            29.3
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            44,248,528
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            29.6
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            14,692,652
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            49.7Interest
      income
                                                                                                                            
                                                                                                                            
                                                                                                                            274,203
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            0.3
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            235,219
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            0.2
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            (38,984
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (14.2
                                                                                                                            )Gain
      on extinguishment of long-term
                                                                                                                              convertible
      notes
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            9,018,169
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            6.0
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            9,018,169Other
      expense
                                                                                                                            
                                                                                                                            
                                                                                                                            (12,094
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (0.01
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (52,833
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (0.04
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (40,739
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            336.9Interest
      expense
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,766,681
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (3.2
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,766,681
                                                                                                                            )Earning
      before income tax
                                                                                                                            
                                                                                                                            
                                                                                                                            29,817,985
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            29.6
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            48,682,402
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            32.6
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            18,864,417
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            63.3




Interest
income for the year ended December 31, 2008 decreased by $38,984 or 14.2%, which
was mainly due to a decrease in bank deposit interest rates.





Gain on
extinguishment of long-term convertible notes for the year ended December
31, 2008 was $9,018,169, which was mainly due to the gain from our
repurchase of $19.8 million face amount of our convertible notes.





Other
expense for the year ended December 31, 2008 increased by $40,739, which was
mainly to the increase in foreign exchange currency losses arising
from our overseas sales.





Interest
expense for the year ended December 31, 2008 was $4,766,681, which mainly
resulted from our interest-bearing convertible notes issued in
2008.




Comparison
for the Years ended December 31, 2006 and 2007




Sales
of Products





For
      the Year Ended December 31,2006
              
              
              2007
              
              
              ChangeAmount
      ($)
              
              
              %
      of Total
                  Revenue
              
              
              Amount
      ($)
              
              
              %
      of Total
                  Revenue
              
              
              Amount
      ($)
              
              
              %Sales
      of ProductsChemical
              
              
              50,592,217
              
              
              
              69.7
              
              
              
              53,933,120
              
              
              
              53.6
              
              
              
              3,340,903
              
              
              
              6.6NPCC
              
              
              22,007,814
              
              
              
              30.3
              
              
              
              46,721,673
              
              
              
              46.4
              
              
              
              24,713,859
              
              
              
              112.3Net
      Sales
              
              
              72,600,031
              
              
              
              100.0
              
              
              
              100,654,793
              
              
              
              100.0
              
              
              
              28,054,762
              
              
              
              38.6




Net sales
of our coal-based chemical business increased by $3,340,903, or 6.6%, for the
year ended December 31, 2007 compared to the prior year. The increase was mainly
due to (i) an additional $5,204,542 from an increase in sales of liquid ammonia
and melamine by 12,802 tons and 625 tons, respectively, and an increase in
average sales price per ton of $12.77 and $49.51, respectively, which was offset
by $1,772,508 from a decrease in sales of ammonium bicarbonate by 49,625 tons;
and (ii) an decrease of $74,558 from the sale of surplus heat from our
production process to the heat supply department of the local
government.  The increase in sales for certain coal-based chemical
products and the decrease in sales for other coal-based chemical products were
caused by the adjustment of our product mix due to market conditions. For
example, from December to February, the demand for our ammonium bicarbonate may
be weaker while the demand for methanol may be stronger as compared to the rest
of year.




46


The
increase in total revenue from our NPCC business was $24,713,859, or 112.3%, for
the year ended December 31, 2007 as compared to the prior year. The increase was
mainly due to (i) an additional $22,579,161 in revenue from an increase in
sales volume of 65,845 tons as a result of our capacity expansion and
(ii) an additional $2,134,698 due to the Rmb’s appreciation against the
USD.




Cost
of Goods Sold and Gross Profits




For
      the Year Ended December 31,2006
                  
                  
                  2007
                  
                  
                  ChangeAmount
      ($)
                  
                  
                  %
      of Total
                      Segment
      Revenue
                  
                  
                  Amount
      ($)
                  
                  
                  %
      of Total
                      Segment
      Revenue
                  
                  
                  Amount
      ($)
                  
                  
                  %Cost
      of Goods SoldChemical
                  
                  
                  37,924,593
                  
                  
                  
                  75.0
                  
                  
                  
                  39,282,251
                  
                  
                  
                  72.8
                  
                  
                  
                  1,357,658
                  
                  
                  
                  3.6NPCC
                  
                  
                  13,297,976
                  
                  
                  
                  60.4
                  
                  
                  
                  26,812,587
                  
                  
                  
                  57.4
                  
                  
                  
                  13,514,611
                  
                  
                  
                  101.6Total
      Cost of Goods Sold
                  
                  
                  51,222,569
                  
                  
                  
                  70.6
                  
                  
                  
                  66,094,838
                  
                  
                  
                  65.7
                  
                  
                  
                  14,872,269
                  
                  
                  
                  29.0Gross
      ProfitChemical
                  
                  
                  12,667,624
                  
                  
                  
                  25.0
                  
                  
                  
                  14,650,869
                  
                  
                  
                  27.2
                  
                  
                  
                  1,983,245
                  
                  
                  
                  15.7NPCC
                  
                  
                  8,709,838
                  
                  
                  
                  39.6
                  
                  
                  
                  19,909,086
                  
                  
                  
                  42.6
                  
                  
                  
                  11,199,248
                  
                  
                  
                  128.6Total
      Gross Profit
                  
                  
                  21,377,462
                  
                  
                  
                  29.5
                  
                  
                  
                  34,559,955
                  
                  
                  
                  34.3
                  
                  
                  
                  13,182,493
                  
                  
                  
                  61.7




The cost
of goods sold of our coal-based chemical business increased by $1,357,658, or
3.6%, for the year ended December 31, 2007 as compared to the prior year. The
increase was mainly due to a reduction of $1,006,450 from a sales volume
decrease of methanol and ammonium bicarbonate as a result of products mix
adjustments and an increase of $2,568,195 from a sales volume increase of liquid
ammonia of 12,802 tons.




The cost
of goods sold of our NPCC business increased by $13,514,611, or 101.6%, for the
year ended December 31, 2007 as compared to the prior year. This was mainly due
to an increase of $13,985,596 in cost from increased production volume as a
result of our NPCC capacity expansion in Shaanxi.




Our gross
margin of NPCC increased from 39.6% to 42.6% for the year ended December 31,
2007 as compared to the year ended December 31, 2006. Gross profit increased by
$11,199,248, or 128.6%, primarily due to the introduction of new technology and
the expansion of capacity with lower cost of raw materials in our new facility
in Shaanxi.




47




Operating
      Expenses





For
      the Year Ended December 31,2006
              
              
              2007
              
              
              ChangeAmount
      ($)
              
              
              %
      of Total
                  Revenue
              
              
              Amount
      ($)
              
              
              %
      of Total
                  Revenue
              
              
              Amount
      ($)
              
              
              %Operating
      ExpensesSelling
      expenses
              
              
              1,260,647
              
              
              
              1.7
              
              
              
              1,771,168
              
              
              
              1.8
              
              
              
              510,521
              
              
              
              40.5General
      and administrative expenses
              
              
              2,641,474
              
              
              
              3.6
              
              
              
              3,232,911
              
              
              
              3.2
              
              
              
              591,437
              
              
              
              22.4Total
      operating expenses
              
              
              3,902,121
              
              
              
              5.4
              
              
              
              5,004,079
              
              
              
              5.0
              
              
              
              1,101,958
              
              
              
              28.2




Selling
expenses increased by $510,521, or 40.5%, for the year ended December 31, 2007
compared to the prior year. The main reasons were an increase of $451,950 in
sales commissions paid as a result of the increase of sales and increased salary
and insurance expenses of $57,841.




General
and administrative expenses increased by $591,437, or 22.4%, for the year ended
December 31, 2007 compared to the prior year. The main reasons were: (i) an
increase of $630,939 in expenses related to consulting fees for compliance with
Sarbanes-Oxley Regulations (SOX 404) and other consulting fees; (ii) an increase
of $138,201 in depreciation of our research and development centre; and
(iii) an increase of $26,547 in salary expenses as a result of staff
increase; which were offset by a decrease of $265,535 in technology testing and
research and development fees as well as office, business and entertainment
fees. The decrease in technology testing and research and development expense
was primarily due to the implementation of the new membrane-dispersion
technology co-owned by us and Tsinghua University and ceasing the payment of
licensing fees for our previously used ultra gravity technology.




Operating
      income and earnings before income
tax





For
      the Year Ended December 31,2006
              
              
              2007
              
              
              ChangeAmount
      ($)
              
              
              %
      of Total Revenue
              
              
              Amount
      ($)
              
              
              %
      of Total Revenue
              
              
              Amount
      ($)
              
              
              %Operating
      income
              
              
              17,475,341
              
              
              
              24.1
              
              
              
              29,555,876
              
              
              
              29.4
              
              
              
              12,080,535
              
              
              
              69.1Interest
      Income
              
              
              140,375
              
              
              
              0.2
              
              
              
              274,203
              
              
              
              0.3
              
              
              
              133,828
              
              
              
              95.3Non-operating
      Expense
              
              
              (89,068
              )
              
              
              (0.1
              )
              
              
              (12,094
              )
              
              
              (0.01
              )
              
              
              76,974
              
              
              
              (86.4
              )Earnings before
      income taxes
              
              
              17,526,648
              
              
              
              24.1
              
              
              
              29,817,985
              
              
              
              29.6
              
              
              
              12,291,337
              
              
              
              70.1




Interest
income for the year ended December 31, 2007 increased by $133,828, or 95.3%, as
compared to the prior year. This increase resulted from an increase in net
cash.




Non-operating
expenses for the year ended December 31, 2007 decreased by $76,974, mainly
because of less exchange loss and no loss from disposition of damaged and
outdated equipment being incurred in 2007.





48


Liquidity and Capital
Resources


As
      of and for the Year ended December 31,2006
                                                
                                                
                                                2007
                                                
                                                
                                                2008Amount
      ($)Cash
                                                
                                                
                                                34,684,142
                                                
                                                
                                                
                                                26,366,568
                                                
                                                
                                                
                                                114,287,073Accounts
      receivable, net
                                                
                                                5,588,676
                                                
                                                
                                                
                                                7,889,001
                                                
                                                
                                                
                                                6,806,066Working
      capital
                                                
                                                33,555,584
                                                
                                                
                                                
                                                26,535,741
                                                
                                                
                                                
                                                112,701,133Cash
      provided by operating activities
                                                
                                                
                                                23,087,280
                                                
                                                
                                                
                                                30,243,119
                                                
                                                
                                                
                                                38,864,570Cash
      provided by /(used in) investing activities
                                                
                                                
                                                (15,874,952
                                                )
                                                
                                                
                                                (38,527,613
                                                )
                                                
                                                
                                                (51,982,948
                                                )Cash
      provided by /(used in) financing activities
                                                
                                                
                                                15,873,661
                                                
                                                
                                                
                                                (1,995,105
                                                )
                                                
                                                
                                                99,472,240





We
believe, based on our current cash levels as well as the operating cash flows
expected in 2009, that we will have sufficient funds to finance our current
operations for at least the next 12 months. However, we have also planned
additional capital expenditures in the next 12 months to expand business. We
anticipate that these expenditures will be funded from working capital and
financing activities. We believe that the capital expenditures may influenced by
changes and there is no assurance that we will be able to obtain the necessary
funds for such capital expenditures.





Cash.Our cash was held for
capital expenditures, strategic investment and working capital purposes. As of
December 31, 2008, our cash balance was $114,287,073 as compared to $26,366,568
as of December 31, 2007.  The increase was primarily due to the
convertible notes issued in May 2008 and positive cash flow from operations
partly offset with investment in property, plant and equipment. We did not
enter into investments for trading or speculative purposes.





Accounts
receivable.Our accounts receivable
balance fluctuates from period to period, which affects our cash flow from
operating activities. The fluctuations vary depending on the timing of our
shipping and billing activity and cash collections. Accounts receivable
turnover in days were 18 days in 2008, 29 days in 2007 and 24 days in 2006. We
established a credit policy granting a 90-day credit term in 2008 to standardize
customers. As of December 31, 2008, there were no overdue accounts
receivable.





Working capital.Our working capital balance fluctuates from period to period, which is
affected by our cash flow from operating activities. Working capital increased
significantly by $86,165,392 from $26,535,741 as of December 31, 2007 to
$112,701,133 as of December 31, 2008 due to the increased cash from issuing of
convertible notes.





Cash flows from
operating activities.Cash provided by
operating activities primarily consists of our cash receipts from product sales
and equipment and the effect of changes in
working capital and other operating activities. A primary
factor affecting our operating cash flow is the timing of the cash receipts of
the proceeds from the sales of NPCC and coal-based chemical products and
payments to purchase raw materials. Cash provided by operating activities
for the year ended December 31, 2008 increased by $8,621,451 from $30,243,119
for the year ended December 31, 2007 was primarily because of our increased
collection of proceeds from the products sold. Cash provided by operating
activities for the year ended December 31, 2007 increased by $7,268,509 from
$22,974,610 for the year ended December 31, 2006 was because of increased
production capacity of our NPCC facility.




49




Cash used
for investing activities for the year ended December 31, 2008 increased by
$13,663,022 from $38,319,926 for the year ended December 31, 2007 primarily due
to the investment costs in Zibo facility. Cash used for investing activates for
the year ended December 31, 2007 increased by $23,648,402 was primarily because
of  the increase in purchase of machinery equipment for Shaanxi
facility.


Cash
provided by financing activities for the year ended December 31, 2008, which is
mainly due to net proceeds amounting to $109,140,337 from the issuance of
convertible notes and offset by cash paid for the repurchase of our convertible
notes amounting to $9,890,000, compared with $(2,202,756) for the year
ended December 31, 2007, which is due to the settlement of amounts due to
related party. Cash
provided by financing activities for the year ended December 31, 2006, which is
mainly due to the proceeds from the issue of common stock.







Contractual
Obligations




Less
      than one year
                            
                            
                            1-3
      years
                            
                            
                            3-5
      years
                            
                            
                            More
      than 5 years
                            
                            
                            TotalConvertible
      notes-principal 1
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            95,250,000
                            
                            
                            $
                            95,250,000Long-term
      convertible notes-interest
                            
                            
                            5,715,000
                            
                            
                            
                            11,430,000
                            
                            
                            
                            11,430,000
                            
                            
                            
                            22,860,000
                            
                            
                            
                            51,435,000Operating
      lease
                            
                            
                            426,862
                            
                            
                            
                            187,353
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            614,215Capital
      commitments
                            
                            
                            11,889,138
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            11,889,138Total
                            
                            
                            18,031,000
                            
                            
                            
                            11,617,353
                            
                            
                            
                            11,430,000
                            
                            
                            
                            118,110,000
                            
                            
                            
                            159,188,353




1




Off-Balance
Sheet Arrangements





We have
not entered into any off-balance sheet arrangements.




Item
7A. Quantitative And Qualitative Disclosures About Market Risk




Market risk is the risk of loss to
future earnings, to fair values or to future cash flows that may result from
changes in the price of a financial instrument. The value of a financial
instrument may change as a result of changes in interest rates, exchange rates,
commodity prices, equity prices and other market changes. Our cash and cash
equivalents are held for working capital and for the strategic investments
and acquisitionpurposes and consist primarily of bank deposits. We do
not enter into investments for trading or speculative purposes.





Foreign Exchange Risk.
Although the conversion of the Chinese Yuan (“RMB”) is highly regulated in the
PRC, the value of the RMB against the value of the U.S. dollar (“USD”) (or any
other currency) nonetheless may fluctuate and be affected by, among other
things, changes in the political and economic conditions in the PRC. Under the
currency policy in effect in the PRC today, the RMB is permitted to fluctuate in
value within a narrow band against a basket of certain foreign currencies. The
PRC is currently under significant international pressures to liberalize this
government currency policy, and if such liberalization were to occur, the value
of the RMB could depreciate against the USD.




The functional currency of our
operating subsidiaries in the PRC is RMB.  However, the accompanying
financial statements have been expressed in USD, which is our functional
currency. The accompanying consolidated balance sheets have been translated into
USD at the exchange rates prevailing at each balance sheet date. The
accompanying consolidated statements of income have been translated using the
average exchange rates prevailing during the periods of each
statement.




Fluctuations in exchange rates may
affect our financial results reported in USD terms without giving effect to any
underlying change in our business or results of operations.




50


Fluctuations in exchange rates may also
affect our balance sheet. For example, to the extent that we need to convert
U.S. dollars received from the proceeds of a financing into the RMB for our
operations, appreciation of the RMB against the USD would have an adverse effect
on the RMB amount that we receive from the conversion. Conversely, if we decide
to convert our RMB into USD for the purpose of making payments for dividends on
our shares or for other business purposes, appreciation of the USD against the
RMB would have a negative effect on the U.S. dollar amount available to us.
Considering the amount of our cash  as of December 31, 2008, a 1.0%
appreciation of the RMB against the U.S. dollar will result in an estimated
increase of approximately  $464,356 in our total amount of cash, and a
1.0% appreciation of the USD against the RMB will result in a decrease of
approximately $(455,160) in our total amount of cash.




We have not used any forward contracts
or currency borrowings to hedge our exposure to foreign currency exchange risk
and do not currently intend to do so.




Interest rate risk. As of
December 31, 2008, we had no short-term borrowings. Our interest rate risk
mainly related to the 6% convertible senior notes issued with a maturity
date of June 1, 2018. However, if we borrow money in future periods, we may be
exposed to interest rate risk. We do not have any derivative financial
instruments and believe our exposure to interest rate risk and other relevant
market risks is not material.




Inflation. In recent years,
the Chinese economy has experienced periods of rapid expansion and high rates of
inflation. During the past three years, the rates of inflation in China were
1.8% in 2005, 2.8% in 2006, and 6.5% in 2007. However, because of the recent
global economic crisis, the danger of inflation is subsiding. For example, in
December 2008, the rate of inflation in China was only 2.4 %.




Item
8. Financial Statements And Supplementary Data




Quarterly
financial information is presented as follows:





2008Three
      Months EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Net
      sales
                
                $
                28,552,904
                
                
                $
                39,845,453
                
                
                $
                49,253,207
                
                
                $
                31,775,575Gross
      profit
                
                
                10,063,069
                
                
                
                14,645,671
                
                
                
                16,741,124
                
                
                
                13,674,534Net
      income
                
                
                7,414,986
                
                
                
                10,030,952
                
                
                
                9,926,270
                
                
                
                12,663,243Basic
      earnings per share
                
                
                0.14
                
                
                
                0.19
                
                
                
                0.18
                
                
                
                0.23Diluted
      earnings per share
                
                
                0.14
                
                
                
                0.18
                
                
                
                0.17
                
                
                
                0.11





2007Three
      Months EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Net
      sales
                
                $
                22,180,271
                
                
                $
                22,680,529
                
                
                $
                27,170,790
                
                
                $
                28,623,203Gross
      profit
                
                
                6,974,585
                
                
                
                7,664,907
                
                
                
                9,660,956
                
                
                
                10,259,507Net
      income
                
                
                5,406,628
                
                
                
                6,032,887
                
                
                
                7,811,260
                
                
                
                7,779,570Basic
      earnings per share
                
                
                0.10
                
                
                
                0.11
                
                
                
                0.14
                
                
                
                0.15Diluted
      earnings per share
                
                
                0.10
                
                
                
                0.11
                
                
                
                0.14
                
                
                
                0.15


2006Three
      Months EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Net
      sales
                
                $
                16,308,211
                
                
                $
                14,291,787
                
                
                $
                18,818,131
                
                
                $
                23,181,902Gross
      profit
                
                
                4,117,939
                
                
                
                4,001,939
                
                
                
                5,580,788
                
                
                
                7,676,796Net
      income
                
                
                3,492,859
                
                
                
                3,157,860
                
                
                
                4,727,588
                
                
                
                6,148,341Basic
      earnings per share
                
                
                0.08
                
                
                
                0.06
                
                
                
                0.09
                
                
                
                0.11Diluted
      earnings per share
                
                
                0.08
                
                
                
                0.06
                
                
                
                0.09
                
                
                
                0.11




51




Item
9.  Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure





There are
no such reportable events as required by Item 304(b) of Regulation
S-K.




Item
9a. Controls And Procedures





(a)
Disclosure Controls and Procedures.





Disclosure
controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
This information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. Our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on the evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective as of December 31, 2008 because of the material weakness described in
Management’s Report on Internal Control over Financial Reporting below.
Notwithstanding the existence of the material weakness described below, we
concluded that the consolidated financial statements included in this Annual
Report on Form 10-K fairly present, in all material respects, our financial
position, results of operations and cash flows for the interim and annual
periods presented.





(b)Management’s report on internal control over financial
reporting.





52


Internal control over financial
reporting (as defined in Rules 13a – 15(f) and 15d-15(f) under the Exchange Act)
is a process that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:




·
            Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of assets of the
      Company,




·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are being made
      only in accordance with authorizations of management and the board of
      directors of the Company, and




·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company's assets that
      could have a material effect on the financial
  statements.




Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.




Based on
our evaluation of internal control over financial reporting as of December 31,
2008, management has determined that the following material weaknesses existed
in our internal control over financial reporting:


·
              For non-routine
      transactions and related disclosures, we did not maintain adequate
      policies and procedures and lacked personnel possessing adequate technical
      accounting expertise to ensure that those transactions are properly
      accounted for and disclosed in our consolidated financial
      statements.
 ·
                  We did not design
      and maintain effective policies and procedures to ensure adequate
      maintenance of tax records, timely reconciliation of income tax accounts
      and adequate analyses and review of deferred tax calculations. As a
      result, we did not maintain effective internal control over the accounting
      for income taxes and related financial statement
    disclosures.
 These
material weaknesses resulted in misstatements related to the repurchases of our
convertible notes, income tax provisions, and errors and omissions in related
party disclosures that were corrected prior to the issuance of our consolidated
financial statements as of and for the year ended December 31, 2008.
  As a
result of material weaknesses described above, management has concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2008 based on the criteria established in COSO's Internal
Control — Integrated
Framework.
 (c)Remediation of Material Weaknesses.
 
 Management is committed to hiring a sufficient
number of technically-qualified employees and/or consultants to ensure that all
significant accounting issues, both routine and non-routine, are identified,
researched, properly documented and timely addressed.
 53
 
 Report
of Independent Registered Public Accounting Firm
 
 The
Board of Directors and Shareholders
 ShengdaTech,
Inc.:
  We
have audited ShengdaTech, Inc. and subsidiaries’ internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). ShengdaTech, Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s
Report On Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on ShengdaTech, Inc. and subsidiaries’ internal control
over financial reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Material
weaknesses have been identified and included in management’s assessment related
to the lack of adequate policies, procedures and personnel to address the
accounting for and disclosures of non-routine transactions and the Company’s
internal control over the accounting for income taxes.
  We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
ShengdaTech, Inc. and subsidiaries as of December 31, 2008, and the related
consolidated statements of income, shareholders’ equity and comprehensive
income, and cash flows for the year then ended. These material weaknesses were
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the 2008 consolidated financial statements, and this report does
not affect our report dated March 31, 2009, which expressed an unqualified
opinion on those consolidated financial statements.
  In
our opinion, because of the effect of the aforementioned material weaknesses on
the achievement of the objectives of the control criteria, ShengdaTech, Inc. and
subsidiaries have not maintained effective internal control over financial
reporting as of December 31, 2008, based oncriteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
   /s/
KPMG
 Hong
Kong, China
 March  31,
2009
 
 54


Item
9b. Other Information




None.








PART
III





Item
10. Directors, Executive Officers and Corporate Governance





We have
provided below certain information about our executive officers and directors.
Our directors serve for a term of one year or until their successors are duly
elected and qualify. Our executive officers serve at the pleasure of our board
of directors and have no fixed term of office.





Name
                  
                  Age
                  
                  PositionXiangzhi
      Chen
                  
                  47
                  
                  President,
      Chief Executive Officer and DirectorAnhui
      Guo
                  
                  39
                  
                  Director
      and Chief Financial OfficerDongquan
      Zhang
                  
                  68
                  
                  DirectorA.Carl
      Mudd
                  
                  65
                  
                  DirectorSheldon
      B. Saidman
                  
                  66
                  
                  DirectorXueyi
      Zhang
                  
                  37
                  
                  Vice
      PresidentXukui
      Chen
                  
                  36
                  
                  President
      of Shandong Bangsheng Chemical Co., Ltd.Lei
      Du
                  
                  30
                  
                  President
      of Shandong Haize Nano-Materials Co., LtdYong
      Zhao
                  
                  36
                  
                  President
      of Shaanxi Haize Nano-Materials Co., Ltd.Xiqing
      Xu
                  
                  50
                  
                  Vice
      President,
Technology





Mr. Xiangzhi Chen has served
as our chief executive officer, president and director since March 31, 2006. Mr.
Chen is the founder of Faith Bloom and its subsidiaries and has served as their
chairman and chief executive officer since the subsidiaries’ formation in 2001.
He served as president of Shandong Shengda Technology Co., Ltd. from January
2003 to March 2009.





Ms. Anhui Guo has served as
our chief financial officer, vice president and treasurer since March 31, 2006
and as director since February 23, 2007. Ms. Guo has served as chief financial
officer of Faith Bloom and its subsidiaries since 2001. Ms Guo was manager of
finance of Shandong Shengda Construction Co., Ltd. from January 2001 to January
2003. She has served as manager of finance of Shandong Shengda Technology Co.,
Ltd. since January 2003. Ms. Guo was licensed as an accountant in
1996.





Mr. Dongquan Zhang has served
as our director since February 23, 2007. Mr. Zhang has extensive experience in
the chemical industry especially in research and development and regulatory
areas. Currently he is a member of the board of directors of All China
Association of Petro-Chemical Industry, vice president of Shandong Chemistry and
Chemical Engineering Association, and vice president of Shandong Environmental
Industry Association, and president of Shandong Chemical Industrial Pollution
Prevention Association. From February 1994 to December 2000, he served as
director general and senior engineer of the Petro-Chemical Industry of Shandong
Province.





Mr. A. Carl Mudd has served
as our director since February 23, 2007. Mr. Mudd has extensive management
experience especially in the financial area. He has spent the past 14 years
consulting with and mentoring CEOs and Boards of Directors of major companies on
global strategy, business processes and international operations and
27 years as CFO, COO and President of international companies. From 2003 to
2006, he was an advisory director at CIMIC Holdings, Ltd. From 1993 to 1996, he
served as director and chairman of the Audit Committee at AM International, Inc.
Mr. Mudd also serves as an independent director and chairman of the Audit
Committee for Sutor Technologies Group, LTD (SUTR) a NASDAQ listed company. He
is also a Statutory Director of the National Association of Corporate
Directors-North Texas Chapter. He is a Certified Public Accountant and holds a
business degree from St. Edward's University. He also holds a
Certification of Director Education – The National Association of Corporate
Directors Institute.





55


Mr. Sheldon B. Saidman has
served as our director since February 23, 2007. Mr. Saidman has extensive senior
executive experience, especially in marketing and general management. He has
held positions as President or Chief Operating Officer in several companies,
both pubic and private. From May 2001 to October 2005, he served as President of
Liberty Wire & Cable, Inc. He currently has his own business management
consulting practice and serves on  another board of directors, Roscoe,
Inc., a medical equipment and supplies company owned by a  private
equity group. He holds a bachelor’s degree in journalism and public relations
from The University of Maryland.





Mr. Xueyi Zhang has served as
vice president since March 31, 2006. Mr. Zhang has served as vice president of
Shandong Shengda Technology since January 2003. He also served as vice president
of Shandong Shengda Construction Co., Ltd from January 2001 to January
2003.





Mr. Xukui Chenhas served as
president Shandong Bangsheng Chemical Co., Ltd. since October 2006. Mr. Chen is
responsible for the management of our chemical business. From October 2005 to
October 2006, he served as director of research and development of Shandong
Shengda Chemicals Co., Ltd. He was president of Shandong Haize Nano-Materials
Co. Ltd. (“Shandong Haize”) from October 2004 to August 2005. From October 2003
to September 2004, he was president of the alcohol division of Shandong Shengda
Technology Co., Ltd. He served as vice president of the alcohol division of
Shandong Shengda Technology Co., Ltd. from September 2000 to September
2003.





Mr. Lei Duhas served as
president of Shandong Haize since July 2008. From January 2007 to July 2008, Mr.
Du served as the vice president of Shandong Haize. From July 2001 to January
2007, he served as the vice director of R & D center of Shandong Haize. He
holds a bachelor’s degree in engineering from Qingdao Science & Technology
University.





Mr. Yong Zhao has served as
president of Shaanxi Haize Nano-Materials Co., Ltd. (“Shaanxi Haize”) since
October 2006 and responsible for the overall management of our nano-materials
business in Shannxi Haize. From August 2002 to October 2006, he was the vice
general manager of Shandong Haize Nano-Materials Co., Ltd.





Mr. Xiqing Xu has been Vice
President, Technology since March 2007. Mr. Xu is responsible for the management
of the Research and DevelopmentCenter. From 2004 to
October 2006, he was the general manager of Shandong Bangsheng Chemical Co. Ltd.
From 2002 to June 2004, he was the general manager of Shandong Haize
Nano-Materials Co. Ltd.





Board
Composition and Committees





Our Board
has five (5) members, of which three (3) are independent directors. We have an
Audit Committee, a Compensation Committee and a Nominating and Corporate
Governance Committee. The Audit Committee has been established as a
separately-designated standing committee in accordance with section 3(a)(58)(A)
of the Exchange Act. The Audit Committee has at least one member, Mr. A. Carl
Mudd, who meets the definition of an “audit committee financial expert” under
SEC rules and whom the Board has determined to be “independent”.





Audit Committee. The
Audit Committee is currently comprised of A. Carl Mudd, Dongquan Zhang and
Sheldon B. Saidman, with A. Carl Mudd as the chairman, each of whom are
“independent” as that term is defined by SEC rules and under the NASDAQ listing
standards. The Audit Committee is directly responsible for the appointment,
retention, compensation and oversight of the work of any registered public
accounting firm employed by the Company (including resolution of disagreements
between management and the accounting firm regarding financial reporting) for
the purpose of preparing or issuing an audit report or related work or
performing other audit, review or other services. Any such registered public
accounting firm must report directly to the Audit Committee. The Audit Committee
has the ultimate authority and responsibility to evaluate and, where
appropriate, replace the independent registered public accounting
firm.





56


The Audit
Committee held nine (9) meetings for year 2008 and the attendance rates for all
committee members are above 75%.





Compensation
Committee. The Compensation Committee is responsible for the
administration of all salary, bonus and incentive compensation plans for our
officers and key employees. The members of the Compensation Committee are
Dongquan Zhang, A. Carl Mudd and Sheldon B. Saidman as the chairman, all of whom
are “independent” directors.





The
Compensation Committee held one (1)  meeting for year 2008 and the
attendance rates for all committee members are 100%.





Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance Committee
is responsible for preparing a list of candidates to fill the expiring terms of
directors on our Board of Directors. The committee submits the list of
candidates to the Board of Directors who determines which candidates will be
nominated to serve on the Board of Directors. The nominees are then submitted
for election at the annual meeting of stockholders. The committee also submits
to the entire Board of Directors, a list of candidates to fill any interim
vacancies on the Board of Directors resulting from the departure of a member of
the Board of Directors for any reason prior to the expiration of his term. In
recommending candidates for the Board of Directors, the committee keeps in mind
the functions of this body.





The
committee considers various criteria, including the ability of the individual to
meet SEC and NASDAQ “independence” requirements, general business experience,
general financial experience, knowledge of the company’s industry
(including past industry experience), education, and demonstrated character and
judgment. The committee will consider director candidates recommended by a
stockholder if the stockholder mails timely notice to the secretary of the
Company at its principal offices, which notice includes (i) the name, age and
business address of such nominee, (ii) the principal occupation of such nominee,
(iii) a brief statement as to such nominee’s qualifications, (iv) a statement
that such nominee consents to his or her nomination and will serve as a director
if elected, (v) whether such nominee meets the definition of an “independent”
director under the SEC rules and under NASDAQ listing standards and (vi) the
name, address, class and number of shares of company stock held by the
nominating stockholder.





Any
person nominated by a stockholder for election to the Board of Directors will be
evaluated based on the same criteria as all other nominees. The committee also
oversees our adherence to our corporate governance standards. The members
of the committee are Sheldon B. Saidman, A. Carl Mudd, and Dongquan Zhang, with
Dongquan Zhang as the chairman.





The
Nominating and Corporate Governance Committee held one (1) meeting for year 2008
and the attendance rates for all committee members are 100%.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires our executive officers, directors and
beneficial owners of more than ten percent (10%) to report their beneficial
ownership of equity interests in the company to the SEC. Their initial reports
are required to be filed using the SEC's Form 3, and they are required to report
subsequent purchases, sales, and other changes using the SEC's Form 4, which
must be filed within two business days of most transactions. Officers,
directors, and persons owning more than 10% of our capital shares are required
by SEC regulations to furnish us with copies of all of reports they file
pursuant to Section 16(a).




Mr.
Sheldon B. Saidman, a director, did not file the required Form 4 in a timely
manner in 2008.





57


Code
of Ethics





We have
adopted a Code of Ethics (as defined in Item 406 of Regulation S-K) that applies
to our principal executive, financial and accounting officers. ShengdaTech, Inc.
will provide a copy of its code of ethics, without charge, to any person that
requests it. Requests should be addressed in writing to Ms. Anhui Guo, CFO,
ShengdaTech, Inc., Youth Pioneer Park, Tai'an Economic and Technological
Development Zone, Tai'an City, Shandong Province 271000, People's Republic of
China.





Item 11. Executive
Compensation




Compensation Discussion and
Analysis





The
Company’s executive compensation program is designed to pay key management
personnel, “Named Executive Officers” (NEOs) competitive remuneration based on
the authority, responsibility, and accountability of the position held by the
individual. In addition, the Company considers the competitive environment
relative to compensation paid to senior management with comparable job scope in
companies in related industries and of approximate size. The plan consists of
several components, base salary, “subsidy,” a non-taxable income provided to
offset housing and transportation expenses, and a supplemental amount referred
to as “proceeds,” an element of total compensation on which bonuses are
based.  The determination of subsidy and proceeds is a calculation
made on total compensation and amounts to a combined 35%, with 14% allocated to
subsidy and 21% to proceeds. The salary and subsidy portions are a fixed amount,
while the proceeds portion is variable based on performance.  The
Company believes that such an approach to their executive compensation packages
is both equitable and competitive, while providing a positive motivational
element to the overall performance of the senior management of
the Company.




Bonuses
earned by Named Executives are calculated against the dollar amount of the
proceed portion and will be paid up to the amount of proceed dollars not to
exceed the full 21%.   Judgment on performance and the percentage
of the proceed amount is based on accomplishments in executing job tasks, and
the general performance of the Company, measured against the financial plan for
the bonus year. The bonus amounts are determined by the CEO. Mr. Chen’s bonus is
determined by the Board of Directors on recommendation of the Compensation
Committee. This bonus will be based on meeting all financial objectives set in
the budget year, including revenue, net income and return on capital employed.
The Company’s bonus plan promotes individual performance as well as
contributions to the overall operation. Bonus dollars earned will be paid
following audited results of Company financial statements reported in the year
following the bonus year. The receiving executive must be employed by the
Company at the time of bonus payments.  Except as so noted, in 2008,
all NEOs earned the full amount of 100% of the established proceed
amount.






Compensation
Table




Name
      & Principal Position
                                          Year
                                          
                                          Salary
                                          
                                          Bonus
                                          
                                          Non-Equity
                                            Incentive
      Plan
                                            Compensation
                                          
                                          All
      other Compensation
                                          
                                          Total(a)
                                          (b)
                                          
                                          (c)
                                          
                                          (d)
                                          
                                          (g)
                                          
                                          (i)
                                          
                                          (j)Xiangzhi
      Chen, CEO
                                          2008
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          *2007
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          *2006
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          *Anhui
      Guo, CFO
                                          2008
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          *2007
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          *2006
                                          
                                          $
                                          0
                                          
                                          
                                          
                                          
                                          0
                                          
                                          
                                          
                                          $
                                          0
                                          *Lei
      Du, COO Shandong Haize (from 7/08)
                                          2008
                                          
                                          $
                                          27,083
                                          
                                          
                                          
                                          $
                                          14,583
                                          
                                          
                                          
                                          $
                                          41,666Zhaowei
      Ma, COO Shandong Haize (resigned 7/08)
                                          2008
                                          
                                          
                                          37,917
                                          
                                          
                                          
                                          $
                                          20,417
                                          
                                          
                                          
                                          $
                                          58,3342007
                                          
                                          $
                                          65,000
                                          
                                          
                                          
                                          
                                          35,000
                                          
                                          
                                          
                                          
                                          100,000Yong
      Zhao COO Shaan’xi Haize
                                          2008
                                          
                                          $
                                          65,000
                                          
                                          
                                          
                                          $
                                          35,000
                                          
                                          
                                          
                                          $
                                          100,0002007
                                          
                                          $
                                          65,000
                                          
                                          
                                          
                                          
                                          35,000
                                          
                                          
                                          
                                          
                                          100,000Xukui
      Chen  COO Shandong Bangsheng
                                          2008
                                          
                                          $
                                          52,000
                                          
                                          
                                          
                                          $
                                          28,000
                                          
                                          
                                          
                                          $
                                          80,0002007
                                          
                                          $
                                          52,000
                                          
                                          
                                          
                                          $
                                          28,000
                                          
                                          
                                          
                                          $
                                          80,000





58


*The
2007 and 2008 compensation for Mr. Chen of $300,000 a year and for Ms. Guo of
$100,000 and $120,000 a year respectively, was paid directly by Shandong Shengda
Technology Co., Ltd.  For 2009 the Company will pay the total
compensation of the two officers at the annual amount paid in 2008.





The
Compensation Committee reviewed and approved the compensation paid to the NEOs
as listed in the Compensation Table above. Recommendations for annual increases
in compensation to named executives are to be presented to the Compensation
Committee and are subject to their approval. Pay increases for non-named
employees will be at the discretion of the employee’s supervisor, subject to
senior management approval.





The
regulations regarding employee pension and retirement plans governed by the
Peoples Republic of China is the only program administered by the Company. No
other supplemental plan exists.




The
Company continues to work with the Compensation Committee in the development of
an Employee Stock Option Plan (ESOP).





Grants
of Plan-Based Awards





The
Company currently does not have any award plans. No options were granted to any
officer in 2008.





Outstanding
Equity Awards at Fiscal Year End





The
Company currently does not have an equity compensation plan. No options or
shares of stock were granted to any officer in 2008.





Option
Exercises and Stock Vested





No
options were exercised and no shares of stock were vested in 2008.





Pension
Benefits





The
Company does not have any pension plans for its officers.





Nonqualified
Deferred Compensation




There was
no nonqualified deferred compensation for the officers in 2008.





Potential
Payment Upon Termination or Change in Control





The
Company currently does not have payment arrangements for its officers upon
termination or change in control.





Director
Compensation





The
following table sets forth information concerning all compensation paid to our
independent directors for services rendered in all capacities for the year ended
December 31, 2008.





59


Name
                                
                                Fees
                                  Earned
      or
                                  Paid
      in
                                  Cash
                                  ($)
                                
                                
                                Total Plan
                                  Compensation
                                  ($)A.
      Carl Mudd
                                
                                
                                75,000
                                
                                
                                
                                133,945Sheldon
      B. Saidman
                                
                                
                                35,000
                                
                                
                                
                                35,000Dongquan
      Zhang
                                
                                
                                35,000
                                
                                
                                
                                35,000





Independent
directors will receive compensation for their service on the board and board
committees consisting of (i) an annual retainer of $35,000 (ii) $1,000 for each
telephone conference call meeting and (iii) $5,000 for each in-person meeting.
We will also reimburse directors for travel and other out-of-pocket expenses
incurred in connection with their board service. Effective April 1, 2008, A.
Carl Mudd was selected by the board to serve as Lead Director and received a
total of $30,000, and 15,000 stock options annually for this service.
Additionally, Mr. Mudd received an extra $10,000 as compensation for the
position of Chairman of Audit Committee. The aggregate value of the 15,000 stock
options was $58,945 using the Black Scholes option pricing model. For detailed
disclosures, please see page F-21 of Financial Statement to this Form 10-K under
the caption “Options”.





Compensation
Committee Report





The
Compensation Committee has reviewed and discussed the Compensation Analysis and
Discussion with the management of the Company. Based on the review and the
discussions, the Compensation Committee recommended to Board of Directors that
the Compensation Analysis and Discussions be included in the
Company’s annual report on Form 10-K. The members of the Compensation
Committee are Dongquan Zhang, Carl Mudd, and Sheldon Saidman,
Chairman.





Item
12. Security Ownership Of Certain Beneficial Owners And Management And Related
Shareholders Matters





The
following table sets forth information as of March 30, 2009, regarding the
beneficial ownership of our common stock by each person known by us to own 5% or
more of the outstanding shares of common stock, each of our directors, each of
our named executive officers, and our directors and executive officers as a
group. The percentage of beneficial ownership is calculated based on 54,202,036
shares of common stock outstanding as of March 30, 2009.




Name
      and Address
                  
                  Number of Shares
                  
                  Percentage OwnedXiangzhi
      Chen
                  
                  
                  22,902,912
                  
                  42.3
                  %Fanying
      Kong
                  
                  
                  1,998,816
                  
                  3.7
                  %Anhui
      Guo
                  
                  
                  —
                  
                  —Xueyi
      Zhang
                  
                  
                  —
                  
                  —Dongquan
      Zhang
                  
                  
                  —
                  
                  —A.
      Carl Mudd
                  
                  
                  25,000**
                  
                  —Sheldon
      B. Saidman
                  
                  
                  6,400
                  
                  —Xiqing
      Xu
                  
                  
                  1,159,584
                  
                  2.1
                  %Lei
      Du
                  
                  
                  —
                  
                  —Directors
      and executive officers as a group (8 persons)
                  
                  
                  26,087,712
                  
                  48.1
                  %





The
address for all these officers and internal directors is Youth Pioneer Park,
Tai'an Economic and Technological Development Zone, Tai'an City, Shandong
Province 271000, People's Republic of China.





60


* Ms.
Fanying Kong is the wife of Mr. Xiangzhi Chen.


**
Represents the number of shares of common stock plus options to purchase 20,000
shares of common stock that is exercisable within 60 days from March 30,
2009.





Item
13. Certain Relationships And Related Transactions and Director
Independence





On December 31, 2008 the Company owed
Shandong Shengda Technology Co. Ltd. $771,442, comprised primarily of rents from
Shandong Haize, the Company’s subsidiary.  Mr. Xiangzhi Chen, Chairman
and CEO of the Company, is the controlling shareholder and an executive officer
of Shandong Shengda Technology Co., Ltd.





On January 1, 2008, the Company owed
$1,064,348 to Shandong Shengda Technology Co. Ltd. for the purchase of property
and equipment. Mr. Xiangzhi Chen, Chairman and CEO of the Company, is the
controlling shareholder and an executive officer of Shandong Shengda Technology
Co., Ltd.





In 2007,
the Company purchased certain buildings and land use rights from Shandong
Shengda for cash of $7,611,007.









Item
14. Principal Accounting Fees And Services





KPMG and
Hansen, Barnett & Maxwell, P.C., (“Hansen”) have audited our financial
statements for the 2008 and 2007 fiscal year, respectively. Hansen has also
reviewed our financial statements included in the three Form 10-Q’s for the
quarters ended on March 31, June 30 and September 30, 2008. All of the services
described below were approved by our board prior to performance. Our board has
determined that the payments made to its independent accountant for these
services are compatible with maintaining such auditor's
independence.





Audit Fees.The aggregate fees
billed by KPMG, for professional services rendered for the audit of the
Company’s financial statements for the fiscal year ended December 31, 2008 are $
395,314. The aggregate fees billed by Hansen for audit of the Company’s
financial statements for the fiscal year ended December 31, 2007 and review of
the Company’s financial statements included in the three Form 10-Q’s for the
quarters ended on March 31, June 30 and September 30, 2008 are
$340,375.




Audit-Related Fees. There were
no fees for assurance and related services by KPMG or Hansen, for the fiscal
year ended December 31, 2008 or 2007 respectively.




Tax Fees. We engage KPMG to
provide service for the income tax returns in the U.S. for the fiscal year ended
December 31, 2008, which are estimated to be $24,927. We also engaged Hansen for
the same service for the fiscal year ended December 31, 2007, which were
$2,848.




All Other Fees. There are no
other fees for either audit-related or non-audit services billed by KPMG or
Hansen, for the fiscal years ended December 31, 2008 or 2007.








PART
IV




Item
15. Exhibits And Financial Statement Schedules





(a)
(1) Financial Statements




61


The
following financial statements are included in this Annual Report on
Form 10-K commencing on the page numbers specified below:




PageReports
      of Independent Registered Public Accounting Firm
              
              F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              
              F-4Consolidated
      Statements of Income and Comprehensive Income for the Years Ended December
      31, 2008, 2007 and 2006
              
              F-5Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2008,
      2007 and 2006
              
              F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and
      2006
              
              F-7Notes
      to Consolidated Financial Statements
              
              F-8




(2) Financial
Statement Schedules




None




(3) Exhibits




The
exhibits listed on the Exhibit Index (following the signatures section of
this report) are included, or incorporated by reference, in this annual
report.




62
 
  SHENGDATECH,
INC. AND SUBSIDIARIES
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 Reports
      of Independent Registered Public Accounting Firms
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                F-4Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006
                F-5Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income
                  for
      the Years Ended December 31, 2008, 2007, and 2006
                F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and
      2006
                F-7Notes
      to Consolidated Financial Statements
                F-8
  
 F-1
   Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Shareholders
 ShengdaTech,
Inc.:
 
 We have
audited the accompanying consolidated balance sheet of ShengdaTech, Inc. and
subsidiaries (the “Company”) as of December 31, 2008, and the related
consolidated statements of income, shareholders’ equity and comprehensive
income, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ShengdaTech, Inc. and
subsidiaries as of December 31, 2008, and the results of their operations and
their cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 31, 2009 expressed an
adverse opinion on the effectiveness of the Company’s internal control over
financial reporting.
 
 
 /s/
KPMG
 Hong
Kong, China
 March 31,
2009
  F-2
 HANSEN,BARNETT& MAXWELL,
      P.C.
                      A
      Professional Corporation
                      CERTIFIED
      PUBLIC ACCOUNTANTS
                      5
      Triad Center, Suite 750
                      Salt
      Lake City, UT 84180-1128
                      Phone:
      (801) 532-2200
                      Fax:
      (801) 532-7944
                      www.hbmcpas.com
                    Registered
      with the Public Company
                      Accounting
      Oversight Board
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and the
 Shareholders
of Shengdatech, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Shengdatech Inc. and
subsidiaries (the Company) as of December 31, 2007, and the related consolidated
statements of income, shareholders’ equity and comprehensive income and cash
flows for each of the two years in the period ended December 31, 2007. The
Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Shengdatech Inc. and
subsidiaries as of December 31, 2007 , and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2007
in conformity with accounting principles generally accepted in the United States
of America.
 
 
 
 HANSEN,
BARNETT & MAXWELL, P.C.
 
 
 
 Salt Lake
City, Utah
 March 14,
2008, except for property, plant and equipment at December 31, 2007, as to which
the date is April 11, 2008.
 
 
 F-3
 
 
 SHENGDATECH, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31,Note
                                        
                                        
                                        2008
                                        
                                        
                                        2007ASSETSCurrent
      assets:Cash
                                        
                                        
                                        
                                        
                                        $
                                        114,287,073
                                        
                                        
                                        $
                                        26,366,568Accounts
      receivable
                                        
                                        
                                        
                                        
                                        
                                        6,806,066
                                        
                                        
                                        
                                        7,889,001Other
      receivables
                                        
                                        
                                        
                                        
                                        
                                        510,825
                                        
                                        
                                        
                                        13,962Advances
      to suppliers
                                        
                                        
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,249,867Inventories
                                        
                                        
                                        (3)
                                        
                                        
                                        
                                        2,647,424
                                        
                                        
                                        
                                        1,955,384Due
      from related parties
                                        
                                        
                                        (8)
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,712Total
      current assets
                                        
                                        
                                        
                                        
                                        
                                        
                                        124,251,388
                                        
                                        
                                        
                                        38,476,494Property,
      plant and equipment, net
                                        
                                        
                                        (4)
                                        
                                        
                                        
                                        99,878,791
                                        
                                        
                                        
                                        62,343,416Land
      use rights
                                        
                                        
                                        
                                        
                                        
                                        
                                        15,593,548
                                        
                                        
                                        
                                        124,028Debt
      issuance costs
                                        
                                        
                                        (9)
                                        
                                        
                                        
                                        3,925,157
                                        
                                        
                                        
                                        -Deferred
      income tax assets
                                        
                                        
                                        (6)
                                        
                                        
                                        
                                        260,056
                                        
                                        
                                        
                                        -Total
      assets
                                        
                                        
                                        
                                        
                                        
                                        $
                                        243,908,940
                                        
                                        
                                        $
                                        100,943,938LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                        
                                        
                                        
                                        
                                        
                                        $
                                        4,493,551
                                        
                                        
                                        $
                                        5,239,648Accrued
      expenses and other payables
                                        
                                        
                                        (5)
                                        
                                        
                                        
                                        4,227,184
                                        
                                        
                                        
                                        4,851,620Income
      taxes payable
                                        
                                        
                                        (6)
                                        
                                        
                                        
                                        1,092,116
                                        
                                        
                                        
                                        728,255Due
      to related parties
                                        
                                        
                                        (8)
                                        
                                        
                                        
                                        1,737,404
                                        
                                        
                                        
                                        1,121,230Total
      current liabilities
                                        
                                        
                                        
                                        
                                        
                                        
                                        11,550,255
                                        
                                        
                                        
                                        11,940,753Long-term
      convertible notes
                                        
                                        
                                        (9)
                                        
                                        
                                        
                                        95,250,000
                                        
                                        
                                        
                                        -Non-current
      income taxes payable
                                        
                                        
                                        (6)
                                        
                                        
                                        
                                        1,268,108
                                        
                                        
                                        
                                        -Total
      liabilities
                                        
                                        
                                        
                                        
                                        
                                        
                                        108,068,363
                                        
                                        
                                        
                                        11,940,753Shareholders'
      equity:Preferred
      stock, par value: $0.00001 authorized: 10,000,000 outstanding:
      Nil
                                        
                                        
                                        
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      stock, par value: $0.00001 authorized: 100,000,000 issued and
      outstanding: 54,202,036
                                        
                                        
                                        
                                        
                                        
                                        
                                        542
                                        
                                        
                                        
                                        542Additional
      paid-in capital
                                        
                                        
                                        
                                        
                                        
                                        
                                        21,897,316
                                        
                                        
                                        
                                        21,616,468Statutory
      reserves
                                        
                                        
                                        
                                        
                                        
                                        
                                        8,130,601
                                        
                                        
                                        
                                        5,642,419Retained
      earnings
                                        
                                        
                                        
                                        
                                        
                                        
                                        92,424,314
                                        
                                        
                                        
                                        54,877,045Accumulated
      other comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        13,387,804
                                        
                                        
                                        
                                        6,866,711Total
      shareholders' equity
                                        
                                        
                                        
                                        
                                        
                                        
                                        135,840,577
                                        
                                        
                                        
                                        89,003,185Commitments
      and contingencies
                                        
                                        
                                        (7)Total
      liabilities and shareholders' equity
                                        
                                        
                                        
                                        
                                        
                                        $
                                        243,908,940
                                        
                                        
                                        $
                                        100,943,938
  See
accompanying notes to the consolidated financial statements
 F-4
 
  
 SHENGDATECH,
      INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOMEFor
      the Years Ended December 31,Note
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006Net
      sales
                              
                              
                              
                              
                              $
                              149,427,139
                              
                              
                              $
                              100,654,793
                              
                              
                              $
                              72,600,031Cost
      of goods sold
                              
                              
                              
                              
                              
                              94,302,741
                              
                              
                              
                              66,094,838
                              
                              
                              
                              51,222,569Gross
      profit
                              
                              
                              
                              
                              
                              55,124,398
                              
                              
                              
                              34,559,955
                              
                              
                              
                              21,377,462Operating
      expenses:Selling
                              
                              
                              
                              
                              
                              2,549,721
                              
                              
                              
                              1,771,168
                              
                              
                              
                              1,260,647General
      and administrative
                              
                              
                              
                              
                              
                              4,394,896
                              
                              
                              
                              3,232,911
                              
                              
                              
                              2,641,474Impairment
      of property, plant and equipment
                              
                              
                              (4)
                              
                              
                              
                              3,931,253
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      operating expenses
                              
                              
                              
                              
                              
                              
                              10,875,870
                              
                              
                              
                              5,004,079
                              
                              
                              
                              3,902,121Operating
      income
                              
                              
                              
                              
                              
                              
                              44,248,528
                              
                              
                              
                              29,555,876
                              
                              
                              
                              17,475,341Other
      income (expense):Interest
      income
                              
                              
                              
                              
                              
                              
                              235,219
                              
                              
                              
                              274,203
                              
                              
                              
                              140,375Interest
      expense
                              
                              
                              
                              
                              
                              
                              (4,766,681
                              )
                              
                              
                              -
                              
                              
                              
                              -Gain
      on extinguishment of long-term convertible notes
                              
                              
                              (9)
                              
                              
                              
                              9,018,169
                              
                              
                              
                              -
                              
                              
                              
                              -Other
      expense, net
                              
                              
                              
                              
                              
                              
                              (52,833
                              )
                              
                              
                              (12,094
                              )
                              
                              
                              (89,068
                              )Other
      income, net
                              
                              
                              
                              
                              
                              
                              4,433,874
                              
                              
                              
                              262,109
                              
                              
                              
                              51,307Earnings
      before income taxes
                              
                              
                              
                              
                              
                              
                              48,682,402
                              
                              
                              
                              29,817,985
                              
                              
                              
                              17,526,648Income
      tax expense
                              
                              
                              (6)
                              
                              
                              
                              8,646,951
                              
                              
                              
                              2,787,640
                              
                              
                              
                              -Net
      income
                              
                              
                              
                              
                              
                              $
                              40,035,451
                              
                              
                              $
                              27,030,345
                              
                              
                              $
                              17,526,648Earnings
      per share:Basic
                              
                              
                              (2)
                              
                              
                              $
                              0.74
                              
                              
                              $
                              0.50
                              
                              
                              $
                              0.34Diluted
                              
                              
                              (2)
                              
                              
                              $
                              0.60
                              
                              
                              $
                              0.50
                              
                              
                              $
                              0.34Weighted
      average shares outstanding:Basic
                              
                              
                              
                              
                              
                              
                              54,202,036
                              
                              
                              
                              54,107,408
                              
                              
                              
                              51,900,641Diluted
                              
                              
                              
                              
                              
                              
                              62,205,660
                              
                              
                              
                              54,188,410
                              
                              
                              
                              52,022,801
  F-5
 
 SHENGDATECH,
      INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOMEAccumulatedAdditional
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            Other
                                            
                                            
                                            TotalCommon
      Stock
                                            
                                            
                                            Paid-in
                                            
                                            
                                            Statutory
                                            
                                            
                                            Retained
                                            
                                            
                                            Comprehensive
                                            
                                            
                                            Shareholders'
                                            
                                            
                                            ComprehensiveShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Reserves
                                            
                                            
                                            Earnings
                                            
                                            
                                            Income
                                            
                                            
                                            Equity
                                            
                                            
                                            IncomeBalance
      as of December 31, 2005
                                            
                                            
                                            45,120,000
                                            
                                            
                                            $
                                            451
                                            
                                            
                                            $
                                            8,608,864
                                            
                                            
                                            $
                                            2,394,371
                                            
                                            
                                            $
                                            13,568,100
                                            
                                            
                                            $
                                            200,802
                                            
                                            
                                            $
                                            24,772,588Net
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            17,526,648
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            17,526,648
                                            
                                            
                                            $
                                            17,526,648Appropriation
      to statutory reserves
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            907,008
                                            
                                            
                                            
                                            (907,008
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Foreign
      currency translationadjustment, net of
      nil tax
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,614,682
                                            
                                            
                                            
                                            1,614,682
                                            
                                            
                                            
                                            1,614,682$
                                            19,141,330Shares
      issued for cash, $2.39 per share
                                            
                                            
                                            5,837,603
                                            
                                            
                                            
                                            59
                                            
                                            
                                            
                                            13,969,655
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            13,969,714Reverse
      acquisition
                                            
                                            
                                            3,137,500
                                            
                                            
                                            
                                            31
                                            
                                            
                                            
                                            63,478
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            63,509Other
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (971,496
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (971,496
                                            )Warrants
      issued forconsulting
      services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            153,619
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            153,619Balance
      as of December 31, 2006
                                            
                                            
                                            54,095,103
                                            
                                            
                                            
                                            541
                                            
                                            
                                            
                                            21,824,120
                                            
                                            
                                            
                                            3,301,379
                                            
                                            
                                            
                                            30,187,740
                                            
                                            
                                            
                                            1,815,484
                                            
                                            
                                            
                                            57,129,264Net
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            27,030,345
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            27,030,345
                                            
                                            
                                            $
                                            27,030,345Appropriation
      to statutory reserves
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,341,040
                                            
                                            
                                            
                                            (2,341,040
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Foreign
      currency translation adjustment,net of nil
      tax
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,051,227
                                            
                                            
                                            
                                            5,051,227
                                            
                                            
                                            
                                            5,051,227$
                                            32,081,572Exercise
      of warrants
                                            
                                            
                                            106,933
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            (1
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Other
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (207,651
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (207,651
                                            )Balance
      as of December 31, 2007
                                            
                                            
                                            54,202,036
                                            
                                            
                                            
                                            542
                                            
                                            
                                            
                                            21,616,468
                                            
                                            
                                            
                                            5,642,419
                                            
                                            
                                            
                                            54,877,045
                                            
                                            
                                            
                                            6,866,711
                                            
                                            
                                            
                                            89,003,185Net
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            40,035,451
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            40,035,451
                                            
                                            
                                            
                                            $40,035,451Appropriation
      to statutory reserves
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,488,182
                                            
                                            
                                            
                                            (2,488,182
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Foreign
      currency translation adjustment,net of nil
      tax
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            6,521,093
                                            
                                            
                                            
                                            6,521,093
                                            
                                            
                                            
                                            6,521,093$
                                            46,556,544Share-based
      compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            58,945
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            58,945Excess
      tax benefit fromexercise of
      warrants
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            221,903
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            221,903Balance
      as of December 31, 2008
                                            
                                            
                                            54,202,036
                                            
                                            
                                            $
                                            542
                                            
                                            
                                            $
                                            21,897,316
                                            
                                            
                                            $
                                            8,130,601
                                            
                                            
                                            $
                                            92,424,314
                                            
                                            
                                            $
                                            13,387,804
                                            
                                            
                                            $
                                            135,840,577
  
 F-6
 
 SHENGDATECH,
      INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the Years Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Cash
      flows from operating activities:Net
      income
                          
                          $
                          40,035,451
                          
                          
                          $
                          27,030,345
                          
                          
                          $
                          17,526,648Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Depreciation
                          
                          
                          3,734,433
                          
                          
                          
                          2,127,990
                          
                          
                          
                          1,031,387Land
      use rights  expense
                          
                          
                          107,121
                          
                          
                          
                          990
                          
                          
                          
                          -Amortization
      of debt issuance costs
                          
                          
                          1,092,675
                          
                          
                          
                          -
                          
                          
                          
                          -Impairment
      of property, plant and equipment
                          
                          
                          3,931,253
                          
                          
                          
                          -
                          
                          
                          
                          -Gain
      on extinguishment of long-term convertible notes
                          
                          
                          (9,018,169
                          )
                          
                          
                          -
                          
                          
                          
                          -Loss
      on disposal of property, plant and equipment
                          
                          
                          -
                          
                          
                          
                          1,845
                          
                          
                          
                          16,377Share-based
      compensation
                          
                          
                          58,945
                          
                          
                          
                          -
                          
                          
                          
                          153,619Deferred
      income tax benefit
                          
                          
                          (260,056
                          )
                          
                          
                          -
                          
                          
                          
                          -Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          1,587,245
                          
                          
                          
                          (1,839,452
                          )
                          
                          
                          (1,635,713
                          )Other
      receivables
                          
                          
                          (496,157
                          )
                          
                          
                          144,500
                          
                          
                          
                          4,040,220Inventories
                          
                          
                          (552,135
                          )
                          
                          
                          330,614
                          
                          
                          
                          (611,842
                          )Due
      from related parties
                          
                          
                          1,798
                          
                          
                          
                          -
                          
                          
                          
                          952,552Accounts
      payable
                          
                          
                          (1,821,581
                          )
                          
                          
                          1,033,008
                          
                          
                          
                          614,532Accrued
      expenses and other payables
                          
                          
                          (914,920
                          )
                          
                          
                          696,887
                          
                          
                          
                          262,936Income
      taxes payable
                          
                          
                          1,578,462
                          
                          
                          
                          728,255
                          
                          
                          
                          -Due
      to related parties
                          
                          
                          (199,795
                          )
                          
                          
                          (11,863
                          )
                          
                          
                          736,564Net
      cash provided by operating activities
                          
                          
                          38,864,570
                          
                          
                          
                          30,243,119
                          
                          
                          
                          23,087,280Cash
      flows from investing activities:Payment
      for property, plant and equipment, including interest
      capitalized
                          
                          
                          (36,654,578
                          )
                          
                          
                          (38,407,530
                          )
                          
                          
                          (15,874,952
                          )Purchase
      of land use rights
                          
                          
                          (15,328,370
                          )
                          
                          
                          (120,083
                          )
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (51,982,948
                          )
                          
                          
                          (38,527,613
                          )
                          
                          
                          (15,874,952
                          )Cash
      flows from financing activities:Proceeds
      from issuance of long-term convertible notes
                          
                          
                          115,000,000
                          
                          
                          
                          -
                          
                          
                          
                          -Payment
      of debt issuance costs
                          
                          
                          (5,859,663
                          )
                          
                          
                          -
                          
                          
                          
                          -Extinguishment
      of long-term convertible notes
                          
                          
                          (9,890,000
                          )
                          
                          
                          -
                          
                          
                          
                          -Due
      to related parties
                          
                          
                          -
                          
                          
                          
                          (1,995,105
                          )
                          
                          
                          1,903,947Proceeds
      from issuance of common stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          13,969,714Excess
      tax benefit from exercise of warrant
                          
                          
                          221,903
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash provided by (used in) financing activities
                          
                          
                          99,472,240
                          
                          
                          
                          (1,995,105
                          )
                          
                          
                          15,873,661Effect
      of exchange rate changes on cash
                          
                          
                          1,566,643
                          
                          
                          
                          1,962,025
                          
                          
                          
                          848,853Net
      increase (decrease) in cash
                          
                          
                          87,920,505
                          
                          
                          
                          (8,317,574
                          )
                          
                          
                          23,934,842Cash
      at beginning of year
                          
                          
                          26,366,568
                          
                          
                          
                          34,684,142
                          
                          
                          
                          10,749,300Cash
      at end of year
                          
                          $
                          114,287,073
                          
                          
                          $
                          26,366,568
                          
                          
                          $
                          34,684,142Non-cash
      investing activities:Accounts
      payable for purchase of property, plant and equipment
                          
                          $
                          740,951
                          
                          
                          $
                          1,218,497
                          
                          
                          $
                          854,068Due
      to related parties for purchase of property, plant and
      equipment
                          
                          $
                          741,263
                          
                          
                          $
                          (354,316
                          )
                          
                          $
                          289,111Supplemental
      disclosures of cash flow information:Cash
      paid for income taxes
                          
                          $
                          7,109,351
                          
                          
                          $
                          2,088,364
                          
                          
                          $
                          415,334Cash
      paid for interest, net of capitalized interest
                          
                          $
                          3,197,756
                          
                          
                          
                          -
                          
                          
                          
                          -
   F-7
 SHENGDATECH,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
1 – Nature of business
 
 Principal
activities
 
 ShengdaTech,
Inc. (“ShengdaTech”) and its subsidiaries (collectively, the “Company”) are
engaged primarily in developing, manufacturing and marketing nano precipitated
calcium carbonate (“NPCC”). The Company sells its products mainly through a
direct sales force.  The geographic markets cover several provinces,
primarily Shandong and Shaanxi of the People’s Republic of China (“PRC”) and to
a lesser extent other East Asian countries.  The NPCC sold by the
Company is ultra fine precipitated calcium carbonate with an average particle
diameter of under 100 nano-meters for application as an additive in various
products, including  paper, paints, rubber and plastic industries. The
Company currently supplies NPCC products primarily to the tire and polyvinyl
chloride (“PVC”) building materials industries.
 
 Prior to
November 1, 2008, the Company’s chemical segment manufactured and sold chemicals
including ammonium bicarbonate, liquid ammonia, methanol and melamine. Ammonium
bicarbonate is mainly used for nitrogenous fertilizers and methanol is used as a
raw material for chemical products. Methanol is a chemical material and a clean
alternative to fossil fuel. Methanol is used in the chemical industry,
pharmaceutical industry, light industry and textile industry. Melamine is the
intermediate product of environment friendly resin. On June 20, 2008 the Company
received a notice from the Tai'an City Government requiring Shandong Bangsheng
Chemical Co., Ltd. (“Bangsheng Chemical”), which represents the Company’s entire
operations for its chemical segment, to cease production by October 31, 2008 due
to the close proximity of the chemical facility to residential and
non-manufacturing business properties. The Company considered alternatives in
order to continue the Company’s chemical operations and on August 11, 2008, the
Company entered into an agreement with Shandong Shengda Technology Co. Ltd.
(“Shandong Shengda”), a related party of which the Chief Executive Officer
(“CEO”) Mr. Xiang Zhi Chen (“Mr. Chen”) of the Company is the major shareholder,
to acquire a state-owned company, Jinan Fertilizer Co. Ltd. (“Jinan
Fertilizer”), located in Jinan, Shandong Province. Jinan Fertilizer manufactures
chemical products similar to those produced by Bangsheng Chemical and therefore
the Company intended to consolidate the Bangsheng Chemical operations with Jinan
Fertilizer. However, in March 2009, the Board of Directors decided that the
Company will no longer pursue the acquisition of Jinan Fertilizer. The Company
did not incur any liability or costs as a result of not consummating the
acquisition of Jinan Fertilizer. The Company’s chemical operations approximated
45%, 54% and 70% of the Company’s total consolidated net sales and approximated
32%, 48% and 71% of the total consolidated earnings before income taxes for the
years ended December 31, 2008, 2007 and 2006, respectively. Additional
information regarding the Company’s chemical segment is presented in Note 14.
The Company is currently seeking strategic investment opportunities to continue
its chemical operations.
 
 Although
as of December 31, 2008, the Company had ceased all operations at Bangsheng
Chemical, management had plans to continue the Bangsheng Chemical
operations through the acquisition of Jinan Fertilizer, therefore concluded that
the Company did not satisfy the criteria for discontinued operations reporting
in accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
 
 Organization
 
 ShengdaTech
is incorporated in Nevada in the United States of America
(“U.S.”).  ShengdaTech’s wholly-owned subsidiaries, Shandong Haize
Nano Co., Ltd. (“Shandong Haize Nano”), Bangsheng Chemical, Shaanxi Haize Nano
Co., Ltd. (“Shaanxi Haize Nano”), and Zibo Jiaze Nano Material Ltd. (“Zibo
Nano”) and collectively the “PRC operating subsidiaries” are established under
the laws of PRC. Prior to March 31, 2006, Shandong Haize Nano and Bangsheng
Chemical were wholly-owned subsidiaries of Faith Bloom Limited (“Faith
Bloom”).
 
 On March
31, 2006, ShengdaTech entered into a share exchange agreement with Faith Bloom
pursuant to which ShengdaTech acquired all of the issued and outstanding shares
of Faith Bloom in exchange for the issuance of 50,957,603 shares of ShengdaTech
(the “Transaction”).
 
 F-8
 As a
result of the Transaction, Faith Bloom became a wholly-owned subsidiary of
ShengdaTech. Further because the former shareholders of Faith Bloom acquired
approximately 94.2% of ShengdaTech’s outstanding stock, the Transaction was
accounted for as a reverse acquisition in which Faith Bloom was deemed to be the
accounting acquirer and ShengdaTech the legal acquirer.
  Therefore,
the historical consolidated financial statements of the Company for periods
prior to the date of the Transaction are those of Faith Bloom, as the accounting
acquirer, and all references to the consolidated financial statements of the
Company apply to the historical financial statements of Faith Bloom prior to the
Transaction and the consolidated financial statements of the Company subsequent
to the Transaction.
  In
addition, because ShengdaTech was a non-operating public shell company before
the Transaction, no goodwill has been recorded in connection with the
Transaction. The net assets of ShengdaTech at the time of the Transaction
amounted to $63,509, mainly consisted of cash at bank and has been credited to
shareholders' equity. The consolidated financial statements present on a
retroactive basis as though the Transaction had occurred as of the earliest
period presented.
 
 Mr. Chen,
the Company’s major shareholder and CEO, together with his wife, own 45.94% of
the Company.
 
 Basis
of presentation
 
 The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
 
 NOTE
2 – Significant accounting policies
 
 Principles of
consolidation – The consolidated financial statements include the
financial statements of  ShengdaTech and its subsidiaries. All
significant intercompany balances and transactions have been eliminated upon
consolidation.
 
 Use of
estimates – The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant items subject to such estimates and assumptions
include the valuation for accounts receivable, realizable value of inventories,
the useful lives and recoverability of the carrying value of long-lived assets,
income tax uncertainties and other contingencies. These estimates are often
based on complex judgments and assumptions that management believes to be
reasonable but are inherently uncertain and unpredictable. Actual results could
differ from those estimates. The current economic environment has increased the
degree of uncertainty inherent in these estimates and assumptions.
 
 Foreign currency
transactions and translation–The functional currency of ShengdaTech and
Faith Bloom is the U.S. dollar. The functional currency of the PRC operating
subsidiaries is the Renminbi (“RMB”). Transactions denominated in currencies
other than the functional currency are translated into the functional currency
at the exchange rates prevailing at the dates of the transaction. Monetary
assets and liabilities denominated in foreign currencies are translated into the
functional currency using the applicable exchange rates at each balance sheet
date. The resulting exchange differences are recorded in other expense, net in
the consolidated statements of income.
 
 The
Company’s reporting currency is the U.S. dollar. Assets and liabilities of the
PRC operating subsidiaries are translated into the U.S. dollar using the
exchange rates at each balance sheet date. Revenues and expenses of the PRC
operating subsidiaries are translated at average rates prevailing during the
reporting period. Adjustments resulting from translating the financial
statements of the PRC operating subsidiaries into the U.S. dollar are recorded
as a separate component of accumulated other comprehensive income in the
consolidated statements of shareholders’ equity and comprehensive
income.
 
 F-9
  Fair value
measurement– On January 1, 2008, the Company adopted the provisions of
SFAS No. 157, Fair Value
Measurements (“SFAS No. 157”), for fair value measurements of financial
assets and financial liabilities and for fair value measurements of nonfinancial
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS No. 157
also establishes a framework for measuring fair value and expands disclosures
about fair value measurements (Note 13). FASB Staff Position (“FSP”) FAS 157-2,
Effective Date of FASB
Statement No. 157, (“FSP FAS 157-2”), delays the effective date of SFAS
No. 157 until fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. In
accordance with FSP FAS 157-2, the Company has not applied the provisions of
SFAS No. 157 to the measurement of long-lived assets upon recognition of an
impairment charge during 2008 (Note 4).
 
 On
January 1, 2009, the Company will be required to apply the provisions of SFAS
No. 157 to fair value measurements of nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. Management is in the process of evaluating
the impact, if any, of applying these provisions on its financial position and
results of operations.
 
 In
October 2008, the Financial Accounting Standard Board (“FASB”) issued FSP FAS
157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active
(“FSP FAS 157-3”), which was effective immediately. FSP FAS 157-3 clarifies the
application of SFAS No. 157 in cases where the market for a financial instrument
is not active and provides an example to illustrate key considerations in
determining fair value in those circumstances. The Company has considered
the guidance provided by FSP FAS 157-3 in its determination of estimated fair
values during 2008.
 
 Cash–
Cash consists of cash on hand and cash at bank. As of December 31, 2008 and
2007, RMB 315,092,101 and RMB 191,093,944 (equivalent to $45,970,661
and $26,126,789), respectively, and U.S. dollar deposits of $67,589,228 and
$236,625, respectively, were held at major financial institutions located in the
PRC. The remaining balance was held primarily at major financial institutions
located in the Hong Kong Special Administrative Region (the “HK SAR”).
Management believes that these major financial institutions are of high credit
quality.
 
 Accounts
receivable – Accounts receivable are recorded at the invoiced amount.
Amounts collected on trade accounts receivable are included in net cash provided
by operating activities in the consolidated statements of cash
flows.  Management reviews accounts receivable on a periodic basis and
records allowances when there is a doubt as to the collectibility of the
balance.  In evaluating the collectibility of accounts receivable
balances, management considers various factors, including historical losses,
current market conditions and customers’ financial condition, the amount of
accounts receivables in dispute, and the accounts receivables aging and payment
patterns.  The Company historically has not had any write-offs and all
accounts receivable are current and due within 90 days as of the balance sheet
dates.  As a result, no allowances for doubtful accounts has been
recorded for any of the periods presented herein because management believes all
accounts receivable are fully collectible. The Company does not have any
off-balance-sheet credit exposure related to its customers.
 
 Inventories
– Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method. Cost of work-in-progress and finished goods
comprise direct materials, direct production costs and an allocation of
production overheads based on normal operating capacity.
 
 Property, plant
and equipment – Property, plant and equipment are stated at cost.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets, taking into consideration the assets’ estimated residual
value.
 
 F-10
  The
estimated useful lives of property, plant and equipment are as
follows:
 
 Buildings
                  
                  15
      - 25  yearsPlant,
      machinery and equipment
                  
                  10
      - 30  yearsMotor
      vehicles
                  
                  5 -
      10  yearsOffice
      equipment
                  
                  3
      -5  years
 Construction
in progress is stated at cost. Cost comprises nonrefundable prepayments and
direct costs of construction as well as interest costs capitalized during the
period of construction of the plant or installation of equipment. Costs included
in construction in progress are transferred into their respective asset
categories when the assets are ready for their intended use, at which time
depreciation commences.
  When
items are retired or otherwise disposed of, income is charged or credited for
the difference between net book value and the proceeds received thereon.
Ordinary maintenance and repairs are charged to expense as incurred, and
replacements and betterments are capitalized.
 
 A
reconciliation of total interest cost incurred to “interest expense” as reported
in the consolidated statements of income for the year ended December 31, 2008,
2007 and 2006 is as follows:
 
 Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Total
      interest cost incurred
                  
                  
                  5,055,842
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      cost capitalized
                  
                  
                  (289,161
                  )
                  
                  
                  -
                  
                  
                  
                  -Interest
      expense
                  
                  $
                  4,766,681
                  
                  
                  $
                  -
                  
                  
                  $
                  -
 
 
 Land use
rights – Land use rights represent payments made to obtain the right to
use land in the PRC, which are charged to expense on a straight-line basis over
the life of the rights of  50 years.
 
 Impairment of
long-lived assets – Long-lived assets, such as property, plant and
equipment and land use rights, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset or asset group to the estimated
undiscounted future cash flows expected to be generated by the asset or asset
group. If the carrying amount of the asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized to the extent the
carrying amount of the asset exceeds its fair value. Assets to be disposed of
are separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer
depreciated.
 
 Debt issuance
costs– Costs incurred by the Company that are directly attributable to
the issuance of the long-term convertible notes, are deferred and are charged to
the consolidated statements of income on a straight-line basis, which
approximate the effective interest rate method from the date the long-term
convertible notes were issued to the earliest date the holders of the long-term
convertible notes can demand payment, which is three years.
 
 Income taxes–Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. A valuation allowance is provided
to reduce the amount of deferred tax assets if it is considered more likely than
not that some portion or all of the deferred tax assets will not be
realized.
  F-11
 On
January 1, 2007, the Company adopted the FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of Statement of Financial Accounting Standards No.
109 (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax
positions. This interpretation requires that an entity recognizes in the
consolidated financial statements the impact of a tax position, if that position
is more likely than not of being sustained upon examination, based on the
technical merits of the position.  Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company has elected to classify
interest and penalties related to unrecognized tax benefits, if and when
required, as part of income tax expense in the consolidated statements of
income. The initial adoption of FIN 48 did not have any impact on the Company’s
consolidated financial position or results of operations.
 
  Revenue
recognition–The Company recognizes
revenues, when the customer takes ownership and assumes risk of loss, collection
of relevant receivable is probable, persuasive evidence of an arrangement exists
and the sales price is fixed or determinable. Written sales agreements or
customer purchase orders, which specify price, product, and quantity, are used
as evidence of an arrangement. For domestic sales, customer acceptance is
evidenced by a carrier or customer signed shipment notification
form.  For export sales, products are considered delivered when the
goods have reached the port of arrival. In the PRC, value added tax (“VAT”) of
approximately 13 - 17% on invoiced amount is collected on behalf of tax
authorities. Revenue is recorded net of VAT. VAT collected from customers, net
of VAT paid for purchases, is recorded as a liability and included in “accrued
expenses and other payables” in the consolidated balance sheets.
 
 Sales incentives
–The Company accounts for sales incentives such as sales rebates in
accordance with the Emerging Issues Task Force ("EITF") Issue No. 01-09,
Accounting for Consideration
Given by a Vendor to a Customer. Provisions for rebates are provided for
in the same period the related revenues are recorded and are included in
“accrued expenses and other payables” in the consolidated balance sheets until
paid. Sales rebates, which amounted to $2,356,330, $1,950,429 and $1,072,924 for
the years ended December 31, 2008, 2007 and 2006, respectively, are recognized
as a reduction of sales.
 
 Share-based
compensation –The Company accounts for share-based payments under the
provision of SFAS No. 123 (revised 2004),Share-based Payment
(“SFAS No. 123R”). Under SFAS No. 123R, the Company measures the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award and recognizes the cost over the
period during which an employee is required to provide service in exchange for
the award, which generally is the vesting period.
 
 Research and
product development costs – Research and development costs are expensed
as incurred and are included in general and administrative expenses in the
consolidated statements of income. For the years ended December 31, 2008, 2007
and 2006, such expenses amounted to $455,104, $153,057 and $340,771,
respectively.
 
 Operating leases– The Company leases land, buildings and equipment under non-cancelable
operating leases. Minimum lease payments are expensed on a straight-line basis
over the term of the lease.  The lease agreements do not contain free
rent or escalating payment terms. Under the terms of the lease agreements, the
Company has no legal or contractual asset retirement obligations at the end of
the leases.
 
 Commitments and
contingencies– Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. Legal and other fees incurred in connection with loss
contingencies are expensed as incurred and are included in general and
administrative expenses in the consolidated statements of income.
 
 F-12
 Retirement
benefit plans – As stipulated by the regulations of the PRC, the Company
participates in various defined contribution plans organized by municipal and
provincial governments for its employees. The Company is required to make annual
contributions at rates prescribed by the related municipal and provincial
governments. Under these plans, certain pension, medical and other welfare
benefits are provided to the employees.  Contributions to employee
benefits associated with these plans are expensed as incurred. The Company has
no other obligation for the payment of employee benefits associated with these
plans beyond the contributions described above. For the years ended December 31,
2008, 2007 and 2006, contributions to the defined contribution plans were
$735,440 , $410,320 and $301,695, respectively.
 
 Basic and diluted
earnings per share – Basic earnings per share (“EPS”) is computed by
dividing net income by the weighted-average shares of common stock outstanding
during the period. Diluted EPS is calculated by dividing net income as adjusted
for the effect of dilutive ordinary equivalent shares, if any, by the weighted
average number of ordinary and dilutive ordinary equivalent shares outstanding
during the year. Ordinary equivalent shares consist of convertible notes, using
the if-converted method, and common stock issuable upon the exercise of
outstanding share options and warrants (using the treasury stock method).
Potential dilutive securities are not included in the calculation of diluted
earnings per share if the effect is anti-dilutive.
 
 The
following table sets forth the computation of basic and diluted earnings per
share:
 Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      income
                    
                    $
                    40,035,451
                    
                    
                    $
                    27,030,345
                    
                    
                    $
                    17,526,648Interest
      on long-term convertible notes, net of tax of $1,620,672
                    
                    
                    3,146,009
                    
                    
                    
                    -
                    
                    
                    
                    -Gain
      on extinguishment of long-term convertible notes,net
      of tax of $3,066,177
                    
                    
                    (5,951,992
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      income used for diluted earnings per share calculation
                    
                    $
                    37,229,468
                    
                    
                    $
                    27,030,345
                    
                    
                    $
                    17,526,648Weighted
      average shares:Basic
                    
                    
                    54,202,036
                    
                    
                    
                    54,107,408
                    
                    
                    
                    51,900,641Effect
      of dilutive securities:Long-term
      convertible notes
                    
                    
                    8,003,624
                    
                    
                    
                    -
                    
                    
                    
                    -Warrants
                    
                    
                    -
                    
                    
                    
                    81,002
                    
                    
                    
                    122,160Diluted
                    
                    
                    62,205,660
                    
                    
                    
                    54,188,410
                    
                    
                    
                    52,022,801Earnings
      per share:Basic
                    
                    $
                    0.74
                    
                    
                    $
                    0.50
                    
                    
                    $
                    0.34Diluted
                    
                    $
                    0.60
                    
                    
                    $
                    0.50
                    
                    
                    $
                    0.34
 
 The total
number of potential common shares excluded from the diluted earnings per share
computation because the exercise price of the stock options exceeded the average
price of the Company’s common stock was 15,000 shares in 2008. There were no
options issued in the prior year. No warrants were issued and outstanding during
the year.
 
 Segment reporting– The
Company’s chief operating decision maker (“CODM”) has been identified as its
Chief Executive Officer.  The Company has two operating segments,
which are the nano-materials segment and the chemical products segment (Note
1).
 
 Reclassificationand other
adjustments– Certain
prior year balance sheet items have been reclassified to conform to the current
year’s presentation. In addition, the Company’s statement of cash flows for the
years ended December 31, 2007 and 2006 have been revised from previously issued
financial statements to correct immaterial errors in the classification of cash
flows. For the year ended December 31, 2007, the effect of the errors was to
increase cash flows from investing and financing activities by $75,298 and
$628,450, respectively and to decrease cash flows from operating activities by
$703,748. For the year ended December 31, 2006, the effect of the errors was to
decrease cash flows from investing and financing activities by $417,034 and
$1,006,734, respectively and to increase cash flows from operating activities by
$1,423,768.
 
 F-13
 Recentlyissuedaccountingpronouncements – In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS No. 159, which provides
companies with an option to report selected financial assets and liabilities at
fair value. SFAS No. 159 establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities and
highlights the effect of a company’s choice to use fair value on its earnings.
It also requires a company to display the fair value of those assets and
liabilities for which it has chosen to use fair value on the face of the balance
sheet. SFAS No. 159 was effective for the Company beginning January 1, 2008
and did not have an impact on its consolidated financial statements as the
Company did not choose to use the fair value option.
 
 In
December 2007, the FASB issued SFAS No. 141R, Business Combinations or SFAS
No. 141R and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment to ARB No. 51 or SFAS
No. 160. SFAS No. 141R and No. 160 require most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in a business
combination to be recorded at “full fair value” and require noncontrolling
interests (previously referred to as minority interests) to be reported as a
component of equity, which changes the accounting for transactions with
noncontrolling interest holders. Both Statements are effective for periods
beginning on or after December 15, 2008, and earlier adoption is prohibited.
SFAS No. 141R will be applied to business combinations occurring after the
effective date. SFAS No. 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date.  All of
the Company’s subsidiaries are wholly-owned, so the adoption of SFAS No. 160 is
not expected to impact the Company’s financial position and results of
operations.
 
 In
May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), or FSP APB 14-1, which requires separate accounting for the
debt and equity components of convertible debt issuances that have a cash
settlement feature permitting settlement partially or fully in cash upon
conversion. A component of such debt issuances representative of the approximate
fair value of the conversion feature at inception should be bifurcated and
recorded to equity, with the resulting debt discount amortized to interest
expense in a manner that reflects the issuer’s nonconvertible, unsecured debt
borrowing rate. The requirements for separate accounting must be applied
retrospectively to previously issued convertible debt issuances as well as
prospectively to newly issued convertible debt issuances, negatively affecting
both net income and earnings per share, in financial statements issued for
fiscal years beginning after December 15, 2008. Management currently does
not expect that the adoption of FSP APB 14-1 will have a material impact on its
consolidated financial statements.
 
 NOTE
3 – Inventories
 
 Inventories
consist of the following:
 December
      31,2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      1,157,842
                      
                      
                      $
                      1,357,510Work-in-process
                      
                      
                      300,780
                      
                      
                      
                      104,872Finished
      goods
                      
                      
                      1,188,802
                      
                      
                      
                      493,002Total
      inventories
                      
                      $
                      2,647,424
                      
                      
                      $
                      1,955,384
  Raw
materials consist primarily of anthracite and limestone supplies used in the
Company’s production of NPCC products.
 
 F-14
  NOTE
4 – Property, plant and equipment, net
 
 Property,
plant and equipment consist of the following:
 December
      31,2008
                      
                      
                      2007Buildings
                      
                      $
                      14,829,091
                      
                      
                      $
                      10,908,890Plant,
      machinery and equipment
                      
                      
                      78,203,534
                      
                      
                      
                      37,771,726Motor
      vehicles
                      
                      
                      140,358
                      
                      
                      
                      125,157Office
      equipment
                      
                      
                      500,355
                      
                      
                      
                      79,381Construction
      in progress
                      
                      
                      16,564,016
                      
                      
                      
                      19,584,655Total
      property, plant and equipment
                      
                      
                      110,237,354
                      
                      
                      
                      68,469,809Less:
      accumulated depreciation
                      
                      
                      (10,358,563
                      )
                      
                      
                      (6,126,393
                      )Total
      property, plant and equipment, net
                      
                      $
                      99,878,791
                      
                      
                      $
                      62,343,416
 Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was $3,734,433,
$2,127,990 and $1,031,387, respectively.
 
 In June
2008 the Company received a notice from the Tai'an City Government requiring
Bangsheng Chemical, which represents the Company’s entire operations for its
chemical products, to cease production before October 31, 2008 because of the
city’s urbanization project. This change required an impairment analysis to be
performed. The estimated undiscounted future cash flows expected to be generated
by the plant equipment were less than their carrying amounts. The carrying
amounts of the equipment were reduced to fair value of approximately $1,777,800,
which was determined based on estimated selling prices in the used equipment
market. This resulted in a pre-tax charge of $3,931,253 recorded in operating
expenses in the consolidated statement of income for the year ended December 31,
2008. As of December 31, 2008, the Company had ceased all operations at
Bangsheng Chemical. Management had not yet determined its plan for this
segment’s equipment, therefore, the equipment is still considered as being held
for use in accordance with SFAS No. 144.
 
 NOTE
5 – Accrued expenses and other payables
 
 Accrued
expenses and other payables consist of the following:
 
 December
      31,2008
                      
                      
                      2007Accrued
      utilities
                      
                      $
                      752,114
                      
                      
                      $
                      1,473,374Accrued
      interest
                      
                      
                      476,250
                      
                      
                      
                      -Sales
      rebate payable
                      
                      
                      455,260
                      
                      
                      
                      477,709Professional
      service fee payable
                      
                      
                      630,071
                      
                      
                      
                      301,815Salaries
      and welfare payable
                      
                      
                      967,183
                      
                      
                      
                      1,302,254Other
      taxes payable
                      
                      
                      787,388
                      
                      
                      
                      1,007,910Other
      payables
                      
                      
                      158,918
                      
                      
                      
                      288,558Total
      accrued expenses and other payables
                      
                      $
                      4,227,184
                      
                      
                      $
                      4,851,620
 
 NOTE
6 – Income taxes
 
 ShengdaTech
and each of its subsidiaries file separate income tax returns.
 
 F-15
  The
United States of America
 
 ShengdaTech,
is incorporated in Nevada in the U.S., and is subject to a gradual U.S. federal
corporate income tax of 15% to 35%. The state of Nevada does not impose any
corporate income tax.
 
 British
Virgin Islands
 
 Under the
current laws of the British Virgin Islands, Faith Bloom is not subject to tax on
income or capital gains.  In addition, upon payment of dividends by
Faith Bloom, no British Virgin Islands withholding tax will be
imposed.
 
 PRC
 
 Prior to
January 1, 2008, the PRC’s statutory income tax rate was
33%.  Shandong Haize Nano, Bangsheng Chemical and Shaanxi Haize Nano,
which were considered “production-oriented foreign investment enterprises”, were
each entitled to a tax holiday of a two-year 100% exemption followed by a
three-year 50% exemption commencing from the first profit making year after
offsetting accumulated tax losses. Shandong Haize Nano, Bangsheng Chemical and
Shaanxi Haize Nano’s tax holidays started in 2005, 2005 and 2006,
respectively.
 
 On March
16, 2007, the National People’s Congress passed the new Corporate Income Tax law
(the “new CIT law”) which unified the income tax rate to 25% for all
enterprises.  The new CIT law became effective on January 1,
2008.  The new CIT law provides a grandfathering on tax holidays which
were granted under the then effective tax laws and regulations.
 
 Based on
the above, the PRC subsidiaries are subject to the following tax
rates:
 
 ·
                Shandong
      Haize Nano and Bangsheng Chemical are under tax holidays in 2006 and are
      subject to tax rates of 16.5%, 12.5% and 12.5% for 2007, 2008 and 2009,
      respectively. Commencing January 1, 2010, Shandong Haize Nano and
      Bangsheng Chemical are subject to a tax rate of
  25%.
 
 ·
                Shaanxi
      Haize Nano is under tax holidays in 2006 and 2007, and is subject to a tax
      rate of 12.5% in 2008 through 2010. Commencing January 1,
      2011, Shaanxi Haize Nano is subject to a tax rate of
    25%.
 
 Earnings
(losses) before income taxes of the Company consists of the
following:
  Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006PRC
                    
                    $
                    45,147,184
                    
                    
                    $
                    30,217,252
                    
                    
                    $
                    18,045,364Non-PRC
                    
                    
                    3,535,218
                    
                    
                    
                    (399,267
                    )
                    
                    
                    (518,716
                    )Total
      earnings before income taxes
                    
                    $
                    48,682,402
                    
                    
                    $
                    29,817,985
                    
                    
                    $
                    17,526,648
 
 The
non-PRC earnings before income taxes were derived primarily
from extinguishment of certain long-term convertible notes by ShengdaTech
during the year ended December 31, 2008. The Company did not generate any
taxable income outside of the PRC for the years ended December 31, 2007 and
2006.
 
 F-16
  Income
tax expense (benefit) attributable to earnings before income taxes, consists
of:
 
 Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006United
      States:Current
      taxesFederal
                    
                    $
                    1,505,854
                    
                    
                    $
                    -
                    
                    
                    $
                    -State
      and local
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Deferred
      income taxes
                    
                    
                    (260,056
                    )
                    
                    
                    -
                    
                    
                    
                    -Total
      U.S. tax expense
                    
                    
                    1,245,798
                    
                    
                    
                    -
                    
                    
                    
                    -PRC:Current
      taxes
                    
                    
                    7,401,153
                    
                    
                    
                    2,787,640
                    
                    
                    
                    -Deferred
      income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      PRC tax expense
                    
                    
                    7,401,153
                    
                    
                    
                    2,787,640
                    
                    
                    
                    -Total
      income tax expense
                    
                    $
                    8,646,951
                    
                    
                    $
                    2,787,640
                    
                    
                    $
                    -
 
 In 2008,
the Company recognized an excess tax benefit in the amount of $221,903 as a
component of additional paid-in capital.
  Reconciliation
between income tax expense and the amounts computed by applying the PRC
statutory tax rates to earnings before income taxes is as follows:
 
 For
      the Years Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Computed
      income tax
                      
                      $
                      12,170,601
                      
                      
                      
                      25
                      %
                      
                      $
                      9,839,935
                      
                      
                      
                      33
                      %
                      
                      $
                      5,783,794
                      
                      
                      
                      33
                      %Change
      in valuation allowance
                      
                      
                      478,284
                      
                      
                      
                      1
                      %
                      
                      
                      380,396
                      
                      
                      
                      1
                      %
                      
                      
                      124,133
                      
                      
                      
                      1
                      %Non-deductible
      expenses
                      
                      
                      20,041
                      
                      
                      
                      0
                      %
                      
                      
                      29,488
                      
                      
                      
                      0
                      %
                      
                      
                      52,230
                      
                      
                      
                      0
                      %Effect
      of unrecognized tax benefit
                      
                      
                      1,248,427
                      
                      
                      
                      3
                      %
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Tax
      rate differential on United States income
                      
                      
                      318,170
                      
                      
                      
                      1
                      %
                      
                      
                      (3,993
                      )
                      
                      
                      0
                      %
                      
                      
                      (5,187
                      )
                      
                      
                      0
                      %Tax
      holiday
                      
                      
                      (5,643,398
                      )
                      
                      
                      (12
                      %)
                      
                      
                      (7,184,053
                      )
                      
                      
                      (24
                      %)
                      
                      
                      (5,954,970
                      )
                      
                      
                      (34
                      %)Other
                      
                      
                      54,826
                      
                      
                      
                      0
                      %
                      
                      
                      (274,133
                      )
                      
                      
                      (1
                      %)
                      
                      
                      -
                      
                      
                      
                      0
                      %Income
      tax expense
                      
                      $
                      8,646,951
                      
                      
                      
                      18
                      %
                      
                      $
                      2,787,640
                      
                      
                      
                      9
                      %
                      
                      $
                      -
                      
                      
                      
                      0
                      %
 
 The PRC
tax rates have been used because the majority of the Company’s earnings before
income taxes and taxable income arise in the PRC. The effect of the tax holiday
amounted to $5,643,398, $7,184,053 and $5,954,970 for the years ended December
31, 2008, 2007 and 2006, equivalent to basic earnings per share amount of $0.10,
$0.13 and $0.11, respectively and diluted earnings per share amount of $0.09,
$0.13 and $0.11, for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 The tax
effects of the Company’s temporary differences that give rise to significant
portions of deferred tax assets are as follows:
 
 December
      31,2008
                      
                      
                      2007Deferred
      income tax assets:Operating
      loss carry forwards
                      
                      $
                      -
                      
                      
                      $
                      504,529Impairment
      of property, plant and equipment
                      
                      
                      982,813
                      
                      
                      
                      -Debt
      issuance costs
                      
                      
                      260,056
                      
                      
                      
                      -Total
      gross deferred income tax assets
                      
                      
                      1,242,869
                      
                      
                      
                      504,529Less:
      valuation allowance
                      
                      
                      (982,813
                      )
                      
                      
                      (504,529
                      )Net
      deferred income tax assets
                      
                      $
                      260,056
                      
                      
                      $
                      -
 
 F-17
 The
increases in the valuation allowance during the years ended December 31, 2008,
2007 and 2006 were $478,284, $380,396 and $124,133, respectively. The valuation
allowance as of December 31, 2008 was related to the deferred tax assets for
impairment of property, plant and equipment of Bangsheng Chemical. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
differences become deductible or tax loss carryforwards are utilized. Management
considers projected future taxable income and tax planning strategies in making
this assessment.  Based upon an assessment of the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible or can be utilized, management
believes it is more likely than not that the Company will realize a portion
of the benefits of the deferred tax assets as of December 31,
2008.  The amount of the deferred tax assets considered realizable;
however, could be reduced in the near term if estimates of future taxable income
are reduced.
 
 The new
CIT law also imposes a withholding tax of 10% unless reduced by a tax
treaty, for dividends distributed by a PRC-resident enterprise to its immediate
holding company outside the PRC for earnings accumulated beginning on January 1,
2008 and undistributed earnings generated prior to January 1, 2008 are exempt
from such withholding tax. The Company has not provided for income taxes on
accumulated earnings of its subsidiaries as of December 31, 2008 since these
earnings are intended to be reinvested indefinitely in the overseas
jurisdictions. It is not practicable to estimate the amount of additional taxes
that might be payable on such undistributed earnings.
  As of
January 1, 2007 and for the year ended December 31, 2007, the Company did not
have any unrecognized tax benefits relating to uncertain tax positions.
Reconciliation of unrecognized tax benefits for the year ended December 31, 2008
is as follows:
 Balance
      at January 1, 2008
                  
                  $
                  -Increases
      related to prior year tax positions
                  
                  
                  492,759Decreases
      related to prior year tax positions
                  
                  
                  -Increases
      related to current year tax positions
                  
                  
                  755,668Settlements
                  
                  
                  -Lapse
      of statute
                  
                  
                  -Foreign
      currency translation adjustment
                  
                  
                  19,681Balance
      at December 31, 2008
                  
                  $
                  1,268,108
 
 Included
in the balance of unrecognized tax benefits at December 31, 2008 are potential
benefits of $1,248,427 that if recognized, would affect the Company’s effective
tax rate. No material interest and penalty have been recorded for the year ended
December 31, 2008. The Company does not expect that the amount of unrecognized
tax benefits will change significantly within the next 12 months.
 
 ShengdaTech
and its subsidiaries file income tax returns in the U.S. federal jurisdiction
and the PRC. ShengdaTech could be subject to U.S. federal income tax
examinations by tax authorities for years starting March 31,
2006.  According to the PRC Tax Administration and Collection Law, the
statute of limitations is three years if the underpayment of taxes is due to
computational errors made by the taxpayer or the withholding
agent.  The statute of limitations extends to five years under special
circumstances where the underpayment of taxes is more than RMB100,000 ($15,000).
In the case of transfer pricing issues, the statute of limitation is ten
years.  There is no statute of limitation in the case of tax evasion.
Accordingly, the income tax returns of the Company’s PRC operating subsidiaries
for the years ended December 31, 2003 through 2008 are open to examination by
the PRC state and local tax authorities.
 
 
 F-18
 
 NOTE
7 – Commitments and contingencies
 
 Leases– The Company leases land,
buildings and certain equipment from Shandong Shengda, a related party. The
leases were entered into by the Company’s subsidiaries, Shandong Haize Nano and
Bangsheng Chemical, for a 20-year term up to 2024. These leases are classified
as operating leases. In connection with the cessation of the operations at
Bangsheng Chemical, the related lease agreement with Shandong Shengda has been
terminated.
  Total
rent expense under these leases for the years ended December 31, 2008, 2007
and 2006 was $614,215, $843,665 and $720,490, respectively.
 
 Future
minimum lease payments under the Company’s lease agreement as of December 31,
2008 are as follows;
 
 OperatingLeases2009
                    
                    $
                    187,3532010
                    
                    
                    187,3532011
                    
                    
                    187,3532012
                    
                    
                    187,3532013
                    
                    
                    187,353Thereafter
                    
                    
                    2,060,883Minimum
      lease payments
                    
                    $
                    2,997,648
  Capital
commitments– The Company has contractual obligations related to the
purchase of property and equipment amounting to $11,889,138 as of December 31,
2008.
 
 NOTE
8 – Related party transactions
 
 Due to related
parties – As of December 31, 2008, the Company owed Shandong Shengda
$771,442, comprised primarily of  rent expense for land and
buildings.
 
 As of
December 31, 2007, the Company owed Shandong Shengda $1,121,230, comprised
primarily of $869,179 for rent expense and $199,621 for purchase of property,
plant and equipment.
 
 In 2008
and 2007, the Company purchased $17,662,846 and $2,715,672 of equipment from
Shandong Haiqing Chemical Co., Ltd. (“Shandong Haiqing”). Mr. Chen, the
President and CEO of the Company, was also the CEO of Shandong Haiqing during
2008 and 2007.  Mr. Chen’s contract with Shandong Haiqing expired as
of January 1, 2009.  Shandong Haiqing has appointed a new CEO and as a
result effective January 1, 2009,  Shandong Haiqing is no longer
considered a related party to the Company since January 1, 2009.
 
 In 2007,
the Company purchased certain buildings and land use rights from Shandong
Shengda for cash of $7,611,007.
 
 In 2006,
the Company purchased machineries from Shandong Haiqing for cash of
$6,699,065.
 
 The total
compensation for the CEO and the Chief Financial Officer of the Company for the
years ended December 31, 2008, 2007 and 2006 of $420,000, $400,000 and $350,000
respectively, were paid by Shandong Shengda, a related party of the Company.
 
 F-19
  NOTE
9 – Long-term convertible notes
 
 On May
28, 2008 the Company issued $100,000,000 of 6% long-term convertible notes due
June 1, 2018 (the “Notes”) in a private placement. On June 25, 2008, the Company
issued an additional $15,000,000 of the Notes to cover over
allotments.  Proceeds from the issuance of the Notes were
$115,000,000. The Notes bear interest at 6 % per annum, payable semiannually on
June 1 and December 1, and have a maturity date of June 1, 2018. At maturity,
subject to certain exceptions, the Company will be required to repay the
principal amount of the Notes. The Company has used approximately
$40,475,000 of the net proceeds from the offering of the Notes to expand its
NPCC production capacity. The Company plans to use the remaining proceeds to
expand its NPCC business, strategic investments, and to fund working capital
requirements.
 
 The Notes are convertible at the option
of the holders, at any time prior to maturity, into common shares at an initial
conversion rate of 100.6036 shares per $1,000 principal amount of the Notes (at
approximately $9.94 per common share) subject to adjustment.  Holders who
convert their Notes at any time prior to June 1, 2011 are entitled to additional
interest in cash or, at the Company’s option, in common shares of the Company.
The additional interest shall be equal to the interest due and payable from the
date of issuance until and including June 1, 2011, less any interest actually
paid or provided for prior to the date of such conversion (such additional
interest is referred to as the “make-whole interest payment”). Upon conversion
of a convertible note, if the Company chooses to pay the make-whole interest
payment in shares the aggregate make-whole interest to such noteholder shall not
exceed $68.21 per each $1,000 original principal amount of
Notes.
 
 The
Company evaluated the accounting for the conversion feature in accordance with
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities(“SFAS No. 133”), and
concluded that since the embedded conversion option is both indexed to the
Company’s stock and would be classified in stockholders’ equity if it were a
freestanding instrument, it is not required to be accounted for separately from
the Notes as a derivative.
 
 The
Company cannot redeem the Notes prior to June 1, 2011. Beginning on or after
June 1, 2011 and up to May 31, 2013, the Company may redeem the Notes for cash,
in whole or part, at a price equal to 100% of the principal amount of the Notes
being redeemed plus accrued and unpaid interest to, but excluding, the
redemption date, if the last trading price of the Company’s shares of common
stock, subject to certain qualifications, is at least 150% of the conversion
price then in effect on the trading date. On or after June 1, 2013, the Company
may redeem the Notes for cash in whole or in part, at a price equal to 100% of
the principal amount of the Notes being redeemed plus accrued and unpaid
interest to, but excluding, the redemption date.
 
 On June
1, 2011 and June 1, 2013, holders of the Notes may require the Company to
purchase all or a portion of the Notes at a purchase price in cash equal to 100%
of the principal amount of the Notes being repurchased plus accrued and unpaid
interest to, but excluding, the repurchase date, subject to certain
conditions.
 
 The
Company evaluated the accounting for embedded call and put in accordance with
SFAS No. 133 and determined that such call and put options are clearly and
closely related to the Notes because the amount paid upon settlement is fixed at
a price equal to the principal amount plus accrued and unpaid interest, and as
such would not be accounted for separately.
 
 At
maturity, subject to certain exceptions, the Company will be required to repay
the principal amount of the Notes.
 
 The
Company is required to use reasonable efforts to have a shelf registration
statement declared effective no later than the 185th day after the latest date
of original issuance of the Notes and satisfy the maintenance requirements of
the registration statement according to the terms of the registration rights
agreement.  Should there be a default as defined in the registration
rights agreement, the Company shall pay a penalty to the holders of the Notes
for each day of default additional interest at a rate per annum equal to 0.25%
of the aggregate principal amount of the Notes for the first 90 days of such
default period and a rate per annum equal to 0.50% of the aggregate principal
amount of the Notes thereafter.
 
 F-20
 However,
the Company is not obligated to file, have declared effective or maintain an
effective registration statement to the extent and during the periods that the
Notes and any shares of common stock issuable upon conversion of the Notes are
eligible to be sold by a person who is not an affiliate of the Company pursuant
to Rule 144 (or any other similar provision then in force (other than Rule
144A)) under the Securities Act without any volume or manner of sale
restrictions after six months following the latest date of original issuance of
the Notes.
 
 The
Company did not file a registration statement as of December 31, 2008 because
the Notes meet the requirements of Rule 144 and have satisfied the six-month
holding period requirement;  therefore no accrual has been made for
potential penalties for not filing the registration statement within the allowed
time period. The Company will evaluate any liability related to the effective
date of the registration statement at the end of each reporting
period.
 
 The Notes
require the Company not incur any secured indebtedness and it will not permit
any of its subsidiaries to directly or indirectly incur any indebtedness. The
Company will be permitted to incur additional indebtedness which ranks equal in
right of payment to the Notes in an amount not to exceed $15,000,000; provided
that such indebtedness does not require any repayment prior to the next purchase
date as set forth in the Notes. The Company will be permitted to issue equity
securities, including common stock and preferred stock (in the case of preferred
stock, which shall not be redeemable or otherwise repayable prior to the stated
maturity date of the Notes so long as 25% or more of the initial aggregate
principal amount of notes issued, including any notes issued pursuant to the
over-allotment option, is outstanding), and any securities which rank junior in
right of payment to the Notes.
 
 According
to the terms of the Notes, the Company can repurchase the Notes in the open
market any time. During November and December 2008, the Company repurchased, in
privately negotiated transactions, part of the Noteswith a principal amount
of $19,750,000 from certain investors for cash of $9,890,000 plus accrued
interest of $581,792. In conjunction with the repurchase, the Company recognized
a pre-tax gain of $9,018,169, and also charged to expense previously deferred
debt issuance costs of $841,831 in the consolidated statements of income for the
year ended December 31, 2008.
 
 NOTE
10 - Shareholders’ equity
  Common and
preferred shares – In January 2007, the shareholders of the Company
amended and restated the Company’s articles of incorporation and thereby: 1)
changed the name of the Company from Zeolite Exploration Company to ShengdaTech;
2) increased the authorized number of shares of common stock to 100,000,000,
$0.00001 par value; and 3) increased the authorized number of shares of
preferred stock to 10,000,000, $0.00001 par value. The shares of preferred stock
may be issued in one or more series and may be granted voting rights, at the
discretion of the Company’s Board of Directors.
 
 Statutory
reserves – Under the Law of the PRC on Enterprises with Wholly Owned
Foreign Investment, the Company’s subsidiaries in the PRC are required to
allocate at least 10% of their after tax profits, after making good of
accumulated losses as reported in their PRC statutory financial statements, to
the general reserve fund and have the right to discontinue appropriations to the
general reserve fund if the balance of such reserve has reached 50% of their
registered capital. A transfer of $2,488,182, $2,341,040 and $907,008 from
retained earnings to statutory reserves was recorded for the years ended
December 31, 2008, 2007 and 2006, respectively.
 
 NOTE
11 – Share-based compensation
 
 Options
–  On April 1, July 1, and October 1, 2008, respectively, the Company
issued options to a director to purchase 5,000 shares of common stock under each
grant at an exercise prices of $8.50, $9.93, and $7.00 per share with a
contractual term of three years and vesting immediately. The options under each
grant were valued at $21,086, $22,739, and $15,120 using Black-Scholes option
pricing model to determine the fair value of share-based payments. The related
share-based payments were recognized as compensation expense on the date of the
grant. No stock options were granted in years prior to 2008.
 
 F-21
 The
Company estimated the fair value of options granted using a Black-Scholes option
pricing model with the following assumptions:
 2008Expected
      life
                  
                  1.5
      yearsExpected
      volatility
                  
                  72.07%
      to 74.23%Risk
      free interest rate
                  
                  1.94%
      to 2.90%Dividend
      yield
                  
                  0%
 The
risk-free interest rate is based on the U.S. Treasury zero-coupon rate. Expected
volatility of stock option awards is estimated based on the Company’s historical
stock price using the expected life of the grant. Expected life is based upon
the short-cut method.
 
 Stock
option transactions for the year ended December 31, 2008 are as
follows.  No options were granted prior to January 1,
2008.
  2008Number
                  
                  
                  Weighted
                    average
                    exercise
      priceBalance
      at January 1
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  15,000
                  
                  
                  
                  8.48Exercised
                  
                  
                  -
                  
                  
                  
                  -Balance
      at December 31
                  
                  
                  15,000
                  
                  
                  $
                  8.48Options
      vested and exercisable as of December 31
                  
                  
                  15,000
                  
                  
                  $
                  8.48
 The
aggregated intrinsic value of options outstanding as of December 31, 2008 was
zero. These options are granted with an exercise price ranging from $7.00-$9.93
and have a weighted average remaining contractual life of 2.5
years.
 
 Warrants –
On April 1, 2006, the Company issued a warrant to purchase 162,285 shares of
common stock to a vendor for services provided. The warrant was exercisable at
$2.57 per share through March 31, 2008.  The value of the services of
$153,619 was recognized as an expense on the date the warrant was issued and was
based upon the fair value of the warrant using the Black-Scholes option pricing
model.  Under the terms of the warrant, the vendor was permitted to
pay the exercise price by having the Company repurchase a portion of the shares
from the vendor at the 30-day average closing price of the Company’s common
shares ending three days prior to the exercise date. The vendor exercised the
warrant on November 19, 2007 when the 30-day average closing price was $7.54 per
share which resulted in the issuance of 106,933 shares of common shares to the
vendor.  No tax benefit was realized from the exercise of the warrant
in 2007.  In 2008, the Company recognized an excess tax benefit in the
amount of $221,903 as a component of additional paid-in capital.
 
 The
Company estimated the fair value of warrants granted using a Black-Scholes
option pricing model with the following assumptions:
 2006Expected
      life
                  
                  2
      yearsExpected
      volatility
                  
                  66.97%Risk
      free interest rate
                  
                  4.82%Dividend
      yield
                  
                  0%
  F-22
 
 NOTE
12 – Significant Concentrations, Risks and Uncertainties
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk primarily consist of cash and accounts receivableincluded in the
consolidated balance sheets. The Company deposits its cash in banks primarily in
the PRC. Historically, deposits in the PRC banks have been secure due to the
state policy on protecting depositors’ interests.
 
 The
Company sells its products primarily in the PRC.  The Company
continuously monitors the creditworthiness of its customers and has internal
policies regarding customer credit limits. The Company has no customer that
individually comprised of 10% or more of the Company’s consolidated sales or
accounts receivable.
 
 The
Company is dependent on certain suppliers for major materials used in
manufacturing of its products. If the supply of certain materials were
interrupted, the Company’s own manufacturing process could be delayed and could
cause a possible loss of sales, which would adversely affect operating results.
Purchases (net of VAT) made from two (2) local suppliers for soft coal,
limestone, and modification agents for the years ended December 31, 2008,
2007 and 2006 were $14,507,099 and $10,527,490 and $2,630,470,
respectively.
 
 NOTE
13 – Fair value measurements
 
 Fair Value
Hierarchy -The Company adopted SFAS No. 157 on January 1, 2008 for fair
value measurements of financial assets and financial liabilities and for fair
value measurements of nonfinancial items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
 
 ·
                Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to access at the
      measurement date.
 ·
                Level
      2 inputs are inputs other than quoted prices included within Level 1 that
      are observable for the asset or liability, either directly or
      indirectly.
 ·
                Level
      3 inputs are unobservable inputs for the asset or
    liability.
 
 The
consolidated financial statements as of and for the year ended December 31, 2008
do not include any nonrecurring fair value measurements relating to assets or
liabilities for which the Company has adopted the provisions of SFAS No. 157.
All nonrecurring fair value measurements for 2008 involved nonfinancial assets
and the Company will not adopt the provisions of SFAS No. 157 for nonrecurring
fair value measurements involving nonfinancial assets and nonfinancial
liabilities until January 1, 2009 as discussed in Note 2.
 
 Fair Value of
Financial Instruments -The fair value of a financial instrument is the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date.  The fair values of the financial instruments addressed below as
of December 31, 2008 represent management’s best estimates of the amounts that
would be received to sell those assets or that would be paid to transfer those
liabilities in an orderly transaction between market participants at that date.
Those fair value measurements maximize the use of observable inputs. However, in
situations where there is little, if any, market activity for the asset or
liability at the measurement date, the fair value measurement reflects the
Company’s own judgments about the assumptions that market participants would use
in pricing the asset or liability. Those judgments are developed by the Company
based on the best information available in the circumstances.
 
 F-23
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
 
 ·
                Cash,
      accounts receivable, other receivables, accounts payable and amounts due
      from related parties: The carrying amounts, at face value or cost plus
      accrued interest, approximate fair value because of the short maturity of
      these instruments.
 
 ·
                Long-term
      convertible notes: As of December 31, 2008, the estimated fair value of
      the Company’s convertible notes is $86,152,840. The fair value of the
      long-term convertible notes is based on a mark-to-model valuation model.
      Due to the fact that there is no active market for this security, the
      Company utilized other sources of information for the relevant market
      parameters in order to develop its fair value estimates. The model
      incorporates market data as of December 31, 2008 including the historical
      volatility of the Company’s common stock, dividend rate and the USD LIBRO
      and swap rates as of the valuation date. The model also includes non
      observable credit spread assumption for the
  Company.
 
 NOTE
14 – Segment information
 
 The
nano-materials segment develops, manufactures, and markets NPCC products.
 The nano-materials segment includes the operations of the Shandong Haize
Nano and Shaanxi Haize Nano.
 
 The
chemical segment manufactured and sold chemicals including ammonium bicarbonate,
liquid ammonia, methanol and melamine. These products were manufactured and sold
by Bangsheng Chemical prior to the cessation of its production as of October 31,
2008. On August 11, 2008 the Company entered into an agreement to acquire Jinan
Fertilizer in an effort to consolidate the Bangsheng operations with Jinan
Fertilizer. However, in March 2009, the Board of Directors decided that the
Company will no longer pursue the acquisition of Jinan Fertilizer. Although
the Company is currently seeking strategic investment opportunities to continue
its chemical segment operations, due to the decision in March 2009 to not
consummate the acquisition of Jinan Fertilizer, the Company has no specific
plans to continue the chemical segment operations.
   
 F-24
  Segment
information for the years ended December 31, 2008, 2007 and 2006 are as
follows:
   As
      of and For the Year Ended December 31, 2008
                  
                  Nano-Materials
                  
                  
                  Chemical
                  
                  
                  TotalNet
      sales
                  
                  $
                  82,419,689
                  
                  
                  $
                  67,007,450
                  
                  
                  $
                  149,427,139Interest
      income
                  
                  
                  130,825
                  
                  
                  
                  102,796
                  
                  
                  
                  233,621Depreciation
                  
                  
                  3,379,369
                  
                  
                  
                  355,064
                  
                  
                  
                  3,734,433Impairment
      of property, plant and equipment
                  
                  
                  -
                  
                  
                  
                  3,931,253
                  
                  
                  
                  3,931,253Segment
      income
                  
                  
                  29,388,995
                  
                  
                  
                  15,758,189
                  
                  
                  
                  45,147,184Segment
      assets
                  
                  
                  172,348,870
                  
                  
                  
                  58,150,952
                  
                  
                  
                  230,499,822Capital
      expenditures
                  
                  
                  36,654,578
                  
                  
                  
                  -
                  
                  
                  
                  36,654,578As
      of and For the Year Ended December 31, 2007
                  
                  Nano-Materials
                  
                  
                  Chemical
                  
                  
                  TotalNet
      sales
                  
                  $
                  46,721,673
                  
                  
                  $
                  53,933,120
                  
                  
                  $
                  100,654,793Interest
      income
                  
                  
                  94,529
                  
                  
                  
                  179,560
                  
                  
                  
                  274,089Depreciation
                  
                  
                  1,775,690
                  
                  
                  
                  352,300
                  
                  
                  
                  2,127,990Segment
      income
                  
                  
                  16,051,837
                  
                  
                  
                  14,165,415
                  
                  
                  
                  30,217,252Segment
      assets
                  
                  
                  88,275,432
                  
                  
                  
                  47,867,221
                  
                  
                  
                  136,142,653Capital
      expenditures
                  
                  
                  37,987,428
                  
                  
                  
                  420,102
                  
                  
                  
                  38,407,530As
      of and For the Year Ended December 31, 2006
                  
                  Nano-Materials
                  
                  
                  Chemical
                  
                  
                  TotalNet
      sales
                  
                  $
                  22,007,814
                  
                  
                  $
                  50,592,217
                  
                  
                  $
                  72,600,031Interest
      income
                  
                  
                  44,568
                  
                  
                  
                  93,923
                  
                  
                  
                  138,491Depreciation
                  
                  
                  696,313
                  
                  
                  
                  335,074
                  
                  
                  
                  1,031,387Segment
      income
                  
                  
                  5,660,654
                  
                  
                  
                  12,384,710
                  
                  
                  
                  18,045,364Segment
      assets
                  
                  
                  43,498,816
                  
                  
                  
                  32,349,430
                  
                  
                  
                  75,848,246Capital
      expenditures
                  
                  
                  14,568,176
                  
                  
                  
                  1,306,776
                  
                  
                  
                  15,874,952
 (a)
      Reconciliation of segment income to consolidated earnings before income
      taxesFor
      the Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Total
      segment income
                    
                    $
                    45,147,184
                    
                    
                    $
                    30,217,252
                    
                    
                    $
                    18,045,364Gain
      on extinguishment of long-term convertible notes
                    
                    
                    9,018,169
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      on long-term convertible notes
                    
                    
                    (4,766,681
                    )
                    
                    
                    -
                    
                    
                    
                    -Corporate
      general and administrative
                    
                    
                    (717,868
                    )
                    
                    
                    (399,267
                    )
                    
                    
                    (518,716
                    )Interest
      income
                    
                    
                    1,598
                    
                    
                    
                    -
                    
                    
                    
                    -Consolidated
      earnings before income taxes
                    
                    $
                    48,682,402
                    
                    
                    $
                    29,817,985
                    
                    
                    $
                    17,526,648
  F-25
 
 (b)
      Reconciliation of segment interest income to consolidated interest
      incomeFor
      the Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Total
      segment interest income
                  
                  $
                  233,621
                  
                  
                  $
                  274,089
                  
                  
                  $
                  138,491Corporate
      interest income
                  
                  
                  1,598
                  
                  
                  
                  114
                  
                  
                  
                  1,884Consolidated
      interest income
                  
                  $
                  235,219
                  
                  
                  $
                  274,203
                  
                  
                  $
                  140,375
  (c)
      Reconciliation of segment assets to consolidated total
    assetsDecember
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Total
      segment assets
                    
                    $
                    230,499,822
                    
                    
                    $
                    136,142,653Cash
                    
                    
                    58,007,584
                    
                    
                    
                    3,102Other
      receivables
                    
                    
                    510,825
                    
                    
                    
                    -Debt
      issuance costs
                    
                    
                    3,925,157
                    
                    
                    
                    -Deferred
      tax assets
                    
                    
                    260,056
                    
                    
                    
                    -Elimination
      of intercompany balances
                    
                    
                    (49,294,504
                    )
                    
                    
                    (35,201,817
                    )Consolidated
      total assets
                    
                    $
                    243,908,940
                    
                    
                    $
                    100,943,938
 The
following summarizes the Company’s revenue, based on the geographic location of
the customers:
 For
      the Years Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006Amount
                              
                              
                              %
      of sales
                              
                              
                              Amount
                              
                              
                              %
      of sales
                              
                              
                              Amount
                              
                              
                              %
      of salesPRC
                              
                              $
                              141,486,725
                              
                              
                              
                              95
                              %
                              
                              $
                              100,453,195
                              
                              
                              
                              100
                              %
                              
                              $
                              72,600,031
                              
                              
                              
                              100
                              %East
      Asia countries
                              
                              
                              7,940,414
                              
                              
                              
                              5
                              %
                              
                              
                              201,598
                              
                              
                              
                              0
                              %
                              
                              
                              -
                              
                              
                              
                              0
                              %Total
      net sales
                              
                              $
                              149,427,139
                              
                              
                              
                              100
                              %
                              
                              $
                              100,654,793
                              
                              
                              
                              100
                              %
                              
                              $
                              72,600,031
                              
                              
                              
                              100
                              %
  F-26
  The
following summarizes the Company's revenue, based on the product
applications:
 For
      the Years Ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Nano-MaterialsRubber
                                  
                                  $
                                  35,727,730
                                  
                                  
                                  $
                                  21,337,188
                                  
                                  
                                  $
                                  13,060,065Plastic
                                  
                                  
                                  30,303,950
                                  
                                  
                                  
                                  17,333,224
                                  
                                  
                                  
                                  7,004,842Adhesive
                                  
                                  
                                  8,599,392
                                  
                                  
                                  
                                  3,642,528
                                  
                                  
                                  
                                  391,035Paper
                                  
                                  
                                  1,357,589
                                  
                                  
                                  
                                  2,356
                                  
                                  
                                  
                                  -Paint
      and ink
                                  
                                  
                                  3,079,100
                                  
                                  
                                  
                                  2,054,040
                                  
                                  
                                  
                                  1,118,414Latex
                                  
                                  
                                  3,351,928
                                  
                                  
                                  
                                  2,352,337
                                  
                                  
                                  
                                  433,458Sub-total
                                  
                                  $
                                  82,419,689
                                  
                                  
                                  $
                                  46,721,673
                                  
                                  
                                  $
                                  22,007,814ChemicalAmmonium-Bicarbonate
                                  
                                  $
                                  20,635,805
                                  
                                  
                                  $
                                  15,056,720
                                  
                                  
                                  $
                                  16,655,630Methanol
                                  
                                  
                                  11,580,819
                                  
                                  
                                  
                                  10,430,267
                                  
                                  
                                  
                                  10,394,645Liquid
      ammonia
                                  
                                  
                                  25,188,538
                                  
                                  
                                  
                                  19,268,787
                                  
                                  
                                  
                                  15,334,387Melamine
                                  
                                  
                                  9,574,513
                                  
                                  
                                  
                                  9,031,112
                                  
                                  
                                  
                                  7,989,066Others
                                  
                                  
                                  27,775
                                  
                                  
                                  
                                  146,234
                                  
                                  
                                  
                                  218,489Sub-total
                                  
                                  $
                                  67,007,450
                                  
                                  
                                  $
                                  53,933,120
                                  
                                  
                                  $
                                  50,592,217Total
      net sales
                                  
                                  $
                                  149,427,139
                                  
                                  
                                  $
                                  100,654,793
                                  
                                  
                                  $
                                  72,600,031
 F-27
  NOTE 15
– ShengdaTech, Inc. (Parent Company)
 
 Relevant
PRC statutory laws and regulations permit payments of dividends by the Company’s
subsidiaries in the PRC only out of their retained earnings, if any, as
determined in accordance with the PRC accounting standards and regulations.
Under the Law of the PRC on Enterprises with Wholly Owned Foreign Investment,
the Company’s subsidiaries in the PRC are required to allocate at least 10% of
their after tax profits, after making good of accumulated losses as reported in
their PRC statutory financial statements, to the general reserve fund and have
the right to discontinue allocations to the general reserve fund if the balance
of such reserve has reached 50% of their registered capital. These statutory
reserves are not available for distribution to the shareholders (except in
liquidation) and may not be transferred in the form of loans, advances or cash
dividends.
 
 For the
year ended December 31, 2008, $2,488,182 were appropriated from retained
earnings and set aside for the statutory reserve by the Company’s subsidiaries
in the PRC.
 
 As a
result of these PRC laws and regulations, the Company’s subsidiaries in the PRC
are restricted in its ability to transfer a portion of their net assets to
either in the form of dividends, loans or advances, which consisted of paid-up
capital and statutory reserves amounting to $69,870,366 and $26,657,384,
respectively, as of December 31, 2008 and December 31, 2007.
 
 F-28
  The
following represents condensed unconsolidated financial information of the
Parent Company only:
  Condensed Balance
Sheet
 December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Cash
                    
                    $
                    -
                    
                    
                    $
                    3,102Inter-company
      loan receivable
                    
                    
                    55,882,911
                    
                    
                    
                    -Due
      from inter-company
                    
                    
                    289,161
                    
                    
                    
                    -Investment
      in unconsolidated subsidiaries
                    
                    
                    172,493,493
                    
                    
                    
                    89,255,615Debt
      issuance costs
                    
                    
                    3,925,157
                    
                    
                    
                    -Deferred
      income tax assets
                    
                    
                    260,056
                    
                    
                    
                    -Total
      assets
                    
                    $
                    232,850,778
                    
                    
                    $
                    89,258,717Accrued
      expenses
                    
                    $
                    476,250
                    
                    
                    $
                    255,532Income
      taxes payable
                    
                    
                    1,283,951
                    
                    
                    
                    -Long-term
      convertible notes
                    
                    
                    95,250,000
                    
                    
                    
                    -Total
      shareholders' equity
                    
                    
                    135,840,577
                    
                    
                    
                    89,003,185Total
      liabilities and shareholders' equity
                    
                    $
                    232,850,778
                    
                    
                    $
                    89,258,717
  Condensed Statement of Income
 For
      the Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Equity
      in earnings of unconsolidated subsidiaries
                            
                            $
                            35,991,985
                            
                            
                            $
                            27,429,612
                            
                            
                            $
                            18,045,364General
      and administrative
                            
                            
                            (715,024
                            )
                            
                            
                            (399,267
                            )
                            
                            
                            (518,716
                            )Interest
      expense
                            
                            
                            (4,766,681
                            )
                            
                            
                            -
                            
                            
                            
                            -Interest
      income
                            
                            
                            1,752,800
                            
                            
                            
                            -
                            
                            
                            
                            -Gain
      on extinguishment of long-term convertible notes
                            
                            
                            9,018,169
                            
                            
                            
                            -
                            
                            
                            
                            -Earnings
      before income taxes
                            
                            
                            41,281,249
                            
                            
                            
                            27,030,345
                            
                            
                            
                            17,526,648Income
      taxes
                            
                            
                            1,245,798
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      income
                            
                            $
                            40,035,451
                            
                            
                            $
                            27,030,345
                            
                            
                            $
                            17,526,648Condensed
      Statements of Cash FlowsFor
      the Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Net
      cash used in operating activities
                            
                            $
                            (2,867,631
                            )
                            
                            $
                            (143,735
                            )
                            
                            $
                            (365,097
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            (40,724,800
                            )
                            
                            
                            136,257
                            
                            
                            
                            (13,594,037
                            )Net
      cash provided by financing activities
                            
                            
                            43,589,329
                            
                            
                            
                            -
                            
                            
                            
                            13,969,714Net
      increase (decrease) in cash
                            
                            
                            (3,102
                            )
                            
                            
                            (7,478
                            )
                            
                            
                            10,580Cash
      at beginning of year
                            
                            
                            3,102
                            
                            
                            
                            10,580
                            
                            
                            
                            -Cash
      at end of year
                            
                            $
                            -
                            
                            
                            $
                            3,102
                            
                            
                            $
                            10,580
  F-29






EXHIBIT
INDEX




3.1
            Articles
      of Incorporation of the Registrant filed with the Nevada Secretary of
      State on May 11, 2001, as amended by Certificate of Amendment to
      Articles of Incorporation filed with the Nevada Secretary of State on
      February 13, 2006. (incorporated by reference to Exhibit 3.1 to
      Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1
      (SEC File No. 333-132906) filed on December 18,
  2006




3.2
            Certificate
      of Amendment and Restatement of Articles of Incorporation filed with the
      Nevada Secretary of State on January 3, 2007 (incorporated by reference to
      Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Registration Statement
      on Form S-1 (SEC File No. 333-132906) filed on January 9,
      2007.




3.3
            Amended
      and Restated Bylaws of the Registrant incorporated by reference to Exhibit
      3.2 to the Registrant’s Current Report on Form 8-K filed on March 1,
      2007.





4.1
            Indenture
      of convertible senior notes between ShengdaTech, Inc. and the Bank of New
      York dated as of May 28, 2008 (incorporated by reference to Exhibit 4.1 to
      Registrant’s Current Report on Form 8-K filed on June 3,
      2008).







5.1
            Opinion
      of Preston Gates Ellis, LLP (incorporated by reference to Exhibit 5.1 to
      Registrant’s  Registration Statement on Form SB-2 filed on March 31,
      2006).




10.1
            Financial
      Advisory Agreement between Eastern Nanomaterials Pte Co., Ltd. and HFG
      International Co., Ltd., dated as of September 26, 2005, as amended and
      supplemented on March 29, 2006 (incorporated by reference to Exhibit 10.1
      to the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.2
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 10,
      2002 (incorporated by reference to Exhibit 10.2 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.3
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 12,
      2002 (incorporated by reference to Exhibit 10.3 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.4
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 15,
      2002 (incorporated by reference to Exhibit 10.4 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.5
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 16,
      2002 (incorporated by reference to Exhibit 10.5 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.6
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 20,
      2002 (incorporated by reference to Exhibit 10.6 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.7
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 20,
      2002 (incorporated by reference to Exhibit 10.7 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.8
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December 26,
      2002 (incorporated by reference to Exhibit 10.8 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).





10.9
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.
      Ltd. and Shandong Shengda Chemicals Co. Ltd., dated as of December 26,
      2002 (incorporated by reference to Exhibit 10.9 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.10
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.
      Ltd. and Shandong Shengda Chemicals Co. Ltd., dated as of December 26,
      2002 (incorporated by reference to Exhibit 10.10 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.11
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of January 10,
      2003 (incorporated by reference to Exhibit 10.11 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).




10.12
            Industrial
      Product Sales Agreement between Shandong Shengda Chemical Machinery Co.,
      Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of January 12,
      2003 (incorporated by reference to Exhibit 10.12 to the Registrant’s
      Current Report on Form 8-K filed on April 6,
  2006).







10.13
            Industrial
      Product Sales Contract between Feicheng Longxin Material Storage &
      Transportation Co., Ltd. and Shandong Shengda Chemical Co., Ltd. dated as
      of January 15, 2003 (incorporated by reference to Exhibit 10.13 to the
      Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.14
            Industrial
      Product Sales Contract between Xintai Quangou Coal Mine and Shandong
      Shengda Chemical Co., Ltd. dated as of January 15, 2003 (incorporated by
      reference to Exhibit 10.14 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.15
            Industrial
      Product Sales Contract between Xintai Zhaizhen Coal Mine and Shandong
      Shengda Chemicals Co., Ltd. dated as of January 19, 2003 (incorporated by
      reference to Exhibit 10.15 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.16
            Industrial
      Product Sales Contract between Shandong Shengda Chemical Machinery Co.,
      Ltd and Shandong Shengda Chemicals Co., Ltd. dated as of July 5, 2004
      (incorporated by reference to Exhibit 10.16 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.17
            Joint
      Research and Development Agreement between Shandong Shengda Technology
      Co., Ltd and Qingdao University of Science and Technology dated as of
      September 28, 2004 (incorporated by reference to Exhibit 10.17 to the
      Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.18
            Asset
      Purchase Agreement between Shandong Shengda Chemical Co., Ltd. and
      Dongfang Nanomaterials Pte., Ltd. dated as of November 24 2004, as amended
      and supplemented on February 20, 2005 (incorporated by reference to
      Exhibit 10.18 to the Registrant’s Current Report on Form 8-K filed on
      April 6, 2006).





10.19
            Asset
      Purchase Agreement between Shandong Shengda Nanomaterials Co., Ltd. and
      Dongfang Nanomaterials Pte., Ltd. dated as of November 24 2004, as amended
      and supplemented on February 20, 2005 (incorporated by reference to
      Exhibit 10.19 to the Registrant’s Current Report on Form 8-K filed on
      April 6, 2006).




10.20
            Joint
      Technology Development Contract between Shandong Haize Nanomaterials Co.,
      Ltd. and Tsinghua University dated as of January 12, 2005, as supplemented
      on May 10, 2005 (incorporated by reference to Exhibit 10.20 to the
      Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.21
            Contract
      on the Joint Development & Application of NPCC by and among Shandong
      Shengda Technology Co., Ltd, Polymer Modification Research Lab of Qingdao
      University of Science and Technology and Tsingdao Siwei Chemicals Co.,
      Ltd. dated as of March 4, 2003, as amended on January 31, 2005 to
      designate Shandong Haize Nanomaterials Co., Ltd as the assignee of
      Shandong Shengda Technology Co., Ltd. (incorporated by reference to
      Exhibit 10.21 to the Registrant’s Current Report on Form 8-K filed on
      April 6, 2006).




10.22
            Nano
      Technology License & Transfer Agreement between Shandong Shengda
      Technology Co., Ltd. and Shandong Haize Nanomaterials Co., Ltd. dated as
      of January 6, 2005 (incorporated by reference to Exhibit 10.22 to the
      Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.23
            Equipment
      Leasing Agreement between Shandong Shengda Technology Co., Ltd and
      Shandong Bangsheng Chemicals Co., Ltd. dated as of February 20, 2005
      (incorporated by reference to Exhibit 10.23 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).







10.24
            Trademark
      Transfer Agreement between Shandong Shengda Technology Co., Ltd and
      Shandong Haize Nanomaterials Co., Ltd. dated as of February 22, 2005
      (incorporated by reference to Exhibit 10.24 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.25
            Trademark
      Transfer Agreement between Shandong Shengda Chemicals Co., Ltd. and
      Shandong Bangsheng Chemical Co., Ltd. dated as of February 22, 2005
      (incorporated by reference to Exhibit 10.25 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.26
            Land-use
      Right and Building Leasing Agreement between Shandong Haize Nanomaterials
      Co., Ltd. and Shandong Shengda Technology Co., Ltd, Ltd. dated as of
      February 22, 2005, as amended and supplemented on March 21, 2006
      (incorporated by reference to Exhibit 10.26 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.27
            Land-use
      Right and Building Leasing Agreement between Shandong Bangsheng Chemical
      Co., Ltd. and Shandong Shengda Technology Co., Ltd. dated as of February
      22, 2005, as amended and supplemented on March 21, 2006 (incorporated by
      reference to Exhibit 10.27 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.28
            Industrial
      Product Sales Contract between Shandong Shengda Chemical Machinery Co.,
      Ltd and Shandong Bangsheng Chemicals Co., Ltd. dated as of March 2, 2005
      (incorporated by reference to Exhibit 10.28 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.29
            Industrial
      Product Sales Contract between Shandong Taifeng Mining Co., Ltd. and
      Shandong Bangsheng Chemicals Co., Ltd. dated as of March 5, 2005
      (incorporated by reference to Exhibit 10.29 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.30
            Anthracite
      Supply Contract between Shandong Bangsheng Chemicals Co., Ltd. and
      Jincheng Yapeng Trading Co., Ltd. dated as of March 6, 2005 (incorporated
      by reference to Exhibit 10.30 to the Registrant’s Current Report on Form
      8-K filed on April 6, 2006).




10.31
            Construction
      Contract between Shandong Bangsheng Chemicals Co., Ltd. and Chen Houzhi
      dated as of March 1, 2005 (incorporated by reference to Exhibit 10.31 to
      the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.32
            Construction
      Contract between Shandong Bangsheng Chemicals Co., Ltd. and Chen Houzhi
      dated as of April 1, 2005 (incorporated by reference to Exhibit 10.32 to
      the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.33
            Urea
      Supply Contract between Shandong Feida Chemical Technology Co., Ltd. and
      Shandong Bangsheng Chemical Co., Ltd. dated as of May 26, 2005
      (incorporated by reference to Exhibit 10.33 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.34
            Anthracite
      Supply Contract between Shandong Haize Nanomaterials Co., Ltd. and
      Feicheng Longxin Material Storage & Transportation Co., Ltd. dated as
      of June 1, 2005 (incorporated by reference to Exhibit 10.34 to the
      Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.35
            Industrial
      Product Sales Contract between Shandong Taifeng Mining Co., Ltd. and
      Shandong Haize Nanomaterials Co., Ltd. dated as of June 13, 2005
      (incorporated by reference to Exhibit 10.35 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.36
            Industrial
      Product Sales Contract between Shandong Haize Nanomaterials Co., Ltd. and
      Dalian Jinyuan Construction Plastics Co. dated as of June 19, 2005
      (incorporated by reference to Exhibit 10.36 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).







10.37
            Industrial
      Product Sales Contract between Shandong Haize Nanomaterials Co., Ltd. and
      Zhaoyuan LiAo Rubber Products Co. dated as of August 8, 2005 (incorporated
      by reference to Exhibit 10.37 to the Registrant’s Current Report on Form
      8-K filed on April 6, 2006).




10.38
            Industrial
      Product Sales Contract between Shandong Haize Nanomaterials Co., Ltd. and
      Triangle Tire Co., Ltd dated as of August 10, 2005 (incorporated by
      reference to Exhibit 10.38 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.39
            Share
      Transfer Agreement between Singapore Dongfang Nanomaterials Pte., Ltd. and
      Faith Bloom Limited dated as of December 31, 2005 (incorporated by
      reference to Exhibit 10.39 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.40
            Share
      Transfer Agreement between Singapore Dongfang Nanomaterials Pte., Ltd. and
      Faith Bloom Limited dated as of December 31, 2005 (incorporated by
      reference to Exhibit 10.40 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.41
            Lime
      Stone Supply Contract between Shandong Haize Nanomaterials Co., Ltd. and
      Laiwu Yujie Stone Materials Factory dated as of March 27, 2005
      (incorporated by reference to Exhibit 10.41 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).




10.42
            Employment
      Contract between Shandong Haize Nanomaterials Co., Ltd. and Zhaowei Ma
      dated as of January 1, 2005 (incorporated by reference to Exhibit 10.42 to
      the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.43
            Employment
      Contract between Shandong Bangsheng Chemicals Co., Ltd. and Xiqing Xu
      dated as of January 1, 2005 (incorporated by reference to Exhibit 10.43 to
      the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.44
            Loan
      Agreement among Eastern Nano-Materials Holdings Pte. Ltd., Value
      Monetization Ltd. and International Factors (Singapore) Ltd. dated as of
      May 6, 2005, as terminated by two letters from Value Monetization and
      International Factors (Singapore) Ltd, dated December 30, 2005 and
      December 29, 2005, respectively (incorporated by reference to Exhibit
      10.44 to the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.45
            Employment
      Contract between Shandong Haize Nanomaterials Co., Ltd. and Xukui Chen
      dated as of January 1, 2005 (incorporated by reference to Exhibit 10.45 to
      the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.46
            Financing
      Agreement between HFG International and Eastern Nanomaterials Pte. Co.,
      Ltd., dated as of September 26, 2005, as amended and supplemented on March
      29, 2006 to designate Faith Bloom as the assignee for Eastern
      Nanomaterials Pte. Co., Ltd. (incorporated by reference to Exhibit 10.46
      to the Registrant’s Current Report on Form 8-K filed on April 6,
      2006).




10.47
            Short
      Term Loan Agreement between Shandong Shengda Chemicals Co., Ltd. and Bank
      of China Taian Branch, dated as of February 1, 2003 (incorporated by
      reference to Exhibit 10.47 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.48
            Short
      Term Loan Agreement between Shandong Shengda Nanomaterials Co., Ltd. and
      Bank of China, Taian Branch, dated as of January 9, 2003 (incorporated by
      reference to Exhibit 10.48 to the Registrant’s Current Report on Form 8-K
      filed on April 6, 2006).




10.49
            Memorandum
      of Understanding between Faith Bloom Limited and Shandong Shengda
      Technology Co., Ltd. dated as of March 21, 2006 (incorporated by reference
      to Exhibit 10.49 to the Registrant’s Current Report on Form 8-K filed on
      April 6, 2006).







10.50
            Engagement
      Letter of Sterne Agee & Leach, Inc., as managing placement agent, and
      Global Hunter Securities, as co-placement agent, of up to $15,000,000 of
      common stock of Faith Bloom Limited, dated as of March 16, 2006
      (incorporated by reference to Exhibit 10.50 to the Registrant’s Current
      Report on Form 8-K filed on April 6,
2006).





10.51
            Purchase
      Agreement of senior convertible notes between ShengdaTech, Inc. and
      Oppenheimer & Co. Inc. dated as May 22, 2008 (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed on June 3, 2008).





10.52
            Registration
      Rights Agreement between ShengdaTech, Inc. and Oppenheimer & Co. Inc.
      dated as of May 28, 2008 (incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K filed on June 3,
      2008).





10.53
            Form
      of Lock Up Agreement dated as of May 22, 2008 (incorporated by reference
      to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on
      June 3, 2008).





10.54*
            Translation
      of NPCC Project Investment Contract between Zibo Hi-Tech Industry
      Development Zone Administration Committee and Faith Bloom Ltd. dated June
      19, 2008.




16.1
            Letter
      from John Geib, Chartered Accountant (incorporated by reference to Exhibit
      16.1 to the Registrant’s Current Report on Form 8-K filed on March 18,
      2005)




16.2
            Letter
      from Swartz Levitsky Feldman LLP, Chartered Accountants (incorporated by
      reference to Exhibit 16.2 to the Registrant’s Current Report on Form 8-K
      filed on March 18, 2005)




16.3
            Letter
      from Rotenberg & Co., LLP (incorporated by reference to Exhibit 16.1
      to the Registrant’s Current Report on Form 8-K filed on May 17,
      2006)





16.4
            Letter
      from HANSEN, BARNETT & MAXWELL, P.C.  (incorporated by
      reference to Exhibit 16.1 to the Registrant’s Current Report on Form 8-K/A
      filed on November 18, 2008)




21.1*
            List
      of Subsidiaries





31.1*
            Certification
      of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*.





31.2*
            Certification
      of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*.





32.1**
            Certification
      of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*.





32.2**
            Certification
      of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*.






*
            Filed
      herewith.**
            Furnished
      herewith









SIGNATURES




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




SHENGDATECH,
      INC.Date: April
      1, 2009
                By:
                /s/ XIANGZHI
      CHENName: Xiangzhi
      ChenTitle:
      Chairman, Director and Chief Executive Officer


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




Signature
            
            Title
            
            Date/s/
      Xiangzhi Chen
            
            Chairman,
      Director and Chief Executive Officer
            
            April
      1, 2009(Xiangzhi
      Chen)
            
            (Principal
      Executive Officer)/s/
      Anhui Guo
            
            Director
      and Chief Financial Officer
            
            April
      1, 2009(Anhui
      Guo)/s/A.
      Carl Mudd
            
            Director
            
            April
      1, 2009(A.
      Carl Mudd)/s/
      Sheldon B. Saidman
            
            Director
            
            April
      1, 2009(Sheldon
      B. Saidman)/s/ Dongquan
      Zhang
            
            Director
            
            April
      1, 2009(Dongquan
      Zhang)