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, 2009




or


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




For the
transition period from __________ to __________




Commission file number:
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.)





Unit
2003, East Tower, Zhong Rong Heng Rui International Plaza,


620
Zhang Yang Road, Pudong District, Shanghai 200122


People's
Republic of China





(Address
of Principal Executive Offices)





86-21-58359979(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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈  No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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  ̈
              Accelerated
      filer x
              Non-accelerated
      filer  ̈
                (Do
      not check if a smaller
                reporting
      company)
              Smaller
      reporting company
                 ̈




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


Yes  ̈No þ





The
aggregate market value of the 28,114,324 shares of voting and non-voting
common equity stock held by non-affiliates of the registrant was $105,428,715 as
of June 30, 2009, 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 $3.75 per share, as reported by The
NASDAQ Stock Market, Inc.





As
of March 15, 2010, there were 54,202,036 shares of common stock of
ShengdaTech, Inc. outstanding.








SHENGDATECH,
INC.


(A
Nevada Corporation)





TABLE
OF CONTENTS




PagePART
      I
                                    
                                    3Item
      1
                                    Business
                                    
                                    3Item
      1A
                                    Risk
      Factors
                                    
                                    16Item
      1B
                                    Unresolved
      Staff Comments
                                    
                                    34Item
      2
                                    Properties
                                    
                                    34Item
      3
                                    Legal
      Proceedings
                                    
                                    35PART
      II
                                    
                                    35Item
      5
                                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                    
                                    35Item
      6
                                    Selected
      Financial Data
                                    
                                    36Item
      7
                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                                    
                                    37Item
      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
                                    
                                    52Item
      9B
                                    Other
      Information
                                    
                                    55PART
      III
                                    
                                    55Item
      10
                                    Directors,
      Executive Officers and Corporate Governance
                                    
                                    55Item
      11
                                    Executive
      Compensation
                                    
                                    58Item
      12
                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                    
                                    61Item
      13
                                    Certain
      Relationships and Related Transactions, and Director
      Independence
                                    
                                    62Item
      14
                                    Principal
      Accounting Fees and Services
                                    
                                    62PART
      IV
                                    
                                    62Item
      15
                                    Exhibits
      and Financial Statement Schedules
                                    
                                    62




-2-





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.  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. As a result, we recorded an impairment charge of
approximately $3.9 million for Bangsheng Chemical Facility equipment in the
fourth quarter of 2008. We do not believe there is additional impairment of
assets in 2009. In December 2009, the Company decided to discontinue our
operations at Bangsheng Chemical Facility and to sell all of its operating
assets and inventory. Although we discontinued the Bangsheng coal-based chemical
operations, the Company is currently seeking other strategic opportunities in
the chemical business.





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.


-3-





On
December 11 2009, Faith Bloom completed its acquisition of Anhui Chaodong
Nanomaterials Science and Technology Co., Ltd. (“Chaodong”), a company located
in Anhui province, to operate our new NPCC facility in eastern
China.





Our
corporate structure is depicted in the following chart:










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 nano particle 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. Frost &
Sullivan indicates that the production volume was approximately 440,000MT in
China in 2008 with sales of over RMB 1.2 billion. We believe that the
development of the plastics, rubber, paper, construction coating anddaily-use chemical industries
in China will increase the demand for NPCC. With the maturity of NPCC technology
and NPCC expansion in China, we believe that domestic products with superior
quality and steady performance will gradually replacing the market share of
exported products.


-4-




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.




After the financial crisis in 2008, the
automobile industry in China exhibited rebounding in 2009, benefiting from
governmental support policies such as decreased tax rates. Currently, China has
exceeded the United States and became the world’s largest automobile consumption
nation with annual sales of 12,000,000 vehicles. 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. In addition, multinational tire producers are beginning to establish
worldwide production centers and export bases in China, which should support
incremental tire demand. Therefore, 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.


-5-




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%.





The
Coal-based Chemical Markets in China




Prior to
November 2008, our coal-based chemical products included ammonium bicarbonate,
liquid ammonia, methanol and melamine. In December 2009, we decided to
discontinue our operations at our Bangsheng Chemical Facility and to sell all of
its fixed assets and inventory. The facility ceased production at the end
of October 2008.




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.





-6-




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. 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. In 2009, we generated approximately 99.7% of our
income from sales of NPCC products.




Prior to
November 2008, we also 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. 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. In 2009, approximately 0.3% of our income
was generated from the sale of residual coal inventory from the Bangsheng
Chemical Facility after it ceased operations. Although we discontinued the
Bangsheng coal-based chemical operations, the Company is currently
seeking other strategic opportunities in the chemical
business.




Nano
Precipitated Calcium Carbonate




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. As of December 2009, we have increased our total
annual NPCC production capacity to 250,000 metric tons. We are currently the
largest Chinese manufacturer of NPCC products in terms of production capacity,
according to China Chemical
News Weekly. We produced approximately 47.4% of the total NPCC products
manufactured in China in 2008. We believe that we are the largest and the
fastest-growing NPCC manufacturer in China and the first NPCC manufacture that
supplies NPCC products to the tire industry in China.





In August
2009, we, through our wholly-owned subsidiary Faith Bloom Limited, entered into
an Equity Transfer Agreement with Anhui Chaodong Cement Co., Ltd., a company
incorporated under the laws of the People’s Republic of China, pursuant to which
Faith Bloom acquired the entire equity of Chaodong, a PRC company and
wholly-owned subsidiary of Anhui Chaodong Cement Co., Ltd. Chaodong was an
inactive manufacturer of nano precipitated calcium carbonate, and its assets
include mining rights to reserves of approximately 13.2 million tons of
limestone and existing buildings and equipment. The acquisition was approved by
the Chinese government in November 2009. Anhui Chaodong Cement Co., Ltd. and
Chaodong are not affiliates of the Company or any of the Company’s directors or
officers. On December 11, 2009, we completed our acquisition over Anhui Chaodong
Nanomaterials Science and Technology Co., Ltd, which has an annual capacity of
10,000 metric tons. The Chaodong facility is expected to start production in
April 2010 after we complete certain repairs and maintenances of the acquired
facility and equipment and perform certain technological upgrades consistent
with our Shandong facility.




In August
2009, we, through Faith Bloom Limited entered into a Project Investment
Agreement with the local government of Hanshan County, Anhui Province, People’s
Republic of China. Pursuant to this agreement, we anticipate investing RMB
1,200,000,000 (approximately $175.7 million) in several phases by 2013, which
includes an investment in a new NPCC project that has the capacity to
manufacture 200,000 tons of NPCC per year and the purchase of land-use rights
for approximately 341,335 square meters (approximately 84.35 acres) of land. The
local government of Hanshan County also agrees to grant to us exclusive mining
rights to 60 million tons of good quality limestone, and provide other utilities
and services for manufacturing purposes. This agreement is subject to
governmental approval. In addition to the investment per this agreement, the
Company also agreed to purchase the land-use rights for approximately 66,767
square meters (16.5 acres) of land from the local government for Chaodong, which
is subject to approval of the local government. Such approval process will
involve administrative procedures including a public bidding to establish the
transaction price. These agreements are investment plans and are not
contractually binding until key elements of contract terms such as transaction
prices and specific payment schedules are fully agreed upon and evidenced by
execution of agreements.


-7-





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 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. Currently, our product is undergoing trials with
five potential asphalt industry customers.




We
currently sell our NPCC products in Shandong Province, the Yangtze River Delta
and other parts of China through resident sales representatives.
Internationally, in 2009, the countries we target our products for export
decreased from nine to five, consisting of Singapore, Thailand, South Korea,
Malaysia and India, primarily due to the 2008 financial crisis. International
sales decreased from 10% of the total NPCC sales revenue in 2008 to 7% in 2009.
In July 2009, we established a new international sales team at our offices in
Shanghai, China. In January 2010, westrengthened our international
sales and marketing efforts by appointing Mr. Gary Cao, who has over 12 years of
experience as a sales and marketing director for leading chemical companies in
China and the Asia Pacific region, as our new international marketing director.
We believe international sales and marketing will make more contribution to our
business as the worldwide economy recovers.




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. In December 2009, we decided to discontinue our operations at
our Bangsheng Chemical Facility and to sell all of its fixed assets and
inventory. Although we discontinued the Bangsheng coal-based chemical
operations, the company is currently seeking strategic opportunities in the
chemical business.




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
revenue and net income from continuing operations have increased steadily since
2006. In 2009, our revenue was $102.1 million and our net income was $23.6
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 250,000 metric tons per year. Our facility in Zibo,
      Shandong province has an ultimate plant capability of 240,000 metric tons
      per year, including the current 60,000 metric tons capacity. On December
      11, 2009, we completed our acquisition over Chaodong, which has an annual
      capacity of 10,000 metric tons. The Chaodong facility is
      expected to start production in April 2010, after
      we complete certain repairs and maintenance of the acquired facility and
      equipment and perform certain technological upgrades consistent with our
      Shandong facility. In August 2009, we, through Faith Bloom
      Limited entered into a Project Investment Contract with the local
      government of Hanshan County, Anhui Province to expand the existing
      production capacity of Chaodong to add another 200,000 tons. We anticipate
      investing approximately $175.7 million in several phases by 2013,
      including for the purchase of land use rights for approximately 341,335
      square meters (approximately 84.35 acres) of land, which can support the
      additional 200,000 tons of production capacity. When all the capacity expansion
      projects are completed, we expect to increase our NPCC production capacity
      to 640,000 metric tons per year. Due to our large production
      capacity, we believe we are strongly positioned to retain existing
      customers and attract new
customers.




-8-




·
            Advanced
      production technology and facilities: At our facility in Xianyang, Shaanxi
      Province, we employ a proprietary membrane-dispersion technology
      co-developed with Tsinghua University. We have an exclusive right to use
      this patent, and our new facility in Chaodong to be built in addition to
      the existing 10,000 metric tons of capacity will continue to apply the
      same technology. The existing 10,000 metric tons of capacity in Chaodong
      will continue to use ultra gravity 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 phase II and phase III
      production of 40,000 metric tons per year and 60,000 metric tons per year,
      respectively, in our Shaanxi facility. Our phase I facility in Zibo,
      Shandong utilizes the same stainless steel equipment, and the same
      equipment will be further utilized in the expansion of our Zibo facility
      and new Chaodong facility. 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 15 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 seven
      months or longer and involves intensive sample testing. 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 250,000 metric tons as of December 2009,
and we plan to expand our newly acquired Chaodong NPCC facility in Anhui
province located in eastern China in several phases to eventually achieve an
additional annual production capacity of 200,000 metric tons by 2013, based on
market demand.




Broad
and diverse NPCC customer base




Our NPCC
customer base has increased from 53 in 2003 to 163 in the fourth quarter of
2009, including 157 domestic customers and six international customers. 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. Currently, we have engaged or have begun sample testing for 59
potential customers in the PP, rubber, adhesive, latex and asphalt industries.
We generally convert approximately 50% of these leads into revenue producing
customers, which further diversifies our customer base.


-9-




Strong
NPCC research and development capability




·
            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 26 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 $102.1 million in 2009 while
enhancing profitability. Most of our senior management have worked together as a
team for over eight 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 250,000 metric
tons. Demand for NPCC products in China is expected to increase to 750,000
metric tons by 2010. We have constructed a new facility in Zibo, Shandong
Province with a total projected capacity of 240,000 metric tons and acquired
Chaodong in Anhui province, which has a current capacity of 10,000 metric tons.
In connection with the acquisition of Chaodong NPCC facility, we anticipate
investing in several phases to support an additional annual production capacity
of 200,000 tons by 2013, based on market demand. 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 NPCC facility in Xianyang, Shaanxi
      Province, and our NPCC facility in Zibo, Shandong province, improves our
      production stability and yield of nano particles. Our Tai’an NPCC facility
      was ISO 9001 certified in 2003 and our NPCC products were awarded
      “Shandong Top Brand” at the end of 2006. Our NPCC facility in Xianyang,
      Shaanxi Province was ISO 9001 certified in 2008. 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.




-10-




·
            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.




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




Our key
applications for our NPCC products 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 paper





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.





We have
established effective quality assurance systems for our NPCC products. Our
Tai’an NPCC facility was ISO 9001 certified since 2003 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.


-11-




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. We expect the trademark will
be beneficial to our potential strategic opportunities in the chemical business
in the future.





Research
and Development Efforts




We
currently have 26 members in our research and development team. Among them, 13
hold Ph.D. degrees, 13 hold Masters degrees and most have worked in the NPCC
research field for more than four years. Mr. Zhude Xu and Mr. Xiaochuan Zhu, our
two Directors of Research and Development, both with more than 10 years of
experience, are 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, including
extensions of existed products and new products such as epoxy resin, cosmetics
and asphalt.




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.




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 2009, we
completed samples testing of our NPCC products with approximately 40 companies
in various industries, such as PVC, rubber, adhesive, latex and coating. Of
these 40 companies, 30 companies have begun or are ready to purchase after the
first round of testing and 10 companies have indicated interest in further
testing, and we consider most of them to be potential new customers. As of
December 31, 2009, we had 59 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.


-12-




In
addition, we have adopted advanced membrane-dispersion technology in the
production process at our Xianyang, Shaanxi facility and our Zibo, Shandong
facility with phase I capacity of 60,000 metric tons. 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. Our research and development center in Pudong, Shanghai, China is our
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 38 employees, 34 of which are devoted to domestic sales and 4
of which are devoted to international sales. To expand distribution channels and
increase our market share, we will continue our efforts on our international
sales team construction and regularly attend industry fairs and exhibitions. 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 established our leadership in the NPCC
industry in China, particularly for applications in the tire and PVC building
materials markets. We have successfully entered the oil-based paint and paper
industries. We are now actively marketing our NPCC products to major
international companies in the adhesive industry and our products in the asphalt
industry are under testing processes domestically. We plan to begin supplying
our products to certain major international companies in the adhesive industry
and to domestic asphalt manufacturers.




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 Asian countries, including Singapore, Thailand, South Korea, Malaysia and
India. Additionally, our international sales department is actively testing our
products with customers in North America.





Suppliers




In 2009,
the cost of raw materials accounted for approximately 63.8% of our total
production cost. Soft coal, modification agents, anthracite and limestone are
the major raw materials for producing NPCC products.




We have
multiple suppliers for all of our major raw materials, except for modification
agents. Soft coal and anthracite 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 believe we havesufficient mining right over high quality limestone in Shaanxi and our
newly acquired Chaodong facility. We are currently in negotiations with the
government regarding the price and payment terms for our mining rights at our
Zibo, Shandong facility. Our Tai’an, Shandong facility has 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.


-13-





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, 2009.





Major Suppliers for NPCC
Business


Suppliers
                    
                    Amount
                      Purchased in
                      2009
                      (USD
                      million)
                    
                    
                    % of Total
                      Purchases
                      in
                      2009Anthracite
                    
                    Xintai
      Liantai Material Co., Ltd
                    
                    
                    4.46
                    
                    
                    
                    8.42
                    %Anthracite
      and soft coal
                    
                    Xianyang
      Chuangfa Trading Co., Ltd.
                    
                    
                    8.63
                    
                    
                    
                    16.30
                    %Modification
      agent
                    
                    Qingdao
      Siwei Chemical Co. Ltd.
                    
                    
                    6.93
                    
                    
                    
                    13.09
                    %Limestone
      and soft coal
                    
                    Qianxian
      Tianhe Mining Industry LLC
                    
                    
                    5.38
                    
                    
                    
                    10.16
                    %Total
                    
                    
                    
                    
                    
                    
                    
                    
                    47.97
                    %




Our
Major Customers




We sell
our NPCC products to customers in the tire, polyvinyl chloride (PVC) building
materials, ink, paint, latex, adhesive, paper and polyethylene (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. We have long-term
relationships with most of our customers in the NPCC business.




For the
fiscal year ended December 31, 2009, sales to our top five NPCC customers
accounted for 10.5% of total NPCC sales. For the same period, approximately 7.0%
of our NPCC sales were to overseas markets.




Major Customers
of our NPCC Products


Name
                      
                      Industry
                      
                      Amount
                        of
                        Sale in
                        2009
                        (USD
                        million)
                      
                      
                      Percentage of
                        Total SalesTriangle
      Tire
                      
                      Tire
                      
                      
                      2.12
                      
                      
                      
                      2.08
                      %Zhaoyuan
      Liao
                      
                      Tire
                      
                      
                      2.25
                      
                      
                      
                      2.21
                      %Double
      Star Tire
                      
                      Tire
                      
                      
                      2.18
                      
                      
                      
                      2.14
                      %Zhenjiang
      Suhui
                      
                      Tire
                      
                      
                      1.83
                      
                      
                      
                      1.78
                      %Shandong
      Shengtai
                      
                      Tire
                      
                      
                      1.75
                      
                      
                      
                      1.70
                      %Total
                      
                      
                      
                      
                      10.13
                      
                      
                      
                      9.91
                      %Dalian
      Jinyuan
                      
                      PVC
                      
                      
                      2.17
                      
                      
                      
                      2.13
                      %Yiyuan
      Ruifeng
                      
                      PVC
                      
                      
                      2.00
                      
                      
                      
                      1.96
                      %Tshangshan
      Jiaji
                      
                      PVC
                      
                      
                      1.70
                      
                      
                      
                      1.67
                      %Cangzhou
      Cangjing
                      
                      PVC
                      
                      
                      1.65
                      
                      
                      
                      1.62
                      %Total
                      
                      
                      
                      
                      7.52
                      
                      
                      
                      7.38
                      %





-14-




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.
                
                
                250,000Jiawei
                
                
                170,000Tianze
                
                
                100,000Yaohua
                
                
                50,000Guangping
                
                
                30,000CZ
      Calicum Carbonate
                
                
                20,000Keli
                
                
                20,000Perfection
                
                
                15,000BJ
      Chemical Building Material
                
                
                14,000Others
                
                
                125,000




Source:
Frost & Sullivan Report dated November 10, 2008 - Analysis of the Chinese Nano
Precipitated Calcium Carbonate Market





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.




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 at our
Bangsheng Chemical Facility prior to November 2008. 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.


-15-




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 250,000 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 remaining capacity has not yet
passed the assessment. 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.





Employees




As of
December 31, 2009, we employed 1,063 full-time employees. Of our total
employees, 10.5% are management personnel, 3.6% are sales staff members and 2.4%
are R&D 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 who voluntarily participate in the social
insurance program. Social insurance expenses were approximately $347,287 and
$567,741 for fiscal years 2009 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.


-16-




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.





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




Subsequent to the
cease of production 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 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. As of December 31, 2009, the Bangsheng coal-based chemical
operations have been discontinued. For the year ended December 31, 2009, our
sales of NPCC products were approximately $102.1million, or 99.7% of our total
revenue and the other 0.3% or $295,899 comes from sales of coal inventory of
Bangsheng Chemaical Facility. 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 facility in
Shaanxi, we deployed the membrane-dispersion technology co-developed and
co-owned with Tsinghua University.  The same membrane-dispersion
technology is utilized in our facility in Zibo, Shandong.  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 tire, polyvinyl chloride (PVC) building
materials, ink, paint, latex, adhesive, paper and polyethylene (PE)
industries.  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.





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.


-17-




Our NPCC business
depends significantly on the tire industry. 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 2009, our NPCC business derived
approximately 34.3% 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.





The United States
government’s increase in tariffs on tires imported from China may harm the
business of our customers, which would cause our revenue to decline and
materially and adversely affect our business.China’s accession to the
World Trade Organization (“WTO”) included transitional remedies to address
import surges into other countries leading to market disruption. In the United
States, the relevant safeguard provision was enacted as Section 421 of the Trade
Act of 1974. Section 421 permits US domestic industries and workers injured by
rapidly increasing imports from China to seek relief. Similar to other safeguard
provisions, a Section 421 investigation is initiated by the filing of a petition
with the United States International Trade Commission (“ITC”). On the basis of
information developed in an investigation, the ITC determined, pursuant to
section 421(b)(1) of the Trade Act of 1974, that certain passenger vehicle and
light truck tires from China are being imported into the United States in such
increased quantities or under such conditions as to cause or threaten to cause
market disruption to the domestic producers of like or directly competitive
products. On September 11, 2009, the United States government announced the
decision to grant relief in the tire proceeding in the form of tariffs on such
passenger vehicle and light truck tires from China being increased for a
three-year period by 35% in year one, 30% in year two, and 25% in year three.
The increase in tariffs may harm the export business of our NPCC customers in
the tire industry, which would decrease demand for our NPCC products, cause our
revenue to decline and materially and adversely affect our
business.





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.


-18-


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, polyvinyl chloride (PVC)
building materials, ink, paint, latex, adhesive, paper and polyethylene (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 which may 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.





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, our
management determined that certain material weaknesses existed in our internal
control over financial reporting as of December 31, 2008. 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.


-19-





We may not be
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 difficult to finance and/or expensive to fund and may
also 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.





The cost of our
raw materials fluctuates significantly, which may adversely impact our profit
margin and financial position. Raw materials that we use in the
manufacture of our NPCC products include limestone, anthracite, soft coal and
modification agent, among which costs of anthracite and soft coal were 37.64% of
the production cost of our NPCC business in 2009. The costs of modification
agent and limestone were 25.84% of the production cost of our NPCC business in
2009. The prices of these materials are subject to market forces largely beyond
our control. In the last few years, coal prices have fluctuated substantially.
The price for coal 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. If
we cannot secure such raw materials from our suppliers, our business may be
adversely affected.We purchase raw materials from suppliers. 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:


-20-





·
            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;





·
            continued R&D efforts;
      and





·
            the highly competitive nature of
      the NPCC industry.





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 of our 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.


-21-





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.





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 Tai’an 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 capacity to be built in addition to the existing
10,000 metric tons of capacity in Chaodong, Anhui province, 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
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.


-22-





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.





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.


-23-





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.





A slowdown or
other adverse developments in the economy of the PRC may materially and
adversely affect our customers, demand for our products and our 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. 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 have increased. 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
currency exchange 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 rate between 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.


-24-





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 ability to 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.





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, and
may subject to PRC income tax on our worldwide income and we may have to
withhold PRC withholding tax for any dividends or interest we pay to our non-PRC
corporate stockholders or noteholders.Under the Enterprise Income Tax
Law of the People’s Republic of China, or the EIT Law, and its implementing
rules, all domestic and foreign investment companies in China are subject to a
uniform enterprise income tax at the rate of 25%. In addition, dividends from
domestic companies to their foreign corporate stockholders are 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 as a PRC
resident enterprise.


-25-





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 corporate stockholders or noteholders and with respect to gains derived
by our non-PRC corporate stockholders or noteholders from transferring our
shares or our convertible notes.





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, some of our PRC subsidiaries were
subject to an effective enterprise income tax rate of 15% and a local income tax
rate of 1.5% for 2007. Under approvals issued by the tax authorities and the
transitional arrangements under the EIT Law and its relevant regulations,
Shandong Haize Nanomaterials Co., Ltd. and Shandong Bangsheng Chemical Co., Ltd.
were exempted from income tax for 2005 and 2006, were taxed at a reduced rate of
16.5% for 2007, and were taxed at 12.5% for 2008 and 2009; and Shaanxi Haize
Nanomaterials Co., Ltd. was exempted from income tax for 2006 and 2007, and is
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 unifies tax deduction
standards are applied equally to both domestic-invested enterprises and foreign
invested enterprises such as our PRC subsidiaries. The EIT Law and its relevant
regulations provide a five-year transition period starting from January 1, 2008
for enterprises which were established prior to March 16, 2007. On December 26,
2007, the State Council issued the Notice of the State 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 certain preferential tax treatments,
such as our PRC subsidiaries, continue to enjoy the preferential tax treatments
in the manner and during the periods as former laws and administrative
regulations provided until such periods expire. The unified income tax rate of
25% will be applied to our PRC subsidiaries after the expiration of the
above-mentioned periods of preferential tax treatments. While the EIT Law
equalizes the tax rate for foreign invested enterprises and domestic companies,
preferential tax treatments 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 enjoyed/is enjoying their respective tax holidays will continue to qualify
for any preferential tax treatment after the transitional period provided by the
EIT Law and its relevant regulations, 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 boards of directors or
equivalent governing bodies.


-26-


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 individual income tax law,
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 the PRC tax rules and regulations
in case of failure to withhold and pay individual income taxes for their
employees in accordance with the applicable law and regulations. Sales
commission is a component of the salary of NPCC salesmen and we do not currently
deduct or withdraw individual income tax for this portion of the salary.
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 withholding policies and we believe
that such taxes will be effectively withheld in 2010.





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 large fluctuations 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:


-27-





·
            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.





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 limited by 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.


-28-





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 other stockholders.Our executive officers,
directors, and beneficial owners of 5% or more of our outstanding common stock
and their affiliates will beneficially own approximately 48.1% 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:





·
            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.


-29-





For the
year ended December 31, 2009, net cash inflow from operating activities of
continuing operations was US$28.0 million. 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.





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, 2008 to December 31, 2009, 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$2.52 per share to a high of US$7.20 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.


-30-





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, 2009, 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.





We have made only
limited 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.


-31-





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).





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 may be 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 restructuring transactions 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 your
right 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.


-32-





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.





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.


-33-





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.





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 December 2009, the Company committed to a plan to sell all of the
Bangsheng Chemical Facility operating assets, primarily plant equipment and
inventory, and discontinued the Bangsheng coal-based chemical
operations.





In August
2006, Shandong Shengda Technology completed the construction of a 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 August 2009, we completed the
first phase construction of our NPCC facility in Zibo, Shandong on 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.





In August
2009, we, through our wholly-owned subsidiary Faith Bloom Limited, entered into
an Equity Transfer Agreement with Anhui Chaodong Cement Co., Ltd., a company
incorporated under the laws of the People’s Republic of China, pursuant to which
Faith Bloom acquired the entire equity of Chaodong, a PRC company and
wholly-owned subsidiary of Anhui Chaodong Cement Co., Ltd. Chaodong was an
inactive manufacturer of nano precipitated calcium carbonate, and its assets
include mining rights to reserves of 13.2 million tons of limestone and existing
buildings and equipment. The acquisition was approved by the Chinese government
in November 2009. Anhui Chaodong Cement Co., Ltd. and Chaodong has an annual
capacity of 10,000 metric tons. In connection with the acquisition of Chaodong,
in August 2009, we, through Faith Bloom Limited entered into a Project
Investment Contract with the local government of Hanshan County, Anhui Province,
People’s Republic of China. Pursuant to this agreement, we anticipate investing
RMB 1,200,000,000 (approximately $175.7 million) in several phases by 2013,
which includes an investment in a new NPCC project that has the capacity to
manufacture 200,000 tons of NPCC per year and the purchase of land-use rights
for approximately 341,335 square meters (approximately 84.35 acres) of land.
This agreement is currently under government review and is subject to
governmental approval. In addition to the investment per this agreement, the
Company also agreed to purchase the land-use rights for approximately 66,767
square meters (16.5 acres) of land from the local government for Chaodong, which
is subject to the approval of the local government. Such approval will require
administrative procedures including a public bidding to establish the
transaction price. These agreements are investment plans and are not
contractually binding until key elements of contract terms such as transaction
prices and specific payment schedules are fully agreed upon and evidenced by
execution of agreements.





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.





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.


-34-





Item
3. Legal Proceedings





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





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 2008 and 2009.





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
                      
                      $
                      4.29
                      
                      
                      $
                      2.52Second
      Quarter
                      
                      $
                      4.78
                      
                      
                      $
                      3.05Third
      Quarter
                      
                      $
                      7.20
                      
                      
                      $
                      3.86Fourth
      Quarter
                      
                      $
                      7.19
                      
                      
                      $
                      5.31





Year ending December 31, 2010
                    
                    High
                    
                    
                    LowFirst
      Quarter (until March 12)
                    
                    $
                    7.05
                    
                    
                    $
                    5.30





On March
12, 2010, the last reported sale price of our common stock on The NASDAQ Global
Select Market was $6.87 per share.





Shareholders





As of
March 12, 2010, we had 54,202,036 outstanding shares of common stock held by
approximately 310 shareholders of record.





Recent
Sales of Unregistered Securities





None.





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.


-35-





Repurchases
of Equity Securities




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




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.





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December 31,2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2009ASSETSCurrent
      assets:Cash
                        
                        $
                        10,749,300
                        
                        
                        $
                        34,684,142
                        
                        
                        $
                        26,366,568
                        
                        
                        $
                        114,287,073
                        
                        
                        $
                        115,978,763Accounts
      receivable
                        
                        
                        2,583,881
                        
                        
                        
                        4,115,538
                        
                        
                        
                        6,075,371
                        
                        
                        
                        6,806,066
                        
                        
                        
                        4,600,722Inventories
                        
                        
                        253,104
                        
                        
                        
                        909,493
                        
                        
                        
                        1,074,820
                        
                        
                        
                        2,310,995
                        
                        
                        
                        2,018,283Due
      from related parties
                        
                        
                        -
                        
                        
                        
                        1,601
                        
                        
                        
                        1,712
                        
                        
                        
                        -
                        
                        
                        
                        -Prepaid
      expenses and other receivables
                        
                        
                        1,314,640
                        
                        
                        
                        1,028,499
                        
                        
                        
                        2,262,872
                        
                        
                        
                        510,825
                        
                        
                        
                        3,947,086Income
      tax refund receivable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,455,906Current
      assets of discontinued operations
                        
                        
                        6,476,727
                        
                        
                        
                        2,716,399
                        
                        
                        
                        2,695,151
                        
                        
                        
                        962,942
                        
                        
                        
                        801,983Assets
      held for sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,718,475Total
      current assets
                        
                        
                        21,377,652
                        
                        
                        
                        43,455,672
                        
                        
                        
                        38,476,494
                        
                        
                        
                        124,877,901
                        
                        
                        
                        130,521,218Property,
      plant and equipment, net
                        
                        
                        4,216,158
                        
                        
                        
                        18,288,002
                        
                        
                        
                        56,623,334
                        
                        
                        
                        98,344,722
                        
                        
                        
                        123,099,860Land
      use rights
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        124,028
                        
                        
                        
                        15,710,333
                        
                        
                        
                        15,432,743Intangible
      assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        280,329Debt
      issuance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,096,073
                        
                        
                        
                        1,720,209Non-current
      assets of discontinued operations
                        
                        
                        4,363,518
                        
                        
                        
                        5,285,677
                        
                        
                        
                        5,720,082
                        
                        
                        
                        1,777,800
                        
                        
                        
                        -Total
      assets
                        
                        $
                        29,957,328
                        
                        
                        $
                        67,029,351
                        
                        
                        $
                        100,943,938
                        
                        
                        $
                        243,806,829
                        
                        
                        $
                        271,054,359LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        400,542
                        
                        
                        $
                        1,211,485
                        
                        
                        $
                        2,996,020
                        
                        
                        $
                        4,493,551
                        
                        
                        $
                        3,998,532Accrued
      expenses and other payables
                        
                        
                        721,677
                        
                        
                        
                        1,076,408
                        
                        
                        
                        2,848,308
                        
                        
                        
                        4,342,006
                        
                        
                        
                        4,737,356Income
      taxes payable
                        
                        
                        195,859
                        
                        
                        
                        564,151
                        
                        
                        
                        5,869
                        
                        
                        
                        1,588,895
                        
                        
                        
                        60,573Due
      to related parties
                        
                        
                        193,150
                        
                        
                        
                        2,852,885
                        
                        
                        
                        633,638
                        
                        
                        
                        1,737,404
                        
                        
                        
                        1,572,427Payable
      for acquisition
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,803,060Current
      liabilities of discontinued operations
                        
                        
                        3,673,512
                        
                        
                        
                        4,195,158
                        
                        
                        
                        5,456,918
                        
                        
                        
                        14,912
                        
                        
                        
                        42,068Total
      current liabilities
                        
                        
                        5,184,740
                        
                        
                        
                        9,900,087
                        
                        
                        
                        11,940,753
                        
                        
                        
                        12,176,768
                        
                        
                        
                        14,214,016Long-term
      convertible notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        77,926,310
                        
                        
                        
                        79,298,539Non-current
      income taxes payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        974,131
                        
                        
                        
                        1,598,237Note
      payable to related party
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        601,631Net
      deferred income tax liabilities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,387,262
                        
                        
                        
                        4,443,810Non-current
      liabilities of discontinued operations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        293,977
                        
                        
                        
                        294,708Total
      liabilities
                        
                        
                        5,184,740
                        
                        
                        
                        9,900,087
                        
                        
                        
                        11,940,753
                        
                        
                        
                        96,758,448
                        
                        
                        
                        100,450,941Total
      shareholders' equity
                        
                        
                        24,772,588
                        
                        
                        
                        57,129,264
                        
                        
                        
                        89,003,185
                        
                        
                        
                        147,048,381
                        
                        
                        
                        170,603,418Total
      liabilities and shareholders' equity
                        
                        $
                        29,957,328
                        
                        
                        $
                        67,029,351
                        
                        
                        $
                        100,943,938
                        
                        
                        $
                        243,806,829
                        
                        
                        $
                        271,054,359


-36-





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME





For the Years Ended December 31,2005
                                    
                                    
                                    2006
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009Net
      sales
                                    
                                    $
                                    14,613,733
                                    
                                    
                                    $
                                    22,007,814
                                    
                                    
                                    $
                                    46,721,673
                                    
                                    
                                    $
                                    82,419,689
                                    
                                    
                                    $
                                    102,121,804Cost
      of goods sold
                                    
                                    
                                    9,264,339
                                    
                                    
                                    
                                    13,297,976
                                    
                                    
                                    
                                    26,812,587
                                    
                                    
                                    
                                    48,316,242
                                    
                                    
                                    
                                    60,218,310Gross
      profit
                                    
                                    
                                    5,349,394
                                    
                                    
                                    
                                    8,709,838
                                    
                                    
                                    
                                    19,909,086
                                    
                                    
                                    
                                    34,103,447
                                    
                                    
                                    
                                    41,903,494Operating
      expenses:Selling
                                    
                                    
                                    796,074
                                    
                                    
                                    
                                    1,181,341
                                    
                                    
                                    
                                    1,680,259
                                    
                                    
                                    
                                    2,438,908
                                    
                                    
                                    
                                    2,103,822General
      and administrative
                                    
                                    
                                    426,339
                                    
                                    
                                    
                                    2,110,956
                                    
                                    
                                    
                                    2,658,806
                                    
                                    
                                    
                                    3,074,051
                                    
                                    
                                    
                                    5,669,923Total
      operating expenses
                                    
                                    
                                    1,222,413
                                    
                                    
                                    
                                    3,292,297
                                    
                                    
                                    
                                    4,339,065
                                    
                                    
                                    
                                    5,512,959
                                    
                                    
                                    
                                    7,773,745Operating
      income
                                    
                                    
                                    4,126,981
                                    
                                    
                                    
                                    5,417,541
                                    
                                    
                                    
                                    15,570,021
                                    
                                    
                                    
                                    28,590,488
                                    
                                    
                                    
                                    34,129,749Other
      income (expense):Interest
      income
                                    
                                    
                                    8,474
                                    
                                    
                                    
                                    47,654
                                    
                                    
                                    
                                    94,643
                                    
                                    
                                    
                                    132,423
                                    
                                    
                                    
                                    685,858Interest
      expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (7,456,418
                                    )
                                    
                                    
                                    (10,662,252
                                    )Gain
      on extinguishment of long-term convertible notes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,511,487
                                    
                                    
                                    
                                    1,624,844Gain
      on bargain purchase
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    619,466Other
      expense, net
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (72,690
                                    )
                                    
                                    
                                    (12,094
                                    )
                                    
                                    
                                    (51,604
                                    )
                                    
                                    
                                    (121,976
                                    )Other
      income (expense), net
                                    
                                    
                                    8,474
                                    
                                    
                                    
                                    (25,036
                                    )
                                    
                                    
                                    82,549
                                    
                                    
                                    
                                    (1,864,112
                                    )
                                    
                                    
                                    (7,854,060
                                    )Income
      from continuing operations before income taxes
                                    
                                    
                                    4,135,455
                                    
                                    
                                    
                                    5,392,505
                                    
                                    
                                    
                                    15,652,570
                                    
                                    
                                    
                                    26,726,376
                                    
                                    
                                    
                                    26,275,689Income
      tax expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    450,347
                                    
                                    
                                    
                                    3,705,669
                                    
                                    
                                    
                                    2,721,532Income
      from continuing operations
                                    
                                    
                                    4,135,455
                                    
                                    
                                    
                                    5,392,505
                                    
                                    
                                    
                                    15,202,223
                                    
                                    
                                    
                                    23,020,707
                                    
                                    
                                    
                                    23,554,157Income
      (Loss) from discontinued operations, net of taxes
                                    
                                    
                                    11,827,016
                                    
                                    
                                    
                                    12,134,143
                                    
                                    
                                    
                                    11,828,122
                                    
                                    
                                    
                                    13,007,595
                                    
                                    
                                    
                                    (449,550
                                    )Net
      Income
                                    
                                    $
                                    15,962,471
                                    
                                    
                                    $
                                    17,526,648
                                    
                                    
                                    $
                                    27,030,345
                                    
                                    
                                    $
                                    36,028,302
                                    
                                    
                                    $
                                    23,104,607Basic
      Earnings per share:Income
      from continuing operations
                                    
                                    $
                                    0.07
                                    
                                    
                                    $
                                    0.11
                                    
                                    
                                    $
                                    0.28
                                    
                                    
                                    $
                                    0.42
                                    
                                    
                                    $
                                    0.43Income
      (Loss) from discontinued operations
                                    
                                    $
                                    0.18
                                    
                                    
                                    $
                                    0.23
                                    
                                    
                                    $
                                    0.22
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    
                                    (0.00
                                    )Net
      income per share
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.34
                                    
                                    
                                    $
                                    0.50
                                    
                                    
                                    $
                                    0.66
                                    
                                    
                                    $
                                    0.43Diluted
      Earnings per share:Income
      from continuing operations
                                    
                                    $
                                    0.07
                                    
                                    
                                    $
                                    0.11
                                    
                                    
                                    $
                                    0.28
                                    
                                    
                                    $
                                    0.39
                                    
                                    
                                    $
                                    0.43Income
      (Loss) from discontinued operations
                                    
                                    $
                                    0.18
                                    
                                    
                                    $
                                    0.23
                                    
                                    
                                    $
                                    0.22
                                    
                                    
                                    $
                                    0.21
                                    
                                    
                                    
                                    (0.00
                                    )Net
      income per share
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.34
                                    
                                    
                                    $
                                    0.50
                                    
                                    
                                    $
                                    0.60
                                    
                                    
                                    $
                                    0.43Weighted
      average shares outstanding:Basic
                                    
                                    
                                    64,455,210
                                    
                                    
                                    
                                    51,900,641
                                    
                                    
                                    
                                    54,107,408
                                    
                                    
                                    
                                    54,202,036
                                    
                                    
                                    
                                    54,202,036Diluted
                                    
                                    
                                    64,455,210
                                    
                                    
                                    
                                    52,022,801
                                    
                                    
                                    
                                    54,188,410
                                    
                                    
                                    
                                    62,205,660
                                    
                                    
                                    
                                    54,204,923





Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is designed to provide a reader of our financial statements with a
narrative explanation from the perspective of our management on our business,
financial condition, results of operations, and cash flows.





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
via our Bangsheng Chemical Facility. 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.  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. As a result, we recorded an impairment
charge of approximately $3.9 million for Bangsheng Chemical Facility equipment
in the fourth quarter of 2008. We do not believe there is additional impairment
of assets in 2009. In December 2009, the Company decided to sell all of its
operating assets and inventories at the Bangsheng Chemical Facility. Although we
discontinued the Bangsheng coal-based chemical operations, the Company is
currently seeking other strategic opportunities in the chemical
business.


-37-





Organization




ShengdaTech is incorporated in Nevada
in the United States of America (“U.S.”).  ShengdaTech’s wholly-owned
subsidiaries, Chaodong, 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 the PRC.





On
December 11, 2009, Faith Bloom, a wholly-owned subsidiary of ShengdaTech,
acquired 100% of the equity interest of Chaodong.  Chaodong was an inactive
manufacturer of NPCC products.





Our
corporate structure is depicted in the following chart:











Net
Sales




We derive
our net sales from the sale of our NPCC products.





The most
significant factors that directly or indirectly affect our sales are as
follows:





·
            Manufacturing capacity of
      NPCC;





·
            Breakthroughs of R&D and
      applications of NPCC;





·
            Pricing of our NPCC
      products;





·
            Competitive
      landscape;





·
            Industry demand;
      and





·
            Exchange
    rate





Manufacturing capacity of NPCC.We increased our annual manufacturing capacity of NPCC from 90,000 metric
tons as of December 31, 2006 to 190,000 metric tons as of December 31, 2008 and
further to 250,000 metric tons as of December 31, 2009. Our Phase I NPCC
facility in Zibo started production in late August 2009. The facility reached
90% capacity utilization at the end of 2009 and 100% capacity in January 2010.
Our Anhui Facility is expected to achieve 10,000 metric tons of capacity in Q2
2010 after we complete certain repair and maintenance of the acquired facility
and equipment and perform certain technological upgrades consistent with our
Shandong facility. Increasing capacity allows us to provide a stable supply of
NPCC to our existing customers and attract new customers.


-38-





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 will maintain our leading position in
technology for the NPCC market in China.





Pricing of our NPCC products.The pricing of our NPCC products generally is 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.





Competitive landscape.The
competition in the Chinese NPCC market is moderate and stratified. In low-end
applications, where several options are available, including precipitated
calcium carbonate (PCC) and other fillers, suppliers are experiencing price
pressure from their counterparts and from end users. However, in more complex
applications, where NPCC use has proven to lower manufacturing costs and improve
quality, end users will accept higher-priced and technologically advanced
products, especially producers of tires, adhesives, high-end oil and inks, and
auto coating industries. The Company’s target market is potential end users of
high-end NPCC products. Our exclusive, patent-protected membrane-dispersion
technology differentiates us from other competitive offerings and enables us to
penetrate the market.




Industry demand.Our business
and sales of product growth depends on industry demand for NPCC. The downstream
industries we supply are the tire, polyvinyl chloride (PVC) building materials,
ink, paint, latex, adhesive, paper and polyethylene (PE) industries. Given the
diverse application of our NPCC products and the development of our R&D
pipeline for new end markets, we believe that our business is well positioned
for continued growth.





Section 421 of the Trade Act of
1974.China’s accession to the World Trade Organization (“WTO”) included
transitional remedies to address import surges into other countries leading to
market disruption. In the United States, the relevant safeguard provision was
enacted as Section 421 of the Trade Act of 1974.  Section 421 permits U.S.
domestic industries and workers injured by rapidly increasing imports from China
to seek relief. Similar to other safeguard provisions, a Section 421
investigation is initiated by the filing of a petition with the United States
International Trade Commission (“ITC”). On the basis of information developed in
such investigation, the ITC determined, pursuant to Section 421(b)(1) of the
Trade Act of 1974, that certain passenger vehicle and light truck tires from the
People’s Republic of China are being imported into the United States in such
increased quantities or under such conditions as to cause or threaten to cause
market disruption to the domestic producers of like or directly competitive
products. On September 11, 2009, the United States government announced the
decision to grant relief in the tire proceeding in the form of tariffs on such
passenger vehicle and light truck tires being increased for a three-year period
by 35% in year one, 30% in year two, and 25% in year three. The increase in
tariffs may harm the export business of our NPCC customers in the tire industry,
which would decrease demand for our NPCC products, cause our revenue to decline
and materially and adversely affect our business.





Exchange rate.Our sales of
products have 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, 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.


-39-


Cost of
Goods Sold




Cost of
goods sold for NPCC consists primarily of (a) consumption of raw materials and
auxiliary raw materials (b) use of water and electricity (c) machinery
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 right to use the technology under a license agreement with
Tsinghua University for the life of the patent. The membrane-dispersion
technology enables us to produce NPCC in a more efficient and cost effective
way.





Transporting, supply, and price of
limestone.Limestone is an important raw material for NPCC. Our Shaanxi
Facility is close 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 sell to us sources of good quality
limestone, with the sale and transfer of the mining rights to the Company to be
completed within 12 months. As of December 31, 2009, granting of mining rights
to the Company in Zibo is still under review of the Management Committee. In
addition, the acquisition of Chaodong on December 11, 2009 included
approximately two years limestone mining rights. We have not yet obtained the
final reserve report of the limestone in 2009. We are applying for the extension
of mining rights with the PRC government. If the application is approved,
another thirty years of mining rights will be granted. In addition, we have
entered into a Project Investment Agreement with the government of Hanshan
County, Anhui Province, which also includes the exclusive mining rights up to 60
million metric tons of good quality limestone. The access to the limestone
guarantees our requirement for the high quality materials and satisfies our
expansion needs.





Availability and price of coal.Coal is used in the production of our NPCC products as a key fuel for the
calcination of limestone. Coal is approximately 38% of our total cost of
goods.  We have long-term relationships with our coal suppliers. We have
also developed a network of alternative suppliers for backup purposes. Average
coal price has fluctuated through out the periods, increasing from approximately
$145 per metric ton for 2008 to approximately $151 per metric ton for
2009.





Supply and price of electricity.Electricity from the grid is the primary power source for the production
of NPCC, and it is currently supplied by the local government. The price of
electricity for the NPCC industry remained fairly consistent at $0.08/kwh for
2008 and 2009.




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 the
RMB while our financial statements are 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.


-40-





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, (e) competitive activity,
(f) expanded international operations and (g) entry into new industry
applications.




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 expenses.





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. As we continue to expand our operations, our potential merger and
acquisition activities will incur additional expenses related to due diligence,
audit, business appraisals, and valuations.





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 significant 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 of sales rebates and
taxes, when the products are shipped. We have no post-delivery obligations
on our products sold.




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.


-41-


Long-term convertible notes -On January 1, 2009, as required by US GAAP, we changed how we account for
our long-term convertible notes (the “Notes”) The change significantly impacts
the accounting for our convertible notes by requiring us to account separately
for the liability and equity components of the Notes because upon conversion at
any time before June 1, 2011 the make-whole interest payment may be settled in
cash. The liability component is measured so the effective interest expense
associated with the convertible notes reflects our borrowing rate at the date of
issuance for similar debt instruments without the conversion feature. The
difference between the cash proceeds associated with the convertible notes and
this estimated fair value is recorded as a debt discount and amortized to
interest expense through June 1, 2011, the earliest date the holders of the
Notes can demand payment. Determining the fair value of the liability component
requires the use of accounting estimates and assumptions. These estimates and
assumptions are judgmental in nature and could have a significant impact on the
determination of the liability component and, in effect, the associated interest
expense. According to the guidance, the carrying amount of the liability
component is determined by measuring the fair value of a similar liability that
does not have an associated equity component. If no similar liabilities exist,
estimates of fair value are primarily determined using assumptions that market
participants would use in pricing the liability component, including market
interest rates, credit standing, yield curves, and volatilities.





Business combination -The
application of the purchase accounting requires certain estimates and
assumptions especially concerning the determination of the fair values of the
acquired intangible assets and property, plant and equipment as well as the
liabilities assumed at the date of the acquisition. Moreover, the useful lives
of the acquired intangible assets, property, plant and equipment have to be
determined. Measurement of fair value and useful lives are based to a large
extent on anticipated cash flows. If actual cash flows vary from those used in
calculating fair values, this may significantly affect the Company’s future
results of operations. Factors that may affect the assumptions regarding future
cash flows: long-term sales forecasts and anticipation of selling price erosion
due to excessive capacities and competition. For significant acquisitions, the
purchase price allocation is carried out with assistance from independent
third-party valuation specialists. The valuations are based on information
available at the acquisition date.





Results
of operations





Continuing
Operation —Comparison for the Years ended December 31, 2008 and
2009





Sales
of Products





For the Years Ended December 31,2008
                  
                  
                  2009
                  
                  
                  ChangeAmount ($)
                  
                  
                  % of Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  % of
                    Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  %Net
      sales-NPCC
                  
                  
                  82,419,689
                  
                  
                  
                  100.0
                  
                  
                  
                  102,121,804
                  
                  
                  
                  100.0
                  
                  
                  
                  19,702,115
                  
                  
                  
                  23.9




For the
year ended December 31, 2009, sales increased by $19,702,115 or 23.9% for
the year ended December 31, 2009 compared to the year ended December 31,
2008. The increase was mainly due to an increase in sales volume of 32,684
metric tons that resulted from increasing market demand during the year ended
December 31, 2009. In addition, the average selling price for the year
ended December 31, 2009 was approximately $481.7 per metric ton, an increase of
$22.0 per metric ton from an average selling price of $459.7 per metric ton for
the year ended December 31, 2008. The increase in our average selling price was
due primarily to changes in our pricing strategy and in our product mix based on
market demands. For the year ended December 31, 2009, our sales for plastic,
adhesive and latex applications increased by $15,972,617, $3,523,549, and
$873,377, respectively, compared to the year ended December 31, 2008. Our sales
for rubber, paper, paint and ink applications for the year ended December 31,
2009 remained stable compared to the year ended December 31, 2008.




Cost
of Goods Sold and Gross Profit





For the Years Ended December 31,2008
                  
                  
                  2009
                  
                  
                  ChangeAmount ($)
                  
                  
                  % of Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  % of Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  (%)Cost
      of Goods Sold-NPCC
                  
                  
                  48,316,242
                  
                  
                  
                  58.6
                  
                  
                  
                  60,218,310
                  
                  
                  
                  59.0
                  
                  
                  
                  11,902,068
                  
                  
                  
                  24.6Gross
      Profit-NPCC
                  
                  34,103,447
                  
                  
                  41.4
                  
                  
                  41,903,494
                  
                  
                  41.0
                  
                  
                  7,800,047
                  
                  
                  
                  22.9


-42-





The cost
of goods sold increased by $11,902,068 or 24.6% for the year ended December 31,
2009 compared to the year ended December 31, 2008.




The gross
margin decreased slightly by 0.4%, from 41.4% for the year ended December 31,
2008 to 41.0% for the year ended December 31, 2009. An increase in sales volume
and the average selling price in the current period were offset by an increase
in major raw material costs. The initial production start-up costs at our Zibo
NPCC Facility for the first several months after the August 2009 production
launch had a negative impact on our gross margin for the year ended December 31,
2009.





Operating
Expenses





For the Years Ended December 31,2008
                                                      
                                                      2009
                                                      
                                                      ChangeAmount ($)
                                                      
                                                      % of Total
                                                        Revenue
                                                      
                                                      Amount ($)
                                                      
                                                      % of Total
                                                        Revenue
                                                      
                                                      Amount ($)
                                                      
                                                      (%)Operating
      ExpensesSelling
      expenses
                                                      
                                                      
                                                      2,438,908
                                                      
                                                      
                                                      
                                                      3.0
                                                      
                                                      
                                                      
                                                      2,103,822
                                                      
                                                      
                                                      
                                                      2.0
                                                      
                                                      
                                                      
                                                      (335,086
                                                      )
                                                      
                                                      
                                                      (13.7
                                                      )General
      and administrative expenses
                                                      
                                                      
                                                      3,074,051
                                                      
                                                      
                                                      
                                                      3.7
                                                      
                                                      
                                                      
                                                      5,669,923
                                                      
                                                      
                                                      
                                                      5.
      6
                                                      
                                                      
                                                      
                                                      2,595,872
                                                      
                                                      
                                                      
                                                      84.4Total
      Operating expenses
                                                      
                                                      
                                                      5,512,959
                                                      
                                                      
                                                      
                                                      6.7
                                                      
                                                      
                                                      
                                                      7,773,745
                                                      
                                                      
                                                      
                                                      7.6
                                                      
                                                      
                                                      
                                                      2,260,786
                                                      
                                                      
                                                      
                                                      41.0





Selling
expenses decreased by $335,086, or 13.7%, for the year ended December 31, 2009
compared to the prior year. This decrease was mainly due to a decrease of
approximately $572,126 that resulted from a change in our NPCC staff commission
policy to lower commission rates from 3.0% to 1.6% effective January 1, 2009,
which was partially offset by an increase of $237,040 in office expenses, salary
and welfare expenses.





General
and administrative expenses increased by $2,595,872 or 84.4% for the year ended
December 31, 2009 compared to the year ended December 31, 2008. The increase was
mainly due to an increase in our professional services costs of $1,223,579
associated with accounting and auditing and other professional expenses; an
increase in our payroll costs associated with executive compensation of
$656,005; an increase in research and development expenses of $214,510, an
additional amortization charge for land use rights and related property tax
expenses for our new Zibo, Shandong facility of $212,636 and $141,724
respectively, and an increase of $147,418 in other miscellaneous
expenses.





Operating
Income and Income from Continuing Operations before Income Taxes





For the Years Ended December 31,2008
                                          
                                          
                                          2009
                                          
                                          
                                          ChangeAmount ($)
                                          
                                          
                                          % of
                                            Total
                                            Revenue
                                          
                                          
                                          Amount ($)
                                          
                                          
                                          % of
                                            Total
                                            Revenue
                                          
                                          
                                          Amount ($)
                                          
                                          
                                          (%)Operating
      Income
                                          
                                          
                                          28,590,488
                                          
                                          
                                          
                                          34.7
                                          
                                          
                                          
                                          34,129,749
                                          
                                          
                                          
                                          33.4
                                          
                                          
                                          
                                          5,539,261
                                          
                                          
                                          
                                          19.4Interest
      income
                                          
                                          
                                          132,423
                                          
                                          
                                          
                                          0.2
                                          
                                          
                                          
                                          685,858
                                          
                                          
                                          
                                          0.7
                                          
                                          
                                          
                                          553,435
                                          
                                          
                                          
                                          417.9Gain
      on extinguishment of long-term convertible notes
                                          
                                          
                                          5,511,487
                                          
                                          
                                          
                                          6.7
                                          
                                          
                                          
                                          1,624,844
                                          
                                          
                                          
                                          1.6
                                          
                                          
                                          
                                          (3,886,643
                                          )
                                          
                                          
                                          (70.5
                                          )Other
      expenses
                                          
                                          
                                          (51,604
                                          )
                                          
                                          
                                          (0.1
                                          )
                                          
                                          
                                          (121,976
                                          )
                                          
                                          
                                          (0.1
                                          )
                                          
                                          
                                          (70,372
                                          )
                                          
                                          
                                          136.4Gain
      on bargain purchase
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          619,466
                                          
                                          
                                          
                                          0.6
                                          
                                          
                                          
                                          619,466
                                          
                                          
                                          
                                          -Interest
      expense
                                          
                                          
                                          (7,456,418
                                          )
                                          
                                          
                                          (9.0
                                          )
                                          
                                          
                                          (10,662,252
                                          )
                                          
                                          
                                          (10.4
                                          )
                                          
                                          
                                          (3,205,834
                                          )
                                          
                                          
                                          (43.0
                                          )Income
      from Continuing operations before income taxes
                                          
                                          
                                          26,726,376
                                          
                                          
                                          
                                          32.4
                                          
                                          
                                          
                                          26,275,689
                                          
                                          
                                          
                                          25.7
                                          
                                          
                                          
                                          (450,687
                                          )
                                          
                                          
                                          (1.7
                                          )Income
      tax expense
                                          
                                          
                                          3,705,669
                                          
                                          
                                          
                                          4.5
                                          
                                          
                                          
                                          2,721,532
                                          
                                          
                                          
                                          2.7
                                          
                                          
                                          
                                          (984,137
                                          )
                                          
                                          
                                          (26.6
                                          )


-43-





Operating
income increased by $5,539,261 or 19.4% for the year ended December 31,
2009, compared to the year ended December 31, 2008.





Interest
income for the year ended December 31, 2009 increased by $553,435 compared to
the year ended December 31, 2008, which was mainly due to an increased average
cash balance as a result of the proceeds from the issuance of convertible notes
in May 2008.





Interest
expense, related primarily to our convertible notes, was $10,635,500 for the
year ended December 31, 2009.  Interest expense included $5,447,649
contractual coupon interest on convertible notes, $1,217,755 amortization of
debt issuance costs, and $5,690,927 amortization of debt discount. Interest
expense was reduced by $1,720,831 interest cost capitalized during the year
ended December 31, 2009. Our long-term convertible notes balance is accreted
through the amortization of our debt discount to interest expense. Interest
expense is calculated each period on the debt balance during the year using the
effective interest method.




During
the first quarter of 2009, we recorded a gain on extinguishment of debt of
$1,624,844 due to the repurchase of the convertible notes with an aggregate
principal amount of $5,223,000 from certain investors for cash of $2,535,745
plus accrued interest of $72,144 through privately negotiated
transactions.  The difference of $1,062,411 was allocated to debt issuance
cost and the discount on the convertible notes in an amount of $158,109 and
$904,302 respectively.  We did not repurchase any additional convertible
notes during the remaining year of 2009. The Company is not actively seeking to
repurchase additional convertible notes and has no plan for early termination of
the convertible notes.





On
December 11, 2009, we completed our acquisition of Chaodong and recognized a
gain on bargain purchase of $619,466. The company was able to acquire Chaodong
with a bargain purchase price due to the fact that  the seller planned to
focus on its core business of manufacturing cement and that the seller has
experienced difficulty in selling the business in the market as all equipment
used by the business was specifically built to fit ultra gravity technology
system needs. We are one of the very few potential buyers that have the
technology, human resources, research and development expertise, and sales and
marketing capabilities to operate the business. Prior to recording a gain, the
Company reassessed whether all acquired assets and all liabilities assumed have
been identified and performed re-measurements to verify that the consideration
paid and assets acquired have been properly valued and recorded based on
information available to the Company.




Our
effective income tax rate decreased from 13.9% for the year ended December 31,
2008 to 10.3% for the year ended December 31, 2009 due primarily to the effect
of the PRC income tax holiday, which amounted to $3,673,625 and $4,385,137,
respectively.





Discontinued
Operations—Comparison for the
Years ended December 31, 2008 and 2009





In
December 2009, the Company decided to discontinue operations at our Bangsheng
Chemical Facility and to sell all of its fixed assets and inventory. The
facility ceased production at the end of October 2008. Our Bangsheng Chemical
Facility operation was a component of our consolidated entity, and as such
requires discontinued operations reporting treatment.


-44-





A summary
of the operating results of discontinued operations for the years ended December
31, 2009 and 2008 is as follows:





For the Years Ended December 31,2008
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        ChangeAmount ($)
                                                        
                                                        
                                                        % of Total
                                                          Revenue
                                                        
                                                        
                                                        Amount ($)
                                                        
                                                        
                                                        % of Total
                                                          Revenue
                                                        
                                                        
                                                        Amount ($)
                                                        
                                                        
                                                        (%)Net
      Sales
                                                        
                                                        
                                                        67,007,450
                                                        
                                                        
                                                        
                                                        100.0
                                                        
                                                        
                                                        
                                                        295,899
                                                        
                                                        
                                                        
                                                        100.0
                                                        
                                                        
                                                        
                                                        (66,711,551
                                                        )
                                                        
                                                        
                                                        (99.6
                                                        )Gross
      profit
                                                        
                                                        
                                                        21,020,951
                                                        
                                                        
                                                        
                                                        31.4
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (21,020,951
                                                        )
                                                        
                                                        
                                                        (100.0
                                                        )Impairment
      of property, plant and equipment
                                                        
                                                        
                                                        3,931,253
                                                        
                                                        
                                                        
                                                        5.9
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3,931,253
                                                        )
                                                        
                                                        
                                                        (100.0
                                                        )Income
      /(Loss) from discontinued operations before income taxes
                                                        
                                                        
                                                        15,758,189
                                                        
                                                        
                                                        
                                                        23.5
                                                        
                                                        
                                                        
                                                        (449,550
                                                        )
                                                        
                                                        
                                                        (151.9
                                                        )
                                                        
                                                        
                                                        (16,207,739
                                                        )
                                                        
                                                        
                                                        (102.9
                                                        )Income
      tax expense
                                                        
                                                        
                                                        2,750,594
                                                        
                                                        
                                                        
                                                        4.1
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,750,594
                                                        )
                                                        
                                                        
                                                        (100.0
                                                        )





The net
sales for the year ended December 31, 2009 of $295,899 came from sale of
Bangsheng Chemical Facility’s residual coal inventory after it ceased operations
at the end of October 2008. The results of the discontinued operations for the
year ended December 31, 2008 include the normal business activity of our
Bangsheng Chemical production until its cessation of production on October 31,
2008.





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. We assessed our Bangsheng Chemical Facility equipment in 2009 based on
estimated selling price in the used equipment market and determined no further
impairment of loss of fixed asset is required for the year ended December 31,
2009.





We did
not have income tax expense for the discontinued operations for the year ended
December 31, 2009 due to our loss position during the year. The effective income
tax rate for 2008 was approximately 17.4%.




Continuing
Operation—Comparison for the Years ended December 31, 2007 and 2008





Sales
of Products





For the Years Ended December 31,2007
                  
                  
                  2008
                  
                  
                  ChangeAmount ($)
                  
                  
                  % of
                    Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  % of
                    Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  %Net
      sales-NPCC
                  
                  
                  46,721,673
                  
                  
                  
                  100.0
                  
                  
                  
                  82,419,689
                  
                  
                  
                  100.0
                  
                  
                  
                  35,698,016
                  
                  
                  
                  76.4




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 metric tons and $74.8
per metric ton, respectively as a result of our capacity expansion and increase
in demand.




Cost
of Goods Sold and Gross Profit





For the Years Ended December 31,2007
                    
                    
                    2008
                    
                    
                    ChangeAmount ($)
                    
                    
                    % of Total
                      Revenue
                    
                    
                    Amount ($)
                    
                    
                    % of Total
                      Revenue
                    
                    
                    Amount ($)
                    
                    
                    (%)Cost
      of GoodsSold-NPCC
                    
                    26,812,587
                    
                    
                    57.4
                    
                    
                    48,316,242
                    
                    
                    58.6
                    
                    
                    21,503,655
                    
                    
                    80.2Gross
      Profit-NPCC
                    
                    
                    19,909,086
                    
                    
                    
                    42.6
                    
                    
                    
                    34,103,447
                    
                    
                    
                    41.4
                    
                    
                    
                    14,194,361
                    
                    
                    
                    71.3


-45-





The cost
of goods sold for our NPCC business increased by $21,503,655 or 80.2% for the
year ended December 31, 2008 compared to the prior year. This increase was
mainly due to (i) an additional $16,092,246 because of increased sales volume as
a result of our NPCC capacity expansion; (ii) an additional $5,411,409 from the
increase in the production cost of $93.2 per metric 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 average products cost of $46.4 per metric ton as the result of the price
increase of anthracite and soft coal by $60.6 and $32.5, respectively. However,
there was an increase of gross profit of $14,194,361 or 71.3% due to the
increase in sales volume.





Operating
Expenses





For the Years Ended December 31,2007
                    
                    
                    2008
                    
                    
                    ChangeAmount ($)
                    
                    
                    % of Total
                      Revenue
                    
                    
                    Amount ($)
                    
                    
                    % of Total
                      Revenue
                    
                    
                    Amount ($)
                    
                    
                    (%)Operating
      ExpensesSelling
      expenses
                    
                    
                    1,680,259
                    
                    
                    
                    3.6
                    
                    
                    
                    2,438,908
                    
                    
                    
                    3.0
                    
                    
                    
                    758,649
                    
                    
                    
                    45.2General
      and administrative expenses
                    
                    
                    2,658,806
                    
                    
                    
                    5.7
                    
                    
                    
                    3,074,051
                    
                    
                    
                    3.7
                    
                    
                    
                    415,245
                    
                    
                    
                    15.6Total
      Operating expenses
                    
                    
                    4,339,065
                    
                    
                    
                    9.3
                    
                    
                    
                    5,512,959
                    
                    
                    
                    6.7
                    
                    
                    
                    1,173,894
                    
                    
                    
                    27.1





Selling
expenses increased by $758,649, or 45.2%, for the year ended December 31, 2008
compared to the prior year. The main reasons were (1) sales staff commission
increased by $747,657 as a result of the increase of sales; (2) running expenses
such as salary expenses, office expenses and traveling expenses increased
by $10,992.





General
and administrative expense increased by $415,245 or 15.6% for the year ended
December 31, 2008 compared to the prior year. The main reasons were (1) 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; (2) an increase of
$256,648 in depreciation charge for our R&D Center and an amortization
charge of $101,440 for land use rights for Zibo; (3) an increase of $47,064 in
salary expenses; (4) an increase of $100,542 in R&D expenses; (5) an
decrease in our professional service fee of $155,477 due to partial allocation
to Bangsheng Chemical Facility since 2008; (6) a decrease of $20,866 in the
running expenses, such as office expenses, traveling expenses
and entertainment expenses.




Operating
Income and Income from Continuing Operations before Income Taxes




For the Years Ended December 31,2007
                                        
                                        
                                        2008
                                        
                                        
                                        ChangeAmount ($)
                                        
                                        
                                        % of
                                          Total
                                          Revenue
                                        
                                        
                                        Amount ($)
                                        
                                        
                                        % of
                                          Total
                                          Revenue
                                        
                                        
                                        Amount ($)
                                        
                                        
                                        (%)Operating
      Income
                                        
                                        
                                        15,570,021
                                        
                                        
                                        
                                        33.3
                                        
                                        
                                        
                                        28,590,488
                                        
                                        
                                        
                                        34.7
                                        
                                        
                                        
                                        13,020,467
                                        
                                        
                                        
                                        83.6Interest
      income
                                        
                                        
                                        94,643
                                        
                                        
                                        
                                        0.2
                                        
                                        
                                        
                                        132,423
                                        
                                        
                                        
                                        0.2
                                        
                                        
                                        
                                        37,780
                                        
                                        
                                        
                                        39.9Gain
      on extinguishment of long-termconvertible
      notes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,511,487
                                        
                                        
                                        
                                        6.7
                                        
                                        
                                        
                                        5,511,487
                                        
                                        
                                        
                                        -Other
      expenses
                                        
                                        
                                        (12,094
                                        )
                                        
                                        
                                        (0.0
                                        )
                                        
                                        
                                        (51,604
                                        )
                                        
                                        
                                        (0.1
                                        )
                                        
                                        
                                        (39,510
                                        )
                                        
                                        
                                        326.7Interest
      expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7,456,418
                                        )
                                        
                                        
                                        (9.1
                                        )
                                        
                                        
                                        (7,456,418
                                        )
                                        
                                        
                                        -Income
      from Continuingoperations
      before income taxes
                                        
                                        
                                        15,652,570
                                        
                                        
                                        
                                        33.5
                                        
                                        
                                        
                                        26,726,376
                                        
                                        
                                        
                                        32.4
                                        
                                        
                                        
                                        11,073,806
                                        
                                        
                                        
                                        70.7Income
      tax expense
                                        
                                        
                                        450,347
                                        
                                        
                                        
                                        1.0
                                        
                                        
                                        
                                        3,705,669
                                        
                                        
                                        
                                        4.5
                                        
                                        
                                        
                                        3,255,322
                                        
                                        
                                        
                                        722.8


-46-





Interest
income for the year ended December 31, 2008 increased by $37,780 or 39.9%, which
was mainly due to the increase of average cash balance from the proceeds of
convertible note in May 2008.





Gain on
extinguishment of long-term convertible notes for the year ended December
31, 2008 was $5,511,487, as a result of our repurchase of $19.8 million
face amount of our convertible notes.





Other
expense for the year ended December 31, 2008 increased by $39,510, which was
mainly to the increase in foreign exchange currency losses arising from our
overseas sales.





Interest
expense related primarily to our convertible notes was $7,456,418 for the year
ended December 31, 2008.  Interest expense included $3,963,167 contractual
coupon interest on convertible notes, $861,877 amortization of debt issuance
costs, and $3,282,469 amortization of debt discount. The interest expense was
reduced by $651,095 for interest cost capitalized during the year ended December
31, 2008. Our long-term convertible notes balance is accreted through the
amortization of our debt discount to interest expense. Interest expense is
calculated each period on the debt balance during the year using the effective
interest method.





Our
effective income tax rate increased to 13.9% for the year ended December 31,
2008 from 2.9% for the year ended December 31, 2007 due to (1) the Company had
an  income in the United States for the year ended December 31, 2008 at a
rate of 34% while nil income for the year ended December 31, 2007; (2) higher
tax holiday rates for the PRC entities for the year ended December 31, 2007 as
compared to the year ended December 31, 2008.





Discontinued
Operations— Comparison for the Years ended December 31, 2007 and
2008





In
December 2009, the Company decided to discontinue operations at our Bangsheng
Chemical Facility and to sell all of its fixed assets and inventories. The
facility ceased production at the end of October 2008. Our Bangsheng Chemical
operation was a component of our consolidated entity, and as such requires
discontinued operations reporting treatment.





A summary
of the operating results of discontinued operations for the year ended December
31, 2008 and 2007 is as follows:





For the Years Ended December 31,2007
                  
                  
                  2008
                  
                  
                  ChangeAmount ($)
                  
                  
                  % of Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  % of Total
                    Revenue
                  
                  
                  Amount ($)
                  
                  
                  (%)Net
Sales
                  
                  53,933,120
                  
                  
                  100.0
                  
                  
                  67,007,450
                  
                  
                  100.0
                  
                  
                  13,074,330
                  
                  
                  24.2Gross
      profit
                  
                  
                  14,650,869
                  
                  
                  
                  27.2
                  
                  
                  
                  21,020,951
                  
                  
                  
                  31.4
                  
                  
                  
                  6,370,082
                  
                  
                  
                  43.5Impairment
      of property, plant and equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,931,253
                  
                  
                  
                  5.9
                  
                  
                  
                  3,931,253
                  
                  
                  
                  -Income
      from discontinued operations before income taxes
                  
                  
                  14,165,415
                  
                  
                  
                  26.3
                  
                  
                  
                  15,758,189
                  
                  
                  
                  23.5
                  
                  
                  
                  1,592,774
                  
                  
                  
                  11.2Income
      tax expense
                  
                  
                  2,337,293
                  
                  
                  
                  4.3
                  
                  
                  
                  2,750,594
                  
                  
                  
                  4.1
                  
                  
                  
                  413,301
                  
                  
                  
                  17.7





Sales of
our coal-based chemical business products 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 $35.5 per metric ton, which was
partially offset by the decreased sales volume by 28,588 metric tons; (2)
additional revenue of $1,150,553 as a result of the increased price of methanol
by $111.6 per metric ton, which was partially offset by decreased sales volume
of 6,376 metric tons; (3) additional revenue of $5,919,751 as a result of the
increased price of liquid ammonia by $144.3 per metric ton, which was partially
offset by decreased sales volume of 14,160 metric tons; (4)additional revenue of
$4,617 as a result of the increased price of ammonia by $16.3 per metric ton,
which was partially offset by decreased sales volume of 93 tons; (5) additional
revenue of $543,401 as a result of the increased price of melamine by $262.9per
metric ton, which was offset by the decreased sales volume by 1,443 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.


-47-





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 raw materials.





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.





Our
effective income tax rate for the Bangsheng operations for the year ended
December 31, 2007 and 2008 was consistent.





Liquidity
and Capital Resources




As of and for the Years ended December 31,2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009Cash
                                    
                                    
                                    26,366,568
                                    
                                    
                                    
                                    114,287,073
                                    
                                    
                                    
                                    115,978,763Accounts receivable,
      net
                                    
                                    
                                    6,075,371
                                    
                                    
                                    
                                    6,806,066
                                    
                                    
                                    
                                    4,600,722Working
      capital
                                    
                                    
                                    26,535,741
                                    
                                    
                                    
                                    112,701,133
                                    
                                    
                                    
                                    114,588,727Total
      cash provided by /(used in) continuing operations:Cash provided by operating
      activities
                                    
                                    
                                    16,886,666
                                    
                                    
                                    
                                    25,505,205
                                    
                                    
                                    
                                    27,978,434Cash used in investing
      activities
                                    
                                    
                                    (38,065,706
                                    )
                                    
                                    
                                    (52,344,883
                                    )
                                    
                                    
                                    (24,290,530
                                    )Cash
      (used in) provided by financing activities
                                    
                                    
                                    (1,995,105
                                    )
                                    
                                    
                                    99,472,240
                                    
                                    
                                    
                                    (1,934,114
                                    )Net
      cash provided by /(used in) discontinued operations:
                                    
                                    
                                    14,085,213
                                    
                                    
                                    
                                    14,758,320
                                    
                                    
                                    
                                    (141,432
                                    )





We
believe, based on our current cash levels as well as the forecast operating cash
flows of 2010, 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 our business. We
anticipate that these expenditures will be funded from working capital and
financing activities. We believe that the capital expenditures may be 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, 2009, our cash balance was $115,978,763 as compared to $114,287,073
as of December 31, 2008.  The increase was primarily due to positive cash
flow from operations partly offset with repurchase of convertible notes and
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 20 days in 2009, 28 days in 2008 and 38 days in 2007. We
established a credit policy granting a 30-90 days credit term in 2009 to
standardize customers. As of December 31, 2009, there was no overdue accounts
receivable.


-48-





Working capital.Our working capital balance fluctuates from period to period, which is
affected by our cash flow from operating activities. Working capital increased
from $112,701,133 as of December 31, 2008 to $114,588,727 as of December 31,
2009 due to the increased cash flow from operating activities.





Cash flows from
operating activities.Cash provided by
operating activities primarily consists of our cash receipts from product sales
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 payments to purchase
raw materials. Cash provided by operating activities for the year ended December
31, 2009 increased to $27,978,434 from $25,505,205 for the year ended December
31, 2008 primarily because of our increased collection of proceeds from the
products sold. Cash provided by operating activities for the year ended December
31, 2008 increased to $25,505,205 from $16,886,666 for the year ended
December 31, 2007 because of increased production capacity of our NPCC facility.
The acquisition consideration of $3,803,060 was paid in January
2010.





Cash used
for investing activities for the year ended December 31, 2009 decreased to
$24,290,530 from $52,344,883 for the year ended December 31, 2008; cash used for
investing activities for the year ended December 31, 2008 increased to
$52,344,883 from $38,065,706 for the year ended December 31, 2007. These changes
in cash flows used for investing activities are primarily due to the timing
of our capacity buildup activities during the three-year period. Phase III
(60,000 Metric Tons) construction of our Shaanxi facility began in the beginning
of 2008 and Phase I construction of our Zibo, Shandong facility began its 60,000
Metric Tons construction at the end of 2008. Construction of our Zibo, Shandong
facility continued into 2009. The Zibo, Shandong facility was put into use at
the end of August, 2009.





Cash
provided by financing activities for the year ended December 31, 2009 was
$1,934,114, which comprised mainly the $2,535,745 of cash paid for the
repurchase of our convertible notes, offset by the issue $601,631 unsecured note
payable to related parties. Cash provided by financing activities for the year
ended December 31, 2008 was mainly attributable to $115,000,000 of cash received
from the issuance of convertible notes, offset by cash paid for debt issuance
costs of $5,859,663 and $9,890,000 cash paid for the repurchase of our
convertible notes in November and December 2008. Cash used in financing
activities for the year ended December 31, 2007 was $1,995,105, which was mainly
due to repayment of loans with related parties.





Discontinued
operations.There were minimum cash
activities in the discontinued operations of our Bangsheng Chemical Facility
during fiscal year 2009. Its cash balance decreased from $21,775,738 at the
beginning of 2009 to $21,634,306 at the end of 2009. The decrease was mainly due
to revenue of approximately $295,899 generated from the sales of residual coal
inventory after it ceased operations in 2008 and the deposit interest of $78,452
earned, offset by remuneration payment of $111,332 to the security personnel,
rental payments of $143,206 to Shengda Group, local income tax payments of
$301,088 for fourth fiscal quarter of 2008 and payments for other miscellaneous
expenses of $14,193.





Contractual
Obligations





As of December 31,
2009




Less than one year
                    
                    
                    1-3 years
                    
                    
                    3-5 years
                    
                    
                    More than 5 years
                    
                    
                    TotalConvertible
      notes-principal
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    90,027,000
                    
                    
                    $
                    90,027,000Long-term
      convertible notes-interest
                    
                    
                    5,401,620
                    
                    
                    
                    10,803,240
                    
                    
                    
                    10,803,240
                    
                    
                    
                    18,455,535
                    
                    
                    
                    45,463,635Operating
      leases
                    
                    
                    190,677
                    
                    
                    
                    381,354
                    
                    
                    
                    381,354
                    
                    
                    
                    1,898,827
                    
                    
                    
                    2,852,212Capital
      commitment
                    
                    
                    386,792
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    386,792Total
                    
                    
                    5,979,089
                    
                    
                    
                    11,184,594
                    
                    
                    
                    11,184,594
                    
                    
                    
                    110,381,362
                    
                    
                    
                    138,729,639




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 subject to
certain conditions.


-49-





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 strategic
investments and acquisition purposes 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.




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, 2009, a 1.0% appreciation of the RMB against the U.S. dollar will
result in an estimated increase of approximately $826,231, in our total
amount of cash, and a 1.0% appreciation of the USD against the RMB will result
in a decrease of approximately $809,870 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, 2009, 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
2.8% in 2006, 6.5% in 2007 and 5.9% in 2008. Because of the recent global
economic crisis, the danger of inflation is subsiding. For example, in December
2009, the rate of inflation in China was only 1.9%.


-50-




Item
8. Financial Statements And Supplementary Data




Quarterly
financial information is presented as follows:





2009Three Months EndedMarch 31
                
                
                June 30
                
                
                September 30
                
                
                December 31Net
      Sales
                
                $
                20,672,353
                
                
                $
                26,018,533
                
                
                $
                25,376,060
                
                
                $
                30,054,858Gross
      Profit
                
                
                8,487,126
                
                
                
                11,386,120
                
                
                
                10,080,579
                
                
                
                11,949,669Income
      from continuing operations
                
                
                5,353,792
                
                
                
                6,630,891
                
                
                
                4,848,391
                
                
                
                6,721,083(Loss)
      from discontinued operations
                
                
                (78,152
                )
                
                
                (95,726
                )
                
                
                (217,980
                )
                
                
                (57,692
                )Net
      income
                
                
                5,275,640
                
                
                
                6,535,165
                
                
                
                4,630,411
                
                
                
                6,663,391Basic
      Earning (Loss) per Common ShareIncome
      from continuing operations
                
                
                0.10
                
                
                
                0.12
                
                
                
                0.09
                
                
                
                0.12(Loss)
      from discontinued operations
                
                
                (0.00
                )
                
                
                (0.00
                )
                
                
                (0.00
                )
                
                
                (0.00
                )Net
      income per common share
                
                
                0.10
                
                
                
                0.12
                
                
                
                0.09
                
                
                
                0.12Diluted
      Earnings per Common ShareIncome
      from continuing operations
                
                
                0.09
                
                
                
                0.12
                
                
                
                0.09
                
                
                
                0.12(Loss)
      from discontinued operations
                
                
                (0.00
                )
                
                
                (0.00
                )
                
                
                (0.00
                )
                
                
                (0.00
                )Net
      income per common share
                
                
                0.09
                
                
                
                0.12
                
                
                
                0.09
                
                
                
                0.12





2008Three Months EndedMarch 31
                
                
                June 30
                
                
                September 30
                
                
                December 31Net
      Sales
                
                $
                13,424,531
                
                
                $
                19,098,980
                
                
                $
                25,526,971
                
                
                $
                24,369,207Gross
      Profit
                
                
                5,511,619
                
                
                
                7,782,246
                
                
                
                10,799,455
                
                
                
                10,010,127Income
      from continuing operations
                
                
                3,896,460
                
                
                
                4,486,627
                
                
                
                4,786,007
                
                
                
                9,851,613Income
      (loss) from discontinued operations
                
                
                3,518,526
                
                
                
                5,334,490
                
                
                
                4,378,397
                
                
                
                (223,818
                )Net
      income
                
                
                7,414,986
                
                
                
                9,821,117
                
                
                
                9,164,404
                
                
                
                9,627,795Basic
      Earning per Common ShareIncome
      from continuing operations
                
                
                0.07
                
                
                
                0.08
                
                
                
                0.09
                
                
                
                0.18Income
      (loss) from discontinued operations
                
                
                0.07
                
                
                
                0.10
                
                
                
                0.08
                
                
                
                (0.01
                )Net
      income per common share
                
                
                0.14
                
                
                
                0.18
                
                
                
                0.17
                
                
                
                0.17Diluted
      Earnings per Common ShareIncome
      from continuing operations
                
                
                0.07
                
                
                
                0.08
                
                
                
                0.09
                
                
                
                0.12Income
      (loss) from discontinued operations
                
                
                0.07
                
                
                
                0.10
                
                
                
                0.08
                
                
                
                (0.00
                )Net
      income per common share
                
                
                0.14
                
                
                
                0.18
                
                
                
                0.17
                
                
                
                0.12





2007Three Months EndedMarch 31
                
                
                June 30
                
                
                September 30
                
                
                December 31Net
      Sales
                
                $
                8,975,400
                
                
                $
                10,828,104
                
                
                $
                13,123,032
                
                
                $
                13,795,137Gross
      Profit
                
                
                3,684,143
                
                
                
                4,622,790
                
                
                
                5,722,670
                
                
                
                5,879,483Income
      from continuing operations
                
                
                2,770,631
                
                
                
                3,599,068
                
                
                
                4,626,658
                
                
                
                4,205,866Income
      from discontinued operations
                
                
                2,635,997
                
                
                
                2,433,819
                
                
                
                3,184,602
                
                
                
                3,573,704Net
      income
                
                
                5,406,628
                
                
                
                6,032,887
                
                
                
                7,811,260
                
                
                
                7,779,570Basic
      Earning per Common ShareIncome
      from continuing operations
                
                
                0.05
                
                
                
                0.07
                
                
                
                0.08
                
                
                
                0.08Income
      from discontinued operations
                
                
                0.05
                
                
                
                0.04
                
                
                
                0.06
                
                
                
                0.07Net
      income per common share
                
                
                0.10
                
                
                
                0.11
                
                
                
                0.14
                
                
                
                0.15Diluted
      Earnings per Common ShareIncome
      from continuing operations
                
                
                0.05
                
                
                
                0.07
                
                
                
                0.08
                
                
                
                0.08Income
      from discontinued operations
                
                
                0.05
                
                
                
                0.04
                
                
                
                0.06
                
                
                
                0.07Net
      income per common share
                
                
                0.10
                
                
                
                0.11
                
                
                
                0.14
                
                
                
                0.15





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.


-51-


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
effective as of December 31, 2009.





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





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, 2009, management has
determined that our internal control over financial reporting was
effective.  We acquired Chaodong in December 2009, and management excluded
from its assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2009. Chaodong’s internal control over financial
reporting associated with total assets of $4,593,970 and nil revenue, which was
included in the consolidated financial statements of the Company.  We also
did not assess the effectiveness of the internal control over financial
reporting of Chaodong.  The Company’s evaluation of the effectiveness of
our internal control over financial reporting is based on the criteria
established in COSO's Internal Control — Integrated Framework.





Our
independent registered public accounting firm, KPMG has audited the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2009, as stated in their report, which appears below.




(c)
Changes in internal control over financial reporting.





As
previously reported under “Item 4 — Controls and Procedures” in our
quarterly report on Form 10-Q for the quarter ended September 30,
2009, management concluded that our internal control over financial reporting
was not effective based on the material weaknesses identified in the Company’s
internal control over financial reporting described in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008. 
Management has continued to work on remediation efforts since the filing of that
report.


-52-





During
the quarter ended December 31, 2009, changes in our internal control over
financial reporting occurred related to the two previously reported material
weaknesses as follows:





·
            Management had concluded that 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.As of
      December 31, 2009, management has concluded thatthe severity ofthis previously reported material
      weakness has beensufficientlyreduced andremediatedsuch that the
      previouslyreported
      material weakness is no longer a material weakness.We have designed adequate
      policies and procedures and hired and trainedenoughtechnically-qualified personnel
      to properly account for and disclose non-routine transactions.In addition, as
      part of the 2009
      period-end financial closing procedures, management utilized a monthly
      monitoring process. Based on these reviews, which are part of the control
      process, non-routine transactions and related disclosure controls are
      deemed to be operating effectively.





·
            Management had concluded that 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 analysis 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.As of
      December 31, 2009, management has concluded thatthe severity ofthis previously reported material
      weakness hasbeensufficientlyreduced
      andremediatedsuch that
      the previously reported material weakness is no longer a material
      weakness.We have designed policies and
      procedures to ensure the maintenance of tax records, timely reconciliation
      of income tax accountsand adequate analysis and review
      of deferred tax calculations and hiredqualifiedthird party specialists to
      perform these procedures.In addition, as part of the 2009
      period-end financial closing procedures, management utilized a monthly
      monitoring process.
      Based on these reviews, which are part of the control process, tax
      records, timely reconciliation of income tax accounts and adequate
      analysis and review of deferred tax calculations and related disclosure
      controls are deemed to be operating effectively.


-53-




Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Shareholders
 ShengdaTech,
Inc.:
 
 We have
audited ShengdaTech, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). ShengdaTech, Inc.’s 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 Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of the Company’s 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.
 
 In our
opinion, ShengdaTech, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated
Framework issued by COSO.
 
 The
Company acquired Anhui Chaodong Nanomaterials Science and Technology Co., Ltd.
(Chaodong) during 2009, and management excluded from its assessment of the
effectiveness of ShengdaTech, Inc.’s internal control over financial reporting
as of December 31, 2009, Chaodong’s internal control over financial reporting
associated with total assets of $4,593,970 and nil revenue, included in the
consolidated financial statements of the ShengdaTech, Inc. and
subsidiaries  as of and for the year ended December 31, 2009. Our
audit of internal control over financial reporting of ShengdaTech, Inc. also
excluded an evaluation of the internal control over financial reporting of
Chaodong.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of ShengdaTech,
Inc. and subsidiaries of December 31, 2009 and 2008, and the related
consolidated statements of income, shareholders’ equity and comprehensive
income, and cash flows for the years then ended, and our report dated March 15,
2010 expressed an unqualified opinion on those consolidated financial
statements.
 
 KPMG
 Hong
Kong, China
 March 15,
2010




-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
                  
                  48
                  
                  President,
      Chief Executive Officer and DirectorAndrew
      Weiwen Chen
                  
                  42
                  
                  Chief
      Financial OfficerAnhui
      Guo
                  
                  40
                  
                  Director
      and Chief Operating OfficerDongquan
      Zhang
                  
                  69
                  
                  DirectorA.
      Carl Mudd
                  
                  66
                  
                  DirectorSheldon
      B. Saidman
                  
                  67
                  
                  DirectorLei
      Du
                  
                  31
                  
                  President
      of Shandong Haize Nanomaterials Co., LtdYong
      Zhao
                  
                  37
                  
                  President
      of Shaanxi Haize Nanomaterials Co., Ltd.Gongbo
      Wang
                  
                  32
                  
                  President
      of Zibo Jiaze Nanomaterials Co., Ltd.Zhendong
      Li
                  
                  31
                  
                  President
      of Chaodong Nanomaterials Science and Technology Co.,
  Ltd.





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.  We believe Mr. Chen’s qualifications to serve on
our board include his extensive knowledge of the Company as founder, Chairman,
CEO, and President and his understanding and in-depth experience in dealing in
the markets served.  In addition, we believe that his vision and
progressive leadership will continue to positively influence the Company’s
profitable revenue growth and corresponding profitability, and his background
positions him to grow the Company both organically and by
acquisition.





Mr. Andrew Weiwen Chen brings
over 12 years of senior management experience in accounting, auditing, financial
analysis and reporting for both public and private companies in China and the
United States. From September 2008  to March 2009, Mr. Chen served as
Chief Financial Officer at Trony Solar Holdings in Shenzhen, China, where he
played a leading role in the completion of a $45 million private equity
financing and supported the Company's future plans for an initial public
offering ("IPO"). From July 2007 to August 2008, he also worked as Chief
Financial Officer and vice president at China Nepstar Chain Drug Store Ltd., a
NYSE-listed leading pharmacy chain in China, where he gained significant
experience in Sarbanes Oxley ("SOX") implementation and maintenance, SEC
reporting and disclosure, the IPO process and investor relations. From June 2000
to February 2007, Mr. Chen also served as Chief Financial Officer at YRC
Worldwide Inc.'s China International Transportation Operations and as financial
controller and senior auditor at Honeywell International Inc. in the United
States and China. He began his accounting/finance career with
PricewaterhouseCoopers in their New York and Atlanta offices. Mr. Chen holds a
Master's degree in Accountancy and an MBA in Finance from the University of
Alabama at Tuscaloosa, U.S. He also has a Bachelor of Arts degree from Xiamen
University, China.





Ms. Anhui Guo has served as
our chief operating officer since April 2009.  She had served as our
chief financial officer from March 2006 to April 2009, has served as our 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.  We believe Ms. Guo’s
qualifications to serve on our board include her extensive knowledge of the
Company as a long-term executive, which gives her detailed understanding of the
complexities of the operation.  Her experience allows her to direct
the operations of the Company and her financial experience provides valuable
insights both in directing the business operations and in serving on the board
of directors.


-55-





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.  We believe Mr. Zhang’s qualifications to serve on our board
include his extensive knowledge of the Company, his experience serving on boards
of other companies, and his extensive knowledge and experience of the markets in
which we conduct business.  Furthermore, Mr. Zhang is a professional
in the chemical industry and provides technical support to the board, which
support is particularly important when evaluating new ventures proposed to the
board.





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 and Member of the Compensation Committee and Nominating &
Corporate Governance Committee of 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,
holds a business degree from St. Edward's University and a
Certification of Director Education – The National Association of Corporate
Directors Institute.  We believe Mr. Mudd’s qualifications to serve on
our board include his extensive knowledge of the Company, his international
management experience of both public and privately held companies and his
in-depth knowledge of finance, accounting, and general management.





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 owns and operates a business
management consulting practice and serves as a Member of Board of Directors at
Large of Roscoe Medical, Inc., a privately held company owned by River
Associates Investments, LLC, a private equity group.. He holds a bachelor’s
degree in journalism and public relations from The University of
Maryland.  We believe Mr. Saidman’s qualifications to serve on our
board include his extensive knowledge of the Company, his experience serving on
boards of other companies and the unique perspective he brings to various issues
considered by the board, particularly related to sales, marketing, and general
management.





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 the 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. Gongbo Wang has served as
president of Zibo Jiaze since August 2009. From December 2008 to
August 2009, Mr. Wang served as the Director of the Project Department of
Zibo Jiaze. From July 2007 to December 2008, he served as vice president of
Shaanxi Haize. From January 2007 to July 2007, he served as vice president of
Shandong Haize. From January 2005 and January 2007, he served as Director of the
Development Department of Shandong Shengda Technology Co., Ltd. (“Shengda
Group”), a related party of ShengdaTech, Inc. And from April 1998 to January
2005, he served as Laboratory Director and Workshop Manager. of the
Subsidiary of Shengda Group. He graduated from Shandong University, with a
degree in law.


-56-





Mr. Zhendong Li has served as
President of Anhui Chaodong Nanomaterials Co., Ltd. since January 2010. From May
2009 to December 2009, he served as Vice President of Shaanxi Haize
Nanomaterials Co., Ltd. From July 2007 to April 2009, he worked in the R&D
Center of ShengdaTech, Inc. Mr. Li graduated from Xi Bei University, and holds a
master's degree in engineering.





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”. Mr. Xiangzhi
Chen serves as both our Chief Executive Officer and the Chairman of the Board.
We believe that combining the role of Chairman and CEO is appropriate for our
operations because Mr. Chen is most familiar with our business strategy and
our industry. We also believe that the combined role of Chairman and CEO
facilitates the flow of information between the board and management and helps
promote effective corporate governance. We do not have a lead independent
director, but have independent board members that bring experience, oversight
and expertise from outside the Company and our industry.





Audit Committee. The
Audit Committee currently comprises Mr. A. Carl Mudd, Mr. Dongquan Zhang
and  Mr. Sheldon B. Saidman, with Mr. 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.





The Audit
Committee held seven (7) meetings for year 2009 and the attendance rates for all
committee members are 100%.





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 Mr.
Dongquan Zhang, Mr. A. Carl Mudd and Mr. Sheldon B. Saidman as the chairman, all
of whom are “independent” directors.





The
Compensation Committee held one (1) meeting for year 2009 and the
attendance rates for all committee members was 100%.





The Board
or the Management has not used any service of any compensation
consultants.





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.


-57-





The Company has no definitive policy on
diversity.  With the exception of two independent directors who are
American citizens, the Company is managed by executives of Chinese
citizenship and actively staffs the Company at all levels with employees
that are citizens of China.  Currently, the board believes that there
exists no need for a diversity policy for employees or directors because the
Company is diversified when compared to American-based enterprises. 
If the Company expands its markets to North America, or seek to expand or
make a changes to its Board members, we will develop a policy containing
the elements of an acceptable practice that conforms to standard
procedures that assure fair and equal treatment of prospective and current
employees.





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 2009
and the attendance rates for all committee members are 100%.




The Board’s Role in Risk
Oversight. The Board has an active role in overseeing our
risk management.  The Board’s role in the Company’s risk oversight process
includes receiving regular reports from members of senior management on areas of
material risk to the Company, including operational, financial, legal,
regulatory, and strategic risks.  The Board has formed a Risk
Management Committee to coordinate with management to identify, assess and
oversee remediation of high-level risks.  The Risk Management
Committee receives these reports from the appropriate senior manager within
the organization to enable it to understand the Company’s risk identification,
risk management and risk mitigation strategies. Upon receiving such reports, the
Board, through the Risk Management Committee, provides such guidance as it deems
necessary.





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).




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 Mr. Andrew Chen, CFO,
ShengdaTech, Inc., Unit 2003, East Tower, Zhong Rong Heng Rui International
Plaza, 620 Zhang Yang Road, Pudong District, Shanghai 200122, 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
two components, base salary, and a performance-based portion, which otherwise
may be defined as a bonus. The base salary considers seniority, past salary,
competitive environment, contributions to the business; the performance-based
portion is the amount that may be earned by an employee according to their
individual performance against pre-defined objectives.  The purpose is
to effectively motivate the executive to reach individual goals, which
ultimately contributes to the Company’s overall success.  The determination
of the base salary and performance-based compensation is a calculation made on
total compensation. The base salary is a fixed amount, accounting for 65% of the
total compensation, while the performance-based compensation portion is designed
to be variable based on performance and is targeted at 35% of the total
compensation.  In addition, the presidents of the three subsidiaries
also received a production-related subsidy in 2009, which is listed as “All
Other Compensation” in the Compensation Table below.  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.


-58-





The
Company’s performance-based compensation plan promotes individual
accomplishments as well as contributions to the overall operation. Judgment of
performance and the consequential level of bonuses earned is based on
achievements in executing job tasks and the general performance of the Company
measured against the financial plan for the bonus year.  The
percentage of the performance-based portion is to be determined by the
employee’s immediate manager with the approval of the CEO.   Mr.
Chen’s bonus is determined by the Board of Directors on recommendation of the
Compensation Committee.  Based on the Company exceeding  all
financial objectives set in the budget year, including revenue, net earnings,
and earnings per share, the board has awarded the full bonus payment to Mr.
Chen.  All other bonuses will be decided at the end of the year after
appropriate evaluation and assessment of success against set objectives are
measured. All bonus money earned will be paid following audited results of
Company financial statements.





Compensation Policies and Practices
as Related to Risk Management





Although
the company is organized into separate and independent operating units, the
“risk profile” itself rests with the Named Executive Officer
group.  Furthermore, the Company’s compensation structure does not
promote or reward risk taking by any single executive, or group of
executives.  All material decision, by organizational structure and
decision making processes, policies, and practices, are made by the executive
team and implemented only with Board approval. Such decisions are made after
careful evaluation and assessment of inherent risks, which could result from the
execution of any one decision.  As a result of the organizational
structure, strict accountability, span of control, and the well-defined
processes in place, it would be highly unlikely, if not impossible, for
decisions to be made that may possibly place the Company at risk.





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
                                                            
                                                            2009
                                                            
                                                            
                                                            195,000
                                                            
                                                            105,000
                                                            
                                                            
                                                            0
                                                            
                                                            0
                                                            
                                                            
                                                            300,0002008
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            $
                                                            0
                                                            *2007
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            
                                                            0
                                                            *Andrew
      Weiwen Chen, CFO (from April 15, 2009)
                                                            
                                                            2009
                                                            
                                                            
                                                            92,500
                                                            
                                                            49,850
                                                            
                                                            
                                                            0
                                                            
                                                            0
                                                            
                                                            
                                                            142,350Anhui
      Guo, COO
                                                            
                                                            2009
                                                            
                                                            
                                                            78,000
                                                            
                                                            42,000
                                                            
                                                            
                                                            0
                                                            
                                                            0
                                                            
                                                            
                                                            120,0002008
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            $
                                                            0
                                                            *2007
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            
                                                            $
                                                            0
                                                            *Lei
      Du, COO Shandong Haize
                                                            
                                                            2009
                                                            
                                                            
                                                            43,300
                                                            
                                                            23,350
                                                            
                                                            
                                                            0
                                                            
                                                            14,350
                                                            
                                                            
                                                            81,0002008
                                                            
                                                            $
                                                            27,083
                                                            
                                                            
                                                            
                                                            $
                                                            14,583
                                                            
                                                            
                                                            
                                                            $
                                                            41,666Yong
      Zhao COO Shaan’xi Haize
                                                            
                                                            2009
                                                            
                                                            
                                                            43,300
                                                            
                                                            23,350
                                                            
                                                            
                                                            0
                                                            
                                                            14,350
                                                            
                                                            
                                                            81,0002008
                                                            
                                                            $
                                                            65,000
                                                            
                                                            
                                                            
                                                            $
                                                            35,000
                                                            
                                                            
                                                            
                                                            $
                                                            100,0002007
                                                            
                                                            $
                                                            65,000
                                                            
                                                            
                                                            
                                                            
                                                            35,000
                                                            
                                                            
                                                            
                                                            
                                                            100,000Xukui
      Chen  COO Shandong Bangsheng
                                                            
                                                            2009
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            **2008
                                                            
                                                            $
                                                            52,000
                                                            
                                                            
                                                            
                                                            $
                                                            28,000
                                                            
                                                            
                                                            
                                                            $
                                                            80,0002007
                                                            
                                                            $
                                                            52,000
                                                            
                                                            
                                                            
                                                            $
                                                            28,000
                                                            
                                                            
                                                            
                                                            $
                                                            80,000Gongbo
      Wang COO Zibo Jiaze (from August 2009)
                                                            
                                                            2009
                                                            
                                                            
                                                            12,890
                                                            
                                                            6,940
                                                            
                                                            
                                                            
                                                            
                                                            4,270
                                                            
                                                            
                                                            24,100
                                                            ***




-59-





*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.


** Mr.
Xukui Chen’s employment with the Company was terminated as of October,
2008.


*** Mr.
Gongbo Wang was named President of Zibo Jiaze Nanomaterials Co., Ltd. in
2009.


****Bonuses
are listed here for planning purposes and it can be assumed that all or part of
the total allocated bonus amount will be paid in 2010 following evaluation of
performances by respective NEOs.





The
Compensation Committee reviewed and approved the compensation paid, or to be
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 2009





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 2009.





Option
Exercises and Stock Vested





No
options were exercised and no shares of stock were vested in 2009.





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 2009.





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.





Directors
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, 2009.


-60-




Name
                                
                                Fees
                                  Earned or
                                  Paid in
                                  Cash
                                  ($)
                                
                                
                                Total Plan
                                  Compensation
                                  ($)A.
      Carl Mudd
                                
                                
                                75,000
                                
                                
                                
                                75,000Sheldon
      B. Saidman
                                
                                
                                35,000
                                
                                
                                
                                35,000Dongquan
      Zhang
                                
                                
                                10,000
                                
                                
                                
                                *10,000





*Mr.
Zhang’s compensation was reported in error and was overstated in 2007 and
2008.





Independent
directors will receive compensation for their service on the board and board
committees consisting of (i) an annual retainer of $35,000 for Messrs. Saidman
and Mudd, and $10,000 for Mr. Zhang (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. Mr. Mudd received an extra $10,000 as compensation for
the position of Chairman of Audit Committee. Effective April 1, 2008,
Mr.  Mudd was selected by the board to serve as Lead Director and
received quarterly $10,000 and 5,000 stock options this service. Effective the
fourth fiscal quarter of 2009, after six quarters, the board determined that the
Lead Director position was no longer necessary as the requisite support was
provided by the Company’s bilingual CFO. The aggregate value of the 30,000 stock
options earned was $40,100 using the Black-Scholes option pricing model. For
detailed disclosures, please see page 24 of the Financial Statement on this Form
10-K under the caption “Options” in Note 13, Share-based
compensation.





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 Discussion and Analysis be included in the
Company’s annual report on Form 10-K. The members of the Compensation
Committee are Mr. Dongquan Zhang, A. Carl Mudd, and Sheldon B. 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 15, 2010, 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 15, 2010.




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
                        
                        
                        35,000**
                        
                        —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
                        %




-61-





The
address for all these officers and internal directors is Unit 2003, East Tower,
Zhong Rong Heng Rui International Plaza, 620 Zhang Yang Road, Pudong District,
Shanghai 200122, People's Republic of China.


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


**Represents
the number of shares of common stock plus options to purchase 30,000 shares of
common stock that is exercisable within 60 days from March 15,
2010.





Item
13. Certain Relationships And Related Transactions and Director
Independence





On
December 31, 2009 the Company owed Shandong Shengda Technology Co., Ltd.
$849,138 comprising primarily of facilities rent due from Shandong Haize, the
Company’s subsidiary and related party loans between Faith Bloom and Shandong
Shengda Technology Co. Ltd., which is described in the Notes to our Financial
Statements under the section Due to Related Parties.  Mr. Xiangzhi
Chen, Chairman and CEO of the Company, is the controlling shareholder and
chairman of Shandong Shengda Technology Co., Ltd.





Item
14. Principal Accounting Fees And Services





KPMG has
audited our financial statements for the 2009 and 2008 fiscal years. Hansen,
Barnett & Maxwell, P.C. (“Hansen”) has reviewed our financial statements
included in the three Forms 10-Q 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, 2009 and
2008 are $685,584 and $490,479, respectively. 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, 2009 or 2008, respectively.





Tax Fees. We engaged Hansen to
provide services for income tax returns in the U.S. for the fiscal year end
December 31, 2009. The fees to be incurred is estimated to be $10,000. We
engaged KPMG to provide services for income tax returns in the U.S. for the
fiscal year ended December 31, 2008. The fee incurred was $24,850.




All Other Fees. We engaged
KPMG to provide services for tax planning and financial due diligence on
potential acquisition projects. For the fiscal years ended December 31, 2009,
the service fees billed to us is $78,610. There are no other fees for either
audit-related or non-audit services billed by KPMG, for the fiscal years ended
December 31, 2008. We engaged Hansen to provide services for our tax accounting
for the fiscal year ended December 31, 2009. The service fees incurred is
$4,000. There are no other fees for either audit-related or non-audit services
billed by Hansen, for the fiscal years ended December 31, 2008.





PART
IV




Item
15. Exhibits And Financial Statement Schedules





(a)
(1) Financial Statements




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


-62-





PageReports
      of Independent Registered Public Accounting Firm
                  
                  F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  F-4Consolidated
      Statements of Income and Comprehensive Income for the Years Ended December
      31, 2009, 2008 and 2007
                  
                  F-5Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007
                  
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                  
                  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.




-63-




SHENGDATECH,
INC. AND SUBSIDIARIES





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Reports
      of Independent Registered Public Accounting Firms
                  
                  F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  F-4Consolidated
      Statements of Income for the Years Ended December 31, 2009, 2008 and
      2007
                  
                  F-5Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income for the
      Years Ended December 31, 2009, 2008, and 2007
                  
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and
      2007
                  
                  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 sheets of ShengdaTech, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of income, shareholders’ equity and comprehensive income, and cash
flows for the years 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
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ShengdaTech, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
 
 As
discussed in Notes 3 and 11 to the consolidated financial statements, the
Company retrospectively changed its method of accounting for convertible notes
due to the adoption of a new accounting standard issued by the Financial
Accounting Standards Board Accounting Standards Codification Subtopic
470-20, Debt with Conversion
and Other Options, as of January 1, 2009.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), ShengdaTech Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 15, 2010 expressed an unqualified
opinion on the effectiveness of the Company's  internal control over
financial reporting.
 
 KPMG
 Hong
Kong, China
 March 15,
2010




F-2





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and the Shareholders


ShengdaTech,
Inc.





We have
audited the accompanying consolidated statements of income, shareholders’ equity
and comprehensive income, and cash flows of ShengdaTech, Inc. and subsidiaries
(the Company) for the year ended December 31, 2007. The Company’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, 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 results of operations of ShengdaTech, Inc. and
subsidiaries and their cash flows for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.





HANSEN,
BARNETT & MAXWELL, P.C.





Salt Lake
City, Utah


March 14,
2008, except for Note 17, Discontinued Operations for the year ended December
31, 2007,


as
to which the date is March 13, 2010





F-3





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December31,Note
                    
                    
                    2009
                    
                    
                    2008As adjusted(Note 3)ASSETSCurrent
      assets:Cash
                    
                    
                    
                    
                    $
                    115,978,763
                    
                    
                    $
                    114,287,073Accounts
      receivable
                    
                    
                    
                    
                    
                    4,600,722
                    
                    
                    
                    6,806,066Inventories
                    
                    (5)
                    
                    
                    
                    2,018,283
                    
                    
                    
                    2,310,995Prepaid
      expenses and other receivables
                    
                    
                    
                    
                    
                    3,947,086
                    
                    
                    
                    510,825Income
      tax refund receivable
                    
                    (8)
                    
                    
                    
                    1,455,906
                    
                    
                    
                    -Current
      assets of discontinued operations
                    
                    (17)
                    
                    
                    
                    801,983
                    
                    
                    
                    962,942Assets
      held for sale
                    
                    (17)
                    
                    
                    
                    1,718,475
                    
                    
                    
                    -Total
      current assets
                    
                    
                    
                    
                    
                    130,521,218
                    
                    
                    
                    124,877,901Property,
      plant and equipment, net
                    
                    (6)
                    
                    
                    
                    123,099,860
                    
                    
                    
                    98,344,722Land
      use rights
                    
                    
                    
                    
                    
                    15,432,743
                    
                    
                    
                    15,710,333Intangible
      assets
                    
                    
                    
                    
                    
                    280,329
                    
                    
                    
                    -Debt
      issuance costs
                    
                    (11)
                    
                    
                    
                    1,720,209
                    
                    
                    
                    3,096,073Non-current
      assets of discontinued operations
                    
                    (17)
                    
                    
                    
                    -
                    
                    
                    
                    1,777,800Total
      assets
                    
                    
                    
                    
                    $
                    271,054,359
                    
                    
                    $
                    243,806,829LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    
                    
                    
                    $
                    3,998,532
                    
                    
                    $
                    4,493,551Accrued
      expenses and other payables
                    
                    (7)
                    
                    
                    
                    4,737,356
                    
                    
                    
                    4,342,006Payable
      for acquisition
                    
                    (4)
                    
                    
                    
                    3,803,060
                    
                    
                    
                    -Income
      taxes payable
                    
                    (8)
                    
                    
                    
                    60,573
                    
                    
                    
                    1,588,895Due
      to related parties
                    
                    (10)
                    
                    
                    
                    1,572,427
                    
                    
                    
                    1,737,404Current
      liabilities of discontinued operations
                    
                    (17)
                    
                    
                    
                    42,068
                    
                    
                    
                    14,912Total
      current liabilities
                    
                    
                    
                    
                    
                    14,214,016
                    
                    
                    
                    12,176,768Long-term
      convertible notes
                    
                    (11)
                    
                    
                    
                    79,298,539
                    
                    
                    
                    77,926,310Non-current
      income taxes payable
                    
                    (8)
                    
                    
                    
                    1,598,237
                    
                    
                    
                    974,131Note
      payable to related party
                    
                    (10)
                    
                    
                    
                    601,631
                    
                    
                    
                    -Deferred
      income tax liabilities
                    
                    (8)
                    
                    
                    
                    4,443,810
                    
                    
                    
                    5,387,262Non-current
      liabilities of discontinued operations
                    
                    (17)
                    
                    
                    
                    294,708
                    
                    
                    
                    293,977Total
      liabilities
                    
                    
                    
                    
                    
                    100,450,941
                    
                    
                    
                    96,758,448Shareholders'
      equity:
                    
                    (12)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
                    
                    
                    
                    
                    
                    37,132,442
                    
                    
                    
                    37,112,269Statutory
      reserves
                    
                    
                    
                    
                    
                    8,455,328
                    
                    
                    
                    8,130,601Retained
      earnings
                    
                    
                    
                    
                    
                    111,197,045
                    
                    
                    
                    88,417,165Accumulated
      other comprehensive income
                    
                    
                    
                    
                    
                    13,818,061
                    
                    
                    
                    13,387,804Total
      shareholders' equity
                    
                    
                    
                    
                    
                    170,603,418
                    
                    
                    
                    147,048,381Commitments
      and contingencies
                    
                    (9)Total
      liabilities and shareholders' equity
                    
                    
                    
                    
                    $
                    271,054,359
                    
                    
                    $
                    243,806,829




See
accompanying notes to the consolidated financial statements





F-4





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME





FortheYearsEndedDecember31,Note
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007As adjusted(Note 3)Net
      sales
                      
                      
                      
                      
                      $
                      102,121,804
                      
                      
                      $
                      82,419,689
                      
                      
                      $
                      46,721,673Cost
      of goods sold
                      
                      
                      
                      
                      
                      60,218,310
                      
                      
                      
                      48,316,242
                      
                      
                      
                      26,812,587Gross
      profit
                      
                      
                      
                      
                      
                      41,903,494
                      
                      
                      
                      34,103,447
                      
                      
                      
                      19,909,086Operating
      expenses:Selling
                      
                      
                      
                      
                      
                      2,103,822
                      
                      
                      
                      2,438,908
                      
                      
                      
                      1,680,259General
      and administrative
                      
                      
                      
                      
                      
                      5,669,923
                      
                      
                      
                      3,074,051
                      
                      
                      
                      2,658,806Total
      operating expenses
                      
                      
                      
                      
                      
                      7,773,745
                      
                      
                      
                      5,512,959
                      
                      
                      
                      4,339,065Operating
      income
                      
                      
                      
                      
                      
                      34,129,749
                      
                      
                      
                      28,590,488
                      
                      
                      
                      15,570,021Other
      income (expense):Interest
      income
                      
                      
                      
                      
                      
                      685,858
                      
                      
                      
                      132,423
                      
                      
                      
                      94,643Interest
      expense
                      
                      
                      
                      
                      
                      (10,662,252
                      )
                      
                      
                      (7,456,418
                      )
                      
                      
                      -Gain
      on extinguishment of long-term convertible notes
                      
                      (11)
                      
                      
                      
                      1,624,844
                      
                      
                      
                      5,511,487
                      
                      
                      
                      -Gain
      on bargain purchase
                      
                      (4)
                      
                      
                      
                      619,466
                      
                      
                      
                      -
                      
                      
                      
                      -Other
      expense, net
                      
                      
                      
                      
                      
                      (121,976
                      )
                      
                      
                      (51,604
                      )
                      
                      
                      (12,094
                      )Other
      (expense) income , net
                      
                      
                      
                      
                      
                      (7,854,060
                      )
                      
                      
                      (1,864,112
                      )
                      
                      
                      82,549Income
      from continuing operations before income taxes
                      
                      
                      
                      
                      
                      26,275,689
                      
                      
                      
                      26,726,376
                      
                      
                      
                      15,652,570Income
      tax expense
                      
                      (8)
                      
                      
                      
                      2,721,532
                      
                      
                      
                      3,705,669
                      
                      
                      
                      450,347Income
      from continuing operations
                      
                      
                      
                      
                      
                      23,554,157
                      
                      
                      
                      23,020,707
                      
                      
                      
                      15,202,223Discontinued
      operations
                      
                      (17)(Loss)
      income from discontinued operations before income taxes
                      
                      
                      
                      
                      
                      (449,550
                      )
                      
                      
                      15,758,189
                      
                      
                      
                      14,165,415Income
      tax expense
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      2,750,594
                      
                      
                      
                      2,337,293(Loss)
      income from discontinued operations
                      
                      
                      
                      
                      
                      (449,550
                      )
                      
                      
                      13,007,595
                      
                      
                      
                      11,828,122Net
      income
                      
                      
                      
                      
                      $
                      23,104,607
                      
                      
                      $
                      36,028,302
                      
                      
                      $
                      27,030,345Basic
      earnings per share:
                      
                      (14)Income
      from continuing operations
                      
                      
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.42
                      
                      
                      $
                      0.28(Loss)
      income from discontinued operations
                      
                      
                      
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.24
                      
                      
                      $
                      0.22Net
      income per share
                      
                      
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.66
                      
                      
                      $
                      0.50Diluted
      earnings per share:
                      
                      (14)Income
      from continuing operations
                      
                      
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.39
                      
                      
                      $
                      0.28(Loss)
      income from discontinued operations
                      
                      
                      
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.21
                      
                      
                      $
                      0.22Net
      income per share
                      
                      
                      
                      
                      $
                      0.43
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.50Weighted-average
      shares outstanding:Basic
                      
                      
                      
                      
                      
                      54,202,036
                      
                      
                      
                      54,202,036
                      
                      
                      
                      54,107,408Diluted
                      
                      
                      
                      
                      
                      54,204,923
                      
                      
                      
                      62,205,660
                      
                      
                      
                      54,188,410







F-5





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME





AccumulatedAdditional
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Statutory
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Shareholders'
                  
                  
                  ComprehensiveShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Reserves
                  
                  
                  Earnings
                  
                  
                  Income
                  
                  
                  Equity
                  
                  
                  IncomeBalance
      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
                  
                  
                  $
                  27,030,345Foreign
      currency translation adjustment, net of nil tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,051,227
                  
                  
                  
                  5,051,227
                  
                  
                  
                  5,051,227$
                  32,081,572Appropriation
      to statutory reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,341,040
                  
                  
                  
                  (2,341,040
                  )
                  
                  
                  -
                  
                  
                  
                  -Exercise
      of warrants
                  
                  
                  106,933
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Distribution
      to shareholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36,028,302
                  
                  
                  
                  -
                  
                  
                  
                  36,028,302
                  
                  
                  $
                  36,028,302Foreign
      currency translation adjustment, net of nil tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,521,093
                  
                  
                  
                  6,521,093
                  
                  
                  
                  6,521,093$
                  42,549,395Appropriation
      to statutory reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,488,182
                  
                  
                  
                  (2,488,182
                  )
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of convertible notes, as adjusted (See Note 3)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,214,953
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,214,953Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  58,945
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  58,945Excess
      tax benefit from exercise of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  221,903
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  221,903Balance
      as of December 31, 2008
                  
                  
                  54,202,036
                  
                  
                  
                  542
                  
                  
                  
                  37,112,269
                  
                  
                  
                  8,130,601
                  
                  
                  
                  88,417,165
                  
                  
                  
                  13,387,804
                  
                  
                  
                  147,048,381Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,104,607
                  
                  
                  
                  -
                  
                  
                  
                  23,104,607
                  
                  
                  $
                  23,104,607Foreign
      currency translation adjustment, net of nil tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  430,257
                  
                  
                  
                  430,257
                  
                  
                  
                  430,257$
                  23,534,864Appropriation
      to statutory reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  324,727
                  
                  
                  
                  (324,727
                  )
                  
                  
                  -
                  
                  
                  
                  -Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,173
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,173Balance
      as of December 31, 2009
                  
                  
                  54,202,036
                  
                  
                  $
                  542
                  
                  
                  $
                  37,132,442
                  
                  
                  $
                  8,455,328
                  
                  
                  $
                  111,197,045
                  
                  
                  $
                  13,818,061
                  
                  
                  $
                  170,603,418









F-6





SHENGDATECH,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For the Years Ended December
      31,2009
                    
                    
                    2008
                    
                    
                    2007As
      adjusted(Note
      3)Cash
      flows from operating activities:Net
      income
                    
                    $
                    23,104,607
                    
                    
                    $
                    36,028,302
                    
                    
                    $
                    27,030,345(Loss)
      income from discontinued operations
                    
                    
                    (449,550
                    )
                    
                    
                    13,007,595
                    
                    
                    
                    11,828,122Income
      from continuing operations
                    
                    
                    23,554,157
                    
                    
                    
                    23,020,707
                    
                    
                    
                    15,202,223Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                    
                    
                    4,519,020
                    
                    
                    
                    3,406,738
                    
                    
                    
                    1,775,691Land
      use rights expense
                    
                    
                    319,771
                    
                    
                    
                    108,539
                    
                    
                    
                    990Amortization
      of debt issuance costs
                    
                    
                    1,217,755
                    
                    
                    
                    861,877
                    
                    
                    
                    -Amortization
      of debt discount
                    
                    
                    5,690,927
                    
                    
                    
                    3,282,469
                    
                    
                    
                    -Gain
      on extinguishment of long-term convertible notes
                    
                    
                    (1,624,844
                    )
                    
                    
                    (5,511,487
                    )
                    
                    
                    -Gain
      on bargain purchase
                    
                    
                    (619,466
                    )
                    
                    
                    -
                    
                    
                    
                    -Loss
      on disposal of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,845Deferred
      income tax assets
                    
                    
                    (1,150,052
                    )
                    
                    
                    (2,450,744
                    )
                    
                    
                    -Share-based
      compensation expense
                    
                    
                    20,173
                    
                    
                    
                    58,945
                    
                    
                    
                    -Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    2,221,071
                    
                    
                    
                    (318,040
                    )
                    
                    
                    (1,609,863
                    )Prepaid
      expenses and other receivables
                    
                    
                    (3,605,909
                    )
                    
                    
                    (497,161
                    )
                    
                    
                    144,247Inventories
                    
                    
                    298,298
                    
                    
                    
                    (1,145,991
                    )
                    
                    
                    (98,643
                    )Income
      tax refund receivable
                    
                    
                    (1,455,906
                    )
                    
                    
                    -
                    
                    
                    
                    -Due
      from related parties
                    
                    
                    -
                    
                    
                    
                    1,798
                    
                    
                    
                    -Accounts
      payable
                    
                    
                    (324,615
                    )
                    
                    
                    535,432
                    
                    
                    
                    670,497Accrued
      expenses and other payables
                    
                    
                    385,558
                    
                    
                    
                    1,302,674
                    
                    
                    
                    86,202Income
      taxes payable
                    
                    
                    (907,599
                    )
                    
                    
                    2,537,010
                    
                    
                    
                    725,340Due
      to related parties
                    
                    
                    (559,905
                    )
                    
                    
                    312,439
                    
                    
                    
                    (11,863
                    )Net
      cash provided by operating activities
                    
                    
                    27,978,434
                    
                    
                    
                    25,505,205
                    
                    
                    
                    16,886,666Cash
      flows from investing activities:Purchase
      of property, plant and equipment, including interest
      capitalized
                    
                    
                    (24,290,530
                    )
                    
                    
                    (36,898,310
                    )
                    
                    
                    (37,737,972
                    )Purchase
      of land use rights
                    
                    
                    -
                    
                    
                    
                    (15,446,573
                    )
                    
                    
                    (120,083
                    )Distribution
      to shareholders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (207,651
                    )Net
      cash used in investing activities
                    
                    
                    (24,290,530
                    )
                    
                    
                    (52,344,883
                    )
                    
                    
                    (38,065,706
                    )Cash
      flows from financing activities:Proceeds
      from issuance of long-term convertible notes
                    
                    
                    -
                    
                    
                    
                    115,000,000
                    
                    
                    
                    -Payment
      of debt issuance costs
                    
                    
                    -
                    
                    
                    
                    (5,859,663
                    )
                    
                    
                    -Payment
      to extinguish long-term convertible notes
                    
                    
                    (2,535,745
                    )
                    
                    
                    (9,890,000
                    )
                    
                    
                    -Proceeds
      from (Repayment of) note payable to related party
                    
                    
                    601,631
                    
                    
                    
                    -
                    
                    
                    
                    (1,995,105
                    )Excess
      tax benefit from exercise of warrant
                    
                    
                    -
                    
                    
                    
                    221,903
                    
                    
                    
                    -Net
      cash (used in) provided by financing activities
                    
                    
                    (1,934,114
                    )
                    
                    
                    99,472,240
                    
                    
                    
                    (1,995,105
                    )Cash
      flows from discontinued operations:Net
      cash (used in) provided by operating activities
                    
                    
                    (195,468
                    )
                    
                    
                    13,721,299
                    
                    
                    
                    13,356,453Net
      cash used in investing activities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (461,907
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Effects
      of exchange rate changes on cash in discontinued
operations
                    
                    
                    54,036
                    
                    
                    
                    1,037,021
                    
                    
                    
                    1,190,667Net
      cash (used in) provided by discontinued operations
                    
                    
                    (141,432
                    )
                    
                    
                    14,758,320
                    
                    
                    
                    14,085,213Effect
      of exchange rate changes on cash
                    
                    
                    79,332
                    
                    
                    
                    529,623
                    
                    
                    
                    771,358Net
      increase (decrease) in cash
                    
                    
                    1,691,690
                    
                    
                    
                    87,920,505
                    
                    
                    
                    (8,317,574
                    )Cash
      at beginning of year
                    
                    
                    114,287,073
                    
                    
                    
                    26,366,568
                    
                    
                    
                    34,684,142Cash
      at end of year
                    
                    $
                    115,978,763
                    
                    
                    $
                    114,287,073
                    
                    
                    $
                    26,366,568Non-cash
      investing activities:Accounts
      payable for purchase of property, plant and equipment
                    
                    $
                    (181,621
                    )
                    
                    $
                    740,951
                    
                    
                    $
                    1,218,497Due
      to related parties for purchase of property, plant and
      equipment
                    
                    $
                    391,819
                    
                    
                    $
                    741,263
                    
                    
                    $
                    (354,316
                    )Payable
      for acquisition
                    
                    $
                    3,803,060
                    
                    
                    
                    -
                    
                    
                    
                    -Supplemental
      disclosures of cash flow information:Cash
      paid for income taxes
                    
                    $
                    6,536,138
                    
                    
                    $
                    7,109,351
                    
                    
                    $
                    2,088,364Cash
      paid for interest, net of capitalized interest
                    
                    $
                    3,752,933
                    
                    
                    $
                    2,835,822
                    
                    
                    
                    -





See
accompanying notes to the consolidated financial statements





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”) products. 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”).  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 chemical
products used in the chemical, pharmaceutical, lighting and textile industries.
On June 20, 2008 the Company received a notice from the Tai'an City Government
requiring Shandong Bangsheng Chemical Co., Ltd. (“Bangsheng Chemical”), which
represented 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 would 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.





In
December 2009, the Company committed to a plan to sell substantially all of the
Bangsheng Chemical operating assets, primarily plant equipment, as well as
satisfied all of the other criteria in order for a long-lived asset (disposal
group) to be classified as held for sale in accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Section
360-10-45, Impairment or
Disposal of Long-Lived Assets,or ASC 360-10-45,and the criteria for
reporting discontinued operations in accordance with FASB ASC Subtopic
205-20,  Discontinued Operations, or ASC
205-20,as of December 31, 2009. As a result, the Company has presented
the assets, liabilities, operating results and cash flows of Bangsheng Chemical
as discontinued operations for all periods presented in the accompanying
consolidated financial statements. In addition, Bangsheng Chemical plant
equipment and inventory to be disposed of are classified as assets held for
sale. As of December 31, 2009, the Company had ceased all operations at
Bangsheng Chemical. Additional information on discontinued operations is
disclosed in Note 17.





On
December 11, 2009, Faith Bloom, a wholly-owned subsidiary of ShengdaTech,
acquired 100% of the equity interest of Anhui Chaodong Nanomaterials Science and
Technology, Co., Ltd (“Chaodong”).  Chaodong was an inactive
manufacturer of NPCC products.





Organization





ShengdaTech
is incorporated in Nevada in the United States of America
(“U.S.”).  ShengdaTech’s wholly-owned subsidiaries, Chaodong, 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 the PRC.





F-8





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
allocation of the purchase price in business combinations, valuation of accounts
receivable, realizable value of inventories, the useful lives and recoverability
of the carrying value of long-lived assets, valuation of convertible notes,
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.





Cash–
Cash consists of cash on hand and cash at bank. As of December 31, 2009 and
2008, cash deposits of RMB 559,255,721 and RMB 315,092,101 (equivalent
to $81,796,016 and $45,970,661), respectively, and U.S. dollar deposits of
$33,741,126 and $67,589,228, respectively, were held at major financial
institutions located in the PRC. The remaining balance is held primarily at
major financial institutions located in the Hong Kong Special Administrative
Region (the “HK SAR”) and in the U.S. 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 receivable in dispute, and the accounts receivable 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 each balance sheet
date.  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.





F-9





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.





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.





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.





The
Bangsheng Chemical long-lived assets, primarily production equipment of
approximately $1,718,475 met the criteria for classification as held for sale at
December 31, 2009, therefore, in accordance with ASC 360-10-45, the amount is
included in assets held for sale in the accompanying consolidated balance
sheet.





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 tax 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-10







The
Company 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.





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 6 - 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
–Provisions for sales incentives such as sales rebates are recorded in
the same period as the related revenues and are included in “accrued expenses
and other payables” in the consolidated balance sheets until paid. The Company
records sales rebates as a reduction of sales, which amounted to $693,658,
$1,719,986 and $1,286,954 for the years ended December 31, 2009, 2008 and 2007,
respectively.





Share-based
compensation –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. The Company estimates grant-date fair value
using the Black-Scholes option-pricing model.





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, 2009, 2008
and 2007, such expenses amounted to $576,737, $455,104 and $153,057,
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.





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, 2009,
2008 and 2007, contributions to the defined contribution plans were $348,952,
$345,436 and $178,213, 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.





F-11





Segment
reporting– The
Company’s chief operating decision maker (“CODM”) has been identified as its
Chief Executive Officer.  Prior to December 2009, the Company presented two
segments, nano-materials and chemical segments. In connection with the reporting
discontinued operations for Bangsheng Chemical, the operating results of the
Bangsheng  Chemical, which represented the Company’s entire operations for
its chemical segment are classified as discontinued operations. As a result, the
Company is managed and operated as one segment as of December 31,
2009.





Recently
issued and adopted accounting pronouncements





In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair
Value, or ASU 2009-05, which amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820
to provide clarification of circumstances in which a quoted price in an active
market for an identical liability is not available. A reporting entity is
required to measure fair value using one or more of the following methods: 1) a
valuation technique that uses a) the quoted price of the identical liability
when traded as an asset or b) quoted prices for similar liabilities (or similar
liabilities when traded as assets) and/or 2) a valuation technique that is
consistent with the principles of ASC 820. ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required
to include inputs relating to the existence of transfer restrictions on
that liability. The adoption of this ASU did not have an impact on the Company’s
consolidated financial statements.





On
January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations,or ASC 805. ASC 805
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. ASC 805
also requires the capitalization of research and development assets acquired in
a business combination at their acquisition date fair values, separately from
goodwill. In addition, ASC 805 requires that any post-acquisition adjustments to
deferred tax asset valuation allowances and liabilities related to uncertain tax
positions be  recognized in current period income tax expense. ASC 805 was
effective for the Company beginning January 1, 2009. The Company accounted for
the acquisition of Chaodong on December 11, 2009 in accordance with ASC 805 (See
Note 4) and will account for future business combinations in accordance with its
provisions.





On
January 1, 2009, the Company adopted FASB ASC Subtopic 820-10, Fair Value Measurementsand Disclosures, for all
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
initial adoption of the provisions of this standard related to nonfinancial
assets and nonfinancial liabilities did not have any impact on the Company’s
consolidated financial statements.





NOTE
3 – Accounting changes – adoption of FASB ASC Subtopic 470-20





On
January 1, 2009, the Company adopted FASB ASC Subtopic 470-20, Debt with Conversion and Other
Options,or ASC 470-20, which specifies the accounting for convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement). ASC 470-20 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
shareholders’ equity, with the resulting debt discount amortized to interest
expense in a manner that reflects the issuer’s nonconvertible, unsecured debt
borrowing rate. This standard also requires retrospective application to such
convertible notes for all periods presented. This standard impacts the
accounting for the Company’s convertible notes issued in May 2008 which, upon
conversion of the convertible notes by holders at any time before June 1, 2011,
may result in the Company settling the make-whole interest payment in cash. As
such, the convertible notes are deemed to have a partial cash settlement feature
upon conversion.





F-12





As a
result of the adoption of ASC 470-20, the accompanying financial statements
reflects the retroactive adjustments to account for the debt and equity
components of the 6% long-term convertible notes separately as of the date of
issuance. The equity component (conversion option) of the long-term convertible
notes was determined to be $24,290,655 at the issuance date and, accordingly,
the initial carrying amount of the convertible notes was reduced to $90,709,345.
The resulting debt discount of $24,290,655 is amortized and interest expense is
recognized using an effective interest rate of 13.5%. Upon adoption, the Company
also recognized a deferred tax liability of $8,258,823 at issuance due to a
temporary difference between the retroactively adjusted financial statement
carrying amount and tax basis of the convertible notes.





During
November and December 2008, the Company repurchased, in privately negotiated
transactions, part of the convertible notes with a principal amount of
$19,750,000 from certain investors for cash of $9,890,000 plus accrued interest
of $581,792.  As such, the adjusted carrying amount of the convertible
notes as of December 31, 2008, includes the effects of adopting ASC 470-20 and
the repurchases in November and December 2008.





The
adoption of ASC 470-20 has resulted in a reduction in the carrying value of the
Company’s convertible debt, debt issuance costs and an increase in deferred
income taxes and capitalized interest. The adoption had no impact to the 2007
consolidated financial statements. The following table sets forth the effect of
the retroactive application of ASC 470-20 on certain previously reported
financial statement captions. In addition, certain prior year balance sheet
amounts have been reclassified to conform to the current year
presentation:





December 31, 2008As retroactivelyAs previously reported
                  
                  
                  Adjustments
                  
                  
                  Reclassification
                  
                  
                  adjustedAssets:Total
      current assets
                  
                  $
                  124,251,388
                  
                  
                  $
                  -
                  
                  
                  $
                  (336,429
                  )
                  
                  $
                  123,914,959Total
      current assets of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  962,942
                  
                  
                  
                  962,942Property,
      plant and equipment, net
                  
                  
                  99,878,791
                  
                  
                  
                  243,731
                  
                  
                  
                  (1,777,800
                  )
                  
                  
                  98,344,722Land
      use rights
                  
                  
                  15,593,548
                  
                  
                  
                  116,785
                  
                  
                  
                  -
                  
                  
                  
                  15,710,333Debt
      issuance costs
                  
                  
                  3,925,157
                  
                  
                  
                  (829,084
                  )
                  
                  
                  -
                  
                  
                  
                  3,096,073Deferred
      income tax assets
                  
                  
                  260,056
                  
                  
                  
                  -
                  
                  
                  
                  (260,056
                  )
                  
                  
                  -Non-current
      assets of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,777,800
                  
                  
                  
                  1,777,800Total
      assets
                  
                  $
                  243,908,940
                  
                  
                  $
                  (468,568
                  )
                  
                  $
                  366,457
                  
                  
                  $
                  243,806,829Liabilities
      and shareholders' equity:Total
      current liabilities
                  
                  $
                  11,550,255
                  
                  
                  $
                  -
                  
                  
                  $
                  611,601
                  
                  
                  $
                  12,161,856Total
      current liabilities of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,912
                  
                  
                  
                  14,912Long-term
      convertible notes
                  
                  
                  95,250,000
                  
                  
                  
                  (17,323,690
                  )
                  
                  
                  -
                  
                  
                  
                  77,926,310Non-current
      income taxes payable
                  
                  
                  1,268,108
                  
                  
                  
                  -
                  
                  
                  
                  (293,977
                  )
                  
                  
                  974,131Deferred
      income tax liabilities
                  
                  
                  -
                  
                  
                  
                  5,647,318
                  
                  
                  
                  (260,056
                  )
                  
                  
                  5,387,262Non-current
      liabilities of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  293,977
                  
                  
                  
                  293,977Total
      liabilities
                  
                  
                  108,068,363
                  
                  
                  
                  (11,676,372
                  )
                  
                  
                  366,457
                  
                  
                  
                  96,758,448Common
      stock
                  
                  
                  542
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  542Additional
      paid-in capital
                  
                  
                  21,897,316
                  
                  
                  
                  15,214,953
                  
                  
                  
                  -
                  
                  
                  
                  37,112,269Retained
      earnings and statutory reserves
                  
                  
                  100,554,915
                  
                  
                  
                  (4,007,149
                  )
                  
                  
                  -
                  
                  
                  
                  96,547,766Accumulated
      other comprehensive income
                  
                  
                  13,387,804
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,387,804Total
      shareholders' equity
                  
                  
                  135,840,577
                  
                  
                  
                  11,207,804
                  
                  
                  
                  -
                  
                  
                  
                  147,048,381Total
      liabilities and shareholders' equity
                  
                  $
                  243,908,940
                  
                  
                  $
                  (468,568
                  )
                  
                  $
                  366,457
                  
                  
                  $
                  243,806,829





F-13





For the Year Ended December 31, 2008As retroactivelyAs previously reported
                
                
                Adjustments
                
                
                Reclassification
                
                
                adjustedOperating
      income
                
                $
                44,248,528
                
                
                $
                (1,418
                )
                
                $
                (15,656,622
                )
                
                $
                28,590,488Other
      income (expense):Interest
      income
                
                
                235,219
                
                
                
                -
                
                
                
                (102,796
                )
                
                
                132,423Interest
      expense
                
                
                (4,766,681
                )
                
                
                (2,689,737
                )
                
                
                -
                
                
                
                (7,456,418
                )Gain
      on extinguishment of convertible notes
                
                
                9,018,169
                
                
                
                (3,506,682
                )
                
                
                -
                
                
                
                5,511,487Other
      expense, net
                
                
                (52,833
                )
                
                
                -
                
                
                
                1,229
                
                
                
                (51,604
                )Income
      before income taxes
                
                
                48,682,402
                
                
                
                (6,197,837
                )
                
                
                (15,758,189
                )
                
                
                26,726,376Income
      tax expense
                
                
                (8,646,951
                )
                
                
                2,190,688
                
                
                
                2,750,594
                
                
                
                (3,705,669
                )Net
      income as previously reported
                
                
                40,035,451
                
                
                
                (4,007,149
                )
                
                
                (13,007,595
                )
                
                
                23,020,707Income
      from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                13,007,595
                
                
                
                13,007,595Net
      income
                
                $
                40,035,451
                
                
                $
                (4,007,149
                )
                
                $
                -
                
                
                $
                36,028,302Earnings
      per share from continuing operations:Basic
                
                $
                0.74
                
                
                
                
                
                
                
                
                
                
                $
                0.42Diluted
                
                $
                0.60
                
                
                
                
                
                
                
                
                
                
                $
                0.39Earnings
      per share from discontinued operations:Basic
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                0.24Diluted
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                0.21





NOTE
4 - Acquisition





On
December 11, 2009, the Company acquired 100% of the equity interest of Chaodong,
a manufacturer of nano precipitated calcium carbonate, including mining rights
to certain limestone reserves (with a remaining period of approximately two
years for the mining rights) and existing buildings and equipment for cash
consideration of RMB 26,000,000 (approximately $3.8 million). The Company did
not assume any liabilities as of the date of the acquisition. In accordance with
the acquisition agreement, the Company obtained control of Chaodong on December
11, 2009. The operating results of Chaodong are included in the Company’s
consolidated financial statements from the date of the acquisition.





The
purchase price of $3.8 million was recorded as a liability to payable for
acquisition on the date of acquisition and included in the accompanying
consolidated balance sheet as of December 31, 2009. It was paid in full on
January 20, 2010. The purchase price allocation resulted in the following
amounts being allocated to the net assets acquired at the acquisition date based
upon their respective fair values:





Mining
      rights
                          
                          $
                          111,774Buildings
                          
                          
                          1,696,750Plant,
      machinery and equipment
                          
                          
                          2,779,689Motor
      vehicles
                          
                          
                          10,137Office
      equipment
                          
                          
                          30,776Deferred
      tax liability
                          
                          
                          (206,600
                          )Fair
      value of net assets acquired
                          
                          
                          4,422,526Gain
      on bargain purchase
                          
                          
                          (619,466
                          )Purchase
      price
                          
                          $
                          3,803,060





The
estimated fair value of the acquired net assets of the Chaodong dormant
manufacturing facility exceeded the purchase price and accordingly, the Company
recognized a gain of $619,466 on bargain purchase in the accompanying
consolidated statement of income for the year ended December 31, 2009. The
company was able to acquire Chaodong with a bargain purchase price due to the
fact that  the seller planned to focus on its core business of
manufacturing cement and that the seller has experienced difficulty in selling
the business in the market as all equipment used by the business was
specifically built to fit ultra gravity technology system needs. The
Company is one of the very few potential buyers that have the technology, human
resources, research and development expertise, and sales and marketing
capabilities to operate the business.Prior to recording a gain, the
Company reassessed whether all acquired assets and all liabilities assumed have
been identified and performed re-measurements to verify that the consideration
paid and assets acquired have been properly valued and recorded based on
information available to the Company.The Company incurred a
total of $111,135 in expenses related to the acquisition, which has been
included in general and administrative expenses in the accompanying consolidated
statement of income for the year ended December 31, 2009. Chaodong did not
generate any revenues and incurred a loss from continuing operations of $125,005
before taxes, comprised primarily of general and administrative expenses since
the date of acquisition through December 31, 2009.





F-14





The
allocation of the purchase price is subject to finalization of management’s
analysis of certain local tax matters as of the acquisition date. The final
allocation of the purchase price may result in additional adjustments to the
recorded amounts of assets and may also result in adjustments to depreciation
expenses. The final allocation is expected to be completed as soon as
practicable but no later than 12 months after the acquisition date.





The
following unaudited pro forma information summarizes the results of operations
for the fiscal years ended December 31, 2009 and 2008, as if the Chaodong
acquisition had occurred as of the beginning of each year presented. Adjustments
for depreciation expense based on the fair value of the newly acquired property
and equipment using the Company’s depreciation policy and amortization of mining
rights based on the Company’s amortization policy have been applied
retroactively. The unaudited pro forma results do not reflect any operating
efficiencies or potential cost savings that may result from the combined
operations of the Company and Chaodong. Accordingly, these unaudited pro forma
results are presented for illustrative purposes and are not intended to
represent or be indicative of the actual results of operations of the combined
companies that would have been achieved had the acquisition occurred at the
beginning of each year presented, nor are they intended to represent or be
indicative of future results of operations.





Pro Forma (Unaudited)FortheYearsEndedDecember31,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  102,121,804
                  
                  
                  $
                  82,419,689Operating
      income
                  
                  
                  33,490,684
                  
                  
                  
                  27,909,131Income
      from continuing operations
                  
                  
                  22,921,086
                  
                  
                  
                  22,339,385(Loss)
      income from discontinued operations
                  
                  
                  (449,550
                  )
                  
                  
                  13,007,595Net
      income
                  
                  $
                  22,471,536
                  
                  
                  $
                  35,346,980





NOTE
5 – Inventories





Inventories
consist of the following:


December31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  1,003,929
                  
                  
                  $
                  821,413Work-in-process
                  
                  
                  383,960
                  
                  
                  
                  300,780Finished
      goods
                  
                  
                  630,394
                  
                  
                  
                  1,188,802Total
      inventories
                  
                  $
                  2,018,283
                  
                  
                  $
                  2,310,995





Raw
materials consist primarily of limestone supplies used in the Company’s
production of NPCC products.





F-15





NOTE
6 – Property, plant and equipment, net





Property,
plant and equipment consist of the following:





December 31,2009
                  
                  
                  2008Buildings
                  
                  $
                  30,224,605
                  
                  
                  $
                  14,815,418Plant,
      machinery and equipment
                  
                  
                  104,836,652
                  
                  
                  
                  74,687,129Motor
      vehicles
                  
                  
                  150,843
                  
                  
                  
                  140,358Office
      equipment
                  
                  
                  592,456
                  
                  
                  
                  499,973Construction
      in progress
                  
                  
                  138,163
                  
                  
                  
                  16,564,016Total
      property, plant and equipment
                  
                  
                  135,942,719
                  
                  
                  
                  106,706,894Less:
      accumulated depreciation
                  
                  
                  (12,842,859
                  )
                  
                  
                  (8,362,172
                  )Total
      property, plant and equipment, net
                  
                  $
                  123,099,860
                  
                  
                  $
                  98,344,722





Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $4,519,020,
$3,406,738 and $1,775,691, respectively.





A
reconciliation of total interest cost incurred to “interest expense” as reported
in the consolidated statements of income for the year ended December 31, 2009,
2008 and 2007 is as follows:





For the Years Ended December31,2009
                
                
                2008
                
                
                2007Total
      interest cost incurred
                
                $
                12,383,083
                
                
                $
                8,107,513
                
                
                $
                -Interest
      cost capitalized
                
                
                (1,720,831
                )
                
                
                (651,095
                )
                
                
                -Interest
      expense
                
                $
                10,662,252
                
                
                $
                7,456,418
                
                
                $
                -





NOTE
7 – Accrued expenses and other payables





Accrued
expenses and other payables consist of the following:





December 31,2009
                  
                  
                  2008Accrued
      utilities
                  
                  $
                  1,240,719
                  
                  
                  $
                  752,114Accrued
      interest
                  
                  
                  527,832
                  
                  
                  
                  476,250Sales
      rebate payable
                  
                  
                  -
                  
                  
                  
                  455,260Professional
      service fee payable
                  
                  
                  594,823
                  
                  
                  
                  629,409Salaries
      and welfare payable
                  
                  
                  1,367,566
                  
                  
                  
                  952,933Other
      taxes payable
                  
                  
                  897,570
                  
                  
                  
                  917,122Other
      payables
                  
                  
                  108,846
                  
                  
                  
                  158,918Total
      accrued expenses and other payables
                  
                  $
                  4,737,356
                  
                  
                  $
                  4,342,006




NOTE
8 – Income taxes
 
 ShengdaTech
and each of its subsidiaries file separate income tax
returns.





F-16




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 39%. The state of Nevada does not impose any
corporate income tax.





British
Virgin Islands





Under the
current laws of the British Virgins Island, 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.





People’s
Republic of China





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 from
the first profit making year after offsetting accumulated tax losses. 
Shandong Haize Nano, Bangsheng Chemical and Shaanxi Haize Nano’s tax holidays
were 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 unify the income tax rate to 25% for all
enterprises.  The new CIT law was effective as of 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%.





·
            Zibo
      Nano and Chaodong are subject to a tax rate of
  25%.





Income
(losses) from continuing operations before income taxes of the Company consists
of the following:





FortheYearsEndedDecember31,2009
                
                
                2008
                
                
                2007PRC
                
                $
                36,171,751
                
                
                $
                29,387,577
                
                
                $
                16,051,837Non-PRC
                
                
                (9,896,062
                )
                
                
                (2,661,201
                )
                
                
                (399,267
                )Total
      income from continuing operations before income taxes
                
                $
                26,275,689
                
                
                $
                26,726,376
                
                
                $
                15,652,570





Income
tax expense (benefit) attributable to income from continuing operations,
consists of:





F-17




For the Years Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007United
      States:Current
      taxesFederal
                      
                      $
                      (1,283,951
                      )
                      
                      $
                      1,505,854
                      
                      
                      $
                      -Deferred
      income taxes
                      
                      
                      (1,150,052
                      )
                      
                      
                      (2,450,744
                      )
                      
                      
                      -Total
      U.S. tax benefit
                      
                      
                      (2,434,003
                      )
                      
                      
                      (944,890
                      )
                      
                      
                      -PRCCurrent
      taxes
                      
                      
                      5,155,535
                      
                      
                      
                      4,650,559
                      
                      
                      
                      450,347Total
      PRC tax expense
                      
                      
                      5,155,535
                      
                      
                      
                      4,650,559
                      
                      
                      
                      450,347Total
      income tax expense
                      
                      $
                      2,721,532
                      
                      
                      $
                      3,705,669
                      
                      
                      $
                      450,347





Total
income taxes are allocated as follows:





FortheYearsEndedDecember31,2009
                
                
                2008
                
                
                2007Continuing
      operations
                
                $
                2,721,532
                
                
                $
                3,705,669
                
                
                $
                450,347Discontinued
      operations
                
                
                -
                
                
                
                2,750,594
                
                
                
                2,337,293$
                2,721,532
                
                
                $
                6,456,263
                
                
                $
                2,787,640





Reconciliation
of the actual income tax expense compared to the amounts computed by applying
the PRC statutory tax rates to income from continuing operations before income
taxes is as follows:





FortheYearsEndedDecember31,2009
                  
                  
                  2008
                  
                  
                  2007Computed
      income tax expense
                  
                  $
                  6,568,922
                  
                  
                  
                  25.0
                  %
                  
                  $
                  6,681,948
                  
                  
                  
                  25.0
                  %
                  
                  $
                  5,165,348
                  
                  
                  
                  33.0
                  %Change
      in valuation allowance
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  (504,529
                  )
                  
                  
                  -1.9
                  %
                  
                  
                  380,396
                  
                  
                  
                  2.4
                  %Effect
      of unrecognized tax benefit
                  
                  
                  621,349
                  
                  
                  
                  2.4
                  %
                  
                  
                  959,013
                  
                  
                  
                  3.6
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Entity
      not subject to income tax
                  
                  
                  321,587
                  
                  
                  
                  1.2
                  %
                  
                  
                  438,512
                  
                  
                  
                  1.6
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Effect
      of non-taxable income
                  
                  
                  (154,867
                  )
                  
                  
                  -0.6
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Tax
      rate differential on United States income
                  
                  
                  (774,874
                  )
                  
                  
                  -2.9
                  %
                  
                  
                  (81,644
                  )
                  
                  
                  -0.3
                  %
                  
                  
                  (3,993
                  )
                  
                  
                  0.0
                  %Tax
      holiday
                  
                  
                  (4,385,137
                  )
                  
                  
                  -16.9
                  %
                  
                  
                  (3,673,625
                  )
                  
                  
                  -13.7
                  %
                  
                  
                  (4,846,759
                  )
                  
                  
                  -30.9
                  %Underprovision
      in respect of prior year
                  
                  
                  171,955
                  
                  
                  
                  0.7
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Interest
      rate change due to the adoption of ASC 470-20
                  
                  
                  123,057
                  
                  
                  
                  0.5
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Other
                  
                  
                  229,540
                  
                  
                  
                  0.9
                  %
                  
                  
                  (114,006
                  )
                  
                  
                  -0.4
                  %
                  
                  
                  (244,645
                  )
                  
                  
                  -1.6
                  %Actual
      income tax expense
                  
                  $
                  2,721,532
                  
                  
                  
                  10.3
                  %
                  
                  $
                  3,705,669
                  
                  
                  
                  13.9
                  %
                  
                  $
                  450,347
                  
                  
                  
                  2.9
                  %





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 $4,385,137, $3,673,625, and $4,846,759 for the years ended December
31, 2009, 2008 and 2007, equivalent to basic earnings per share from continuing
operations, amount of $0.08, $0.07 and $0.09, respectively and diluted earnings
per share amount of $0.08, $0.06 and $0.09, for the years ended December 31,
2009, 2008 and 2007, respectively.





F-18





The tax
effects of the Company’s temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:





FortheYearsEndedDecember31,2009
                          
                          
                          2008Deferred
      income tax assets:Net
      operating loss carry forward
                          
                          $
                          419,611
                          
                          
                          $
                          -Debt
      issuance costs
                          
                          
                          729,327
                          
                          
                          
                          502,793Impairment
      of property, plant and equipment
                          
                          
                          982,813
                          
                          
                          
                          982,813Total
      gross deferred income tax assets
                          
                          
                          2,131,751
                          
                          
                          
                          1,485,606Less:
      valuation allowance
                          
                          
                          (1,095,201
                          )
                          
                          
                          (982,813
                          )Deferred
      income tax assets
                          
                          $
                          1,036,550
                          
                          
                          $
                          502,793Deferred
      income tax liabilities:Gain
      on repurchase
                          
                          $
                          829,882
                          
                          
                          $
                          -Debt
      discount
                          
                          
                          3,647,677
                          
                          
                          
                          5,890,055Capitalized
      interest
                          
                          
                          796,201
                          
                          
                          
                          -Acquisition
      basis difference, non-U.S. entity
                          
                          
                          206,600
                          
                          
                          
                          -Deferred
      income tax liabilities
                          
                          $
                          5,480,360
                          
                          
                          $
                          5,890,055Net
      deferred income tax liabilities
                          
                          $
                          (4,443,810
                          )
                          
                          $
                          (5,387,262
                          )





As of
December 31, 2009, the Company has net operating loss from discontinued
operations for the PRC income tax purposes of $449,550 which are available to
offset future taxable income, if any, through 2014.
  As of
December 31, 2009, the Company has net operating loss from continuing operations
for United States federal income tax purposes of $5,185,673 which are available
to carry back five years or offset future taxable income, if any, through 2029.
The carry back amounted to $4,282,076, which creates a refund of $1,455,906
which was included in income tax refund receivable as of December 31,
2009.


At
December 31, 2009 and 2008, deferred tax assets and liabilities were classified
on the Company’s balance sheet as follows:





FortheYearsEndedDecember31,2009
                
                
                2008Non-current
      deferred income tax assets (liabilities):Non-current
      deferred income tax assets
                
                $
                1,036,550
                
                
                $
                502,793Non-current
      deferred income tax liabilities
                
                
                (5,480,360
                )
                
                
                (5,890,055
                )Net
      non-current deferred income tax liabilities
                
                $
                (4,443,810
                )
                
                $
                (5,387,262
                )





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 carry forwards 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 on 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,
2009.  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 and its implementation rules impose 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 amounting $35,401,200 and
$66,125,300 that are subject to the PRC withholding tax as of December 31, 2008
and 2009, respectively, since these earnings are intended to be permanently
reinvested.  The amounts of unrecognized deferred tax liabilities are
approximately $3,540,120 and $6,612,530 as of December 31, 2008 and 2009,
respectively.





F-19





Unrecognized
tax benefits, generally represented by liabilities on the balance sheet, arise
when the estimated benefit recorded in the financial statements differs from the
amounts taken or expected to be taken in a tax return because of the uncertain
tax positions that the Company currently does not believe meet the more likely
than not recognition threshold to be sustained upon examination. Reconciliation
of unrecognized tax benefits for the years ended December 31, 2009, 2008 and
2007 are as follows:





2009
                
                
                2008
                
                
                2007Balance
      as at January 1
                
                $
                1,268,108
                
                
                $
                -
                
                
                $
                -Increases
      related to prior year tax positions
                
                
                -
                
                
                
                492,759
                
                
                
                -Decreases
      related to prior year tax positions
                
                
                -
                
                
                
                -
                
                
                
                -Increases
      related to current year tax positions
                
                
                621,349
                
                
                
                755,668
                
                
                
                -Settlements
                
                
                -
                
                
                
                -
                
                
                
                -Lapse
      of statute
                
                
                -
                
                
                
                -
                
                
                
                -Foreign
      currency translation adjustment
                
                
                3,488
                
                
                
                19,681
                
                
                
                -Balance
      as at December 31
                
                $
                1,892,945
                
                
                $
                1,268,108
                
                
                $
                -





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.





Included
in the balance of unrecognized tax benefits for continuing operations at
December 31, 2009 and December 31, 2008 are potential benefits of $1,598,237 and
$974,131 respectively that if recognized, would affect the Company’s effective
tax rate. Unrecognized tax benefits for discontinued operations at December 31,
2009 and December 31, 2008 are $294,708 and $293,977 respectively. No material
interest and penalty have been recorded for the year ended December 31,
2009.  The Company does not expect that the nature 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 year under special circumstances where the
underpayment of taxes is more than RMB 100,000 ($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, 2004 through 2009 are open to examination by the PRC state
and local tax authorities.





NOTE
9 – Commitments and contingencies





Project
Investment Contract – On August 28, 2009, Faith Bloom entered into a
Project Investment Contract (the “Investment Agreement”) with the local
government of Hanshan County, Anhui Province, PRC (the “local
government”).  Pursuant to the Investment Agreement, the Company will
invest RMB 1,200,000,000 (approximately $175.70 million) in several phases by
2013, which includes an investment in a new NPCC project with capacity to
manufacture 200,000 tons of NPCC per year and the purchase of approximately
341,335 square meters (approximately 84.35 acres) of land-use rights. The local
government has also agreed to grant the Company mining rights to certain
limestone reserves. In addition, land-use rights and mining rights grants are
also subject to further local government administrative processes.





In
addition, on August 28, 2009, the Company entered into an agreement with the
local government to purchase the land-use rights for approximately 66,767 square
meters (16.50 acres) of land (the “Land Use Right Agreement”) for use in the
operations of Chaodong.  The Land Use Right Agreement is subject to the
local government approval after the completion of certain local administrative
processes.





Leases –
The Company leases land, buildings and certain equipment from Shandong Shengda,
a related party. The lease was entered into by the Company’s subsidiary,
Shandong Haize Nano for a 20-year term up to 2024. These leases are classified
as operating leases.





Total
rent expense under these leases for the years ended December 31, 2009, 2008
and 2007 was $190,677, $187,353 and $366,403, respectively.





F-20





Future
minimum lease payments under the Company's lease agreement as of December 31,
2009 are as follows:





OperatingLeases2010
                          
                          $
                          190,6772011
                          
                          
                          190,6772012
                          
                          
                          190,6772013
                          
                          
                          190,6772014
                          
                          
                          190,677Thereafter
                          
                          
                          1,898,827Minimum
      lease payments
                          
                          $
                          2,852,212





Capital
commitments– The Company has contractual obligations related to the
purchase of property and equipment amounting to $386,792 as of December 31,
2009.





NOTE
10 – Related party transactions





Due to related
parties –  As of December 31, 2009, the amount due to Shandong
Shengda of $212,034 comprised primarily rent expense for land and buildings.
During 2009, the Company issued an unsecured  note payable to Shandong
Shengda bearing interest at a rate of 3.0% in exchange for certain Company
expenses paid by Shandong Shengda.  Principal and accrued interest
were $574,878 and $26,753, respectively, as of December 31, 2009.





In 2009,
the Company’s total rent expense to related party for land and building amounted
to $190,677. In addition, general and administrative expenses of $323,980 were
paid by Shandong Shengda on behalf of the Company.





As of
December 31, 2008, the amount due to Shandong Shengda of $771,442, comprised
primarily of  rent expense for land and buildings and other general
and administrative expenses paid by Shandong Shengda on behalf of the
Company.





In 2008,
the Company’s total rent expense to related party amounted to $669,159 for land,
building and equipment. In addition, general and administrative expenses of
$201,852 were paid by Shandong Shengda on behalf of the Company.





In 2008
the Company purchased $17,662,846 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.  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. As of December
31, 2008, the Company had $8,003,223 advance payment to Shandong Haiqing for
equipment purchases, included in the property, plant and equipment, net. Amount
due to Shandong Haiqing related to these purchases for contracts entered into
prior to January 1, 2009 amounted to $1,360,393 and $965,962 as of December 31,
2009 and December 31, 2008, respectively.





NOTE
11 – 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 6.0 % 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.





F-21





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 shares of the Company’s common shares. 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 adopted ASC 470-20 as of January 1, 2009 and retrospectively applied
this change in accounting to all prior periods presented for which the
convertible notes that may be settled in cash upon conversion (including partial
conversion) were outstanding, as required by the new standard. Under this new
method of accounting, the debt and equity components of the 6% long-term
convertible notes were bifurcated and accounted for separately and interest
expense is computed using an effective interest rate of 13.5% as the convertible
notes are accreted to the face value.





The
long-term convertible notes as of December 31, 2009 and 2008 are summarized in
the following table:





December 31,
                                    
                                    
                                    December 31,2009
                                    
                                    
                                    2008Principal
      amount of long-term convertible notes
                                    
                                    $
                                    90,027,000
                                    
                                    
                                    $
                                    95,250,000Conversion
      option subject to cash settlement
                                    
                                    
                                    (10,728,461
                                    )
                                    
                                    
                                    (17,323,690
                                    )Net
      carrying amount
                                    
                                    $
                                    79,298,539
                                    
                                    
                                    $
                                    77,926,310Carrying
      amount of additional paid-in capital
                                    
                                    $
                                    15,214,953
                                    
                                    
                                    $
                                    15,214,953





Conversion
option subject to cash settlement or debt discount is amortized as interest
expense through June 1, 2011, the earliest date the holders of the long-term
convertible notes can demand payment.  In addition, prior to such
date, holders of the Notes can convert their Notes and receive an additional
interest in cash or, at the Company’s option, in common shares of the
Company.  Debt issuance costs of $4,621,967 as of May 28, 2008, have
been capitalized and are being amortized on a straight-line basis, which
approximate the effective interest rate method from the date the convertible
notes were issued to June 1, 2011.





Interest
relating to the convertible notes was recognized as follows:





For
      the Years Ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Contractual
      coupon interest on convertible notes
                          
                          $
                          5,447,649
                          
                          
                          $
                          3,963,167
                          
                          
                          $
                          -Amortization
      of debt discount
                          
                          
                          5,690,927
                          
                          
                          
                          3,282,469
                          
                          
                          
                          -Amortization
      of debt issuance costs
                          
                          
                          1,217,755
                          
                          
                          
                          861,877
                          
                          
                          
                          -Interest
      cost capitalized
                          
                          
                          (1,720,831
                          )
                          
                          
                          (651,095
                          )
                          
                          
                          -Interest
      expense
                          
                          $
                          10,635,500
                          
                          
                          $
                          7,456,418
                          
                          
                          $
                          -





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.





F-22





The
Company evaluated the accounting for embedded call and put 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 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 February 2009, the Company repurchased, in privately
negotiated transactions, part of the Noteswith a principal amount
of $5,223,000 from certain investors for cash of $2,535,745 plus accrued
interest of $72,144. In conjunction with the repurchases, the Company recognized
a pre-tax gain of $1,624,844, net of unamortized debt issuance costs and
discount of $158,109 and $904,302, respectively, for the year ended December 31,
2009.  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 repurchases, the
Company recognized a pre-tax gain of $5,511,487, net of unamortized debt
issuance costs and discount of $664,017 and $3,684,496, respectively, for the
year ended December 31, 2008.





No
portion of the consideration paid by the Company is deemed to represent
reacquisition of the equity component at the time of the settlement based on the
Company’s fair value considerations of the liability component of the
convertible notes immediately prior to the extinguishment.





NOTE
12 - 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,
Inc.; 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 $324,727, $2,488,182, and $2,341,040 from
retained earnings to statutory reserves was recorded for the years ended
December 31, 2009, 2008 and 2007, respectively.





NOTE
13 – Share-based compensation





Options
–  On January 1, April 1 and July 1, 2009, respectively, the Company
issued options to a director to purchase 5,000 shares of common stock under each
grant at an exercise price of $3.52, $3.10 and $3.75 per share with a
contractual term of three years and vesting immediately. The fair value of each
option grant was estimated at $1.35, $1.20 and $1.48, respectively.





F-23








On April
1, July 1, and October 1, 2008, respectively, the Company issued a three-year
option to a director to purchase 5,000 shares of common stock under each grant
at an exercise price of $8.50, $9.93, and $7.00 per share with a contractual
term of three years and vesting immediately. The fair value of each option grant
was estimated at $4.22, $4.55, and $3.02, respectively.





The
related share-based payments were recognized as compensation expense on the date
of the grant and included in general and administrative expenses in an amount of
$20,173 and $58,945 for the year ended December 31, 2009 and 2008, respectively.
The Company estimated the fair value of options granted using a Black-Scholes
option-pricing model with the following assumptions:





2009
                      
                      2008Expected
      life
                      
                      1.50
      years
                      
                      1.50
      yearsExpected
      volatility
                      
                      80.81%-81.99%
                      
                      72.07%-74.23%Risk-free
      interest rate
                      
                      1.14%
      - 1.57%
                      
                      1.94%
      - 2.90%Dividend
      yield
                      
                      0%
                      
                      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 years ended December 31, 2009 and 2008 are as
follows.  No options were granted prior to January 1,
2008.





Weighted AverageRemainingWeighted Average
                      
                      
                      Contractual Term
                      
                      
                      Aggregate IntrinsicNumber
                      
                      
                      Exercise Price
                      
                      
                      (Years)
                      
                      
                      ValueOutstanding
      at January 1, 2008
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      15,000
                      
                      
                      $
                      8.48Exercised
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at December 31, 2008
                      
                      
                      15,000
                      
                      
                      $
                      8.48
                      
                      
                      
                      2.50
                      
                      
                      
                      -Granted
                      
                      
                      15,000
                      
                      
                      
                      3.46Exercised
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at December 31, 2009
                      
                      
                      30,000
                      
                      
                      $
                      5.97
                      
                      
                      
                      1.87
                      
                      
                      $
                      40,100Vested
      at December 31, 2009
                      
                      
                      30,000
                      
                      
                      $
                      5.97
                      
                      
                      
                      1.87
                      
                      
                      $
                      40,100





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.





NOTE 14 - Earnings per
share





The
following table sets forth the computation of basic and diluted earnings per
share:





F-24





For the Years Ended December
      31,2009
                      
                      
                      2008
                      
                      
                      2007Income
      from continuing operations
                      
                      $
                      23,554,157
                      
                      
                      $
                      23,020,707
                      
                      
                      $
                      15,202,223Interest
      expense on long-term convertible notes, net of tax of $
      2,535,182
                      
                      
                      -
                      
                      
                      
                      4,921,236
                      
                      
                      
                      -Gain
      on extinguishment of long-term convertible notes, net of tax of $
      1,873,906
                      
                      
                      -
                      
                      
                      
                      (3,637,581
                      )
                      
                      
                      -Adjusted
      income from continuing operations
                      
                      $
                      23,554,157
                      
                      
                      $
                      24,304,362
                      
                      
                      $
                      15,202,223(Loss)
      income from discontinued operations
                      
                      $
                      (449,550
                      )
                      
                      $
                      13,007,595
                      
                      
                      $
                      11,828,122Adjusted
      net income
                      
                      $
                      23,104,607
                      
                      
                      $
                      37,311,957
                      
                      
                      $
                      27,030,345Weighted
      average shares:Basic
                      
                      
                      54,202,036
                      
                      
                      
                      54,202,036
                      
                      
                      
                      54,107,408Effect
      of dilutive securities:Long-term
      convertible notes
                      
                      
                      -
                      
                      
                      
                      8,003,624
                      
                      
                      
                      -Warrants
      and options
                      
                      
                      2,887
                      
                      
                      
                      -
                      
                      
                      
                      81,002Diluted
                      
                      
                      54,204,923
                      
                      
                      
                      62,205,660
                      
                      
                      
                      54,188,410Basic
      earnings per share:Income
      from continuing operations
                      
                      $
                      0.43
                      
                      
                      $
                      0.42
                      
                      
                      $
                      0.28(Loss)
      income from discontinued operations
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.24
                      
                      
                      $
                      0.22Net
      income per share
                      
                      $
                      0.43
                      
                      
                      $
                      0.66
                      
                      
                      $
                      0.50Diluted
      earnings per share:Income
      from continuing operations
                      
                      $
                      0.43
                      
                      
                      $
                      0.39
                      
                      
                      $
                      0.28(Loss)
      income from discontinued operations
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.21
                      
                      
                      $
                      0.22Net
      income per share
                      
                      $
                      0.43
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.50





The
potential common shares of  12,390,730 related to the convertible
notes were anti-dilutive and were excluded from the diluted earnings per share
computation for 2009.





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  and 15,000
shares in 2009 and 2008, respectively. There were no options issued in
2007.





NOTE
15 – 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, 2009,
2008 and 2007 were $15,560,635, $14,507,099 and $10,527,490,
respectively.





NOTE
16 – Fair Value Measurements





Effective
January 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements and
Disclosures, or ASC 820, with the exception for nonrecurring,
nonfinancial assets and liabilities where adoption has been deferred and will be
effective on the first day of fiscal year 2010. The adoption of ASC 820 did not
impact the Company’s financial position, results of operations or cash flows.
ASC 820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on our own assumptions
used to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.





F-25





As of
December 31, 2009, the estimated fair value of the outstanding convertible notes
was approximately  $86,425,920 based on the level 3 valuation which
compared to a carrying value of $79,298,539. As of December 31, 2008, the
estimated fair value of the outstanding convertible notes was $86,152,840 which
compared to a carrying value of $77,926,310. The estimated fair value of the
convertible notes is based on a mark-to-model valuation model. Due to
the fact that there is no active market for this instrument, the fair value of
the convertible notes was estimated using a discounted cash flow analysis based
on current borrowing rates for instruments with similar terms. In addition, the
Company utilized other sources of information for the relevant market parameters
in order to develop its fair value.





The
Company’s other financial instruments, including cash, accounts receivable,
accounts payable, accrued expenses and other receivable/payable have net
carrying values that approximate their fair values due to the short-term nature
of these instruments.





NOTE
17 – Discontinued Operations





The
Bangsheng Chemical had ceased all operations since October 31, 2008. In December
2009, the Company committed to a plan to sell the Bangsheng Chemical’s assets,
excluding certain tax receivables, accrued expenses, and non-current income
taxes payable. As such the Bangsheng Chemical plant equipment and inventory were
classified as assets held for sale. The remaining assets and liabilities
associated with the Bangsheng Chemical segment have been classified as assets
and liabilities of discontinued operations as of December 31, 2009 and have been
reclassified as of December 31, 2008 for comparative purpose.




Assets
and liabilities of the Bangsheng Chemical are comprised of the
following:





December 31,2009
                  
                  
                  2008Inventory
                  
                  $
                  -
                  
                  
                  $
                  336,429Income
      taxes receivable
                  
                  
                  801,983
                  
                  
                  
                  496,779Other
      taxes receivable
                  
                  
                  -
                  
                  
                  
                  129,734Current
      assets of discontinued operations
                  
                  $
                  801,983
                  
                  
                  $
                  962,942Assets
      held for sale
                  
                  $
                  1,718,475
                  
                  
                  $
                  -Non-current
      assets of discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  1,777,800Accrued
      expenses
                  
                  $
                  42,068
                  
                  
                  $
                  14,912Non-current
      income taxes payable
                  
                  $
                  294,708
                  
                  
                  $
                  293,977





The
non-current assets of discontinued operations represent assets plant equipment
held for use as of December 31, 2008.





The
operating results of the Bangsheng Chemical for the years ended
December 31, 2009, 2008 and 2007 are as follows:





F-26





For the Years Ended December
      31,2009
                    
                    
                    2008
                    
                    
                    2007Net
      sales
                    
                    $
                    295,899
                    
                    
                    $
                    67,007,450
                    
                    
                    $
                    53,933,120Cost
      of goods sold
                    
                    
                    295,899
                    
                    
                    
                    45,986,499
                    
                    
                    
                    39,282,251Gross
      profit
                    
                    
                    -
                    
                    
                    
                    21,020,951
                    
                    
                    
                    14,650,869Operating
      expenses:Selling
                    
                    
                    -
                    
                    
                    
                    110,813
                    
                    
                    
                    90,909General
      and administrative
                    
                    
                    367,937
                    
                    
                    
                    1,322,263
                    
                    
                    
                    574,105Impairment
      of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    3,931,253
                    
                    
                    
                    -Total
      operating expenses
                    
                    
                    367,937
                    
                    
                    
                    5,364,329
                    
                    
                    
                    665,014Operating
      (loss) income
                    
                    
                    (367,937
                    )
                    
                    
                    15,656,622
                    
                    
                    
                    13,985,855Other
      income (expense):Interest
      income
                    
                    
                    78,442
                    
                    
                    
                    102,796
                    
                    
                    
                    179,560Other
      expense, net
                    
                    
                    (160,055
                    )
                    
                    
                    (1,229
                    )
                    
                    
                    -Other
      (expense) income , net
                    
                    
                    (81,613
                    )
                    
                    
                    101,567
                    
                    
                    
                    179,560(Loss)
      income from discontinued operations before income taxes
                    
                    
                    (449,550
                    )
                    
                    
                    15,758,189
                    
                    
                    
                    14,165,415Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    2,750,594
                    
                    
                    
                    2,337,293(Loss)
      income from discontinued operations
                    
                    $
                    (449,550
                    )
                    
                    $
                    13,007,595
                    
                    
                    $
                    11,828,122





NOTE
18 – Geographic information





The
following summarizes the Company’s revenue, based on the geographic location of
the customers:





For the Years Ended December
      31,2009
                
                
                2008
                
                
                20072009
                
                
                % of sales
                
                
                2008
                
                
                % of sales
                
                
                2007
                
                
                % of salesPRC
                
                $
                94,893,019
                
                
                
                93
                %
                
                $
                74,479,275
                
                
                
                90
                %
                
                $
                46,520,075
                
                
                
                100
                %Others
                
                
                7,228,785
                
                
                
                7
                %
                
                
                7,940,414
                
                
                
                10
                %
                
                
                201,598
                
                
                
                0
                %Total
      net sales
                
                $
                102,121,804
                
                
                
                100
                %
                
                $
                82,419,689
                
                
                
                100
                %
                
                $
                46,721,673
                
                
                
                100
                %





All
tangible long-lived assets for continuing operations are located in three
provinces in the PRC, which amounted to $123,099,860 and $98,344,722,
respectively, as of December 31, 2009 and December 31, 2008.





The
following summarizes the Company's revenue, based on the product
applications:





For the Years Ended December
      31,2009
                
                
                2008
                
                
                2007Rubber
                
                $
                35,019,991
                
                
                $
                35,727,730
                
                
                $
                21,337,188Plastic
                
                
                46,276,567
                
                
                
                30,303,950
                
                
                
                17,333,224Adhesive
                
                
                12,122,941
                
                
                
                8,599,392
                
                
                
                3,642,528Paper
                
                
                1,377,526
                
                
                
                1,357,589
                
                
                
                2,356Paint
      and Ink
                
                
                3,099,474
                
                
                
                3,079,100
                
                
                
                2,054,040Latex
                
                
                4,225,305
                
                
                
                3,351,928
                
                
                
                2,352,337$
                102,121,804
                
                
                $
                82,419,689
                
                
                $
                46,721,673




F-27





NOTE 19
– 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
years ended December 31, 2009 and 2008, $324,727 and $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 $89,523,152 and $69,870,366,
respectively, as of December 31, 2009 and December 31, 2008.





The
following represents condensed unconsolidated financial information of the
Parent Company only:





Condensed
      Balance SheetsDecember 31,
                    
                    
                    December 31,2009
                    
                    
                    2008As
      adjustedCash
                    
                    $
                    11,262
                    
                    
                    $
                    -Prepaid
      expenses
                    
                    
                    19,983
                    
                    
                    
                    -Inter-company
      loan receivable
                    
                    
                    27,557,001
                    
                    
                    
                    55,882,911Income
      tax refund receivable
                    
                    
                    1,455,906
                    
                    
                    
                    -Due
      from inter-company
                    
                    
                    2,371,927
                    
                    
                    
                    651,095Investment
      in unconsolidated subsidiaries
                    
                    
                    221,530,711
                    
                    
                    
                    172,492,075Debt
      issuance costs
                    
                    
                    1,720,209
                    
                    
                    
                    3,096,073Total
      assets
                    
                    $
                    254,666,999
                    
                    
                    $
                    232,122,154Accrued
      expenses
                    
                    $
                    527,832
                    
                    
                    $
                    476,250Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    1,283,951Long-term
      convertible notes
                    
                    
                    79,298,539
                    
                    
                    
                    77,926,310Deferred
      income tax liabilities
                    
                    
                    4,237,210
                    
                    
                    
                    5,387,262Total
      shareholders' equity
                    
                    
                    170,603,418
                    
                    
                    
                    147,048,381Total
      liabilities and shareholders' equity
                    
                    $
                    254,666,999
                    
                    
                    $
                    232,122,154




F-28





For the Years Ended December
      31,2009
                
                
                2008
                
                
                2007As
      adjustedEquity
      in earnings of unconsolidated subsidiaries
                
                $
                29,280,321
                
                
                $
                35,990,567
                
                
                $
                27,429,612Operating
      expenses
                
                
                (1,096,257
                )
                
                
                (715,024
                )
                
                
                (399,267
                )Interest
      expense
                
                
                (10,635,500
                )
                
                
                (7,456,418
                )
                
                
                -Interest
      income
                
                
                1,497,196
                
                
                
                1,752,800
                
                
                
                -Gain
      on extinguishment of long-term convertible notes
                
                
                1,624,844
                
                
                
                5,511,487
                
                
                
                -Earnings
      before income taxes
                
                
                20,670,604
                
                
                
                35,083,412
                
                
                
                27,030,345Income
      taxes
                
                
                (2,434,003
                )
                
                
                (944,890
                )
                
                
                -Net
      income
                
                $
                23,104,607
                
                
                $
                36,028,302
                
                
                $
                27,030,345





Condensed
Statements of Cash Flows





For the Years Ended December
      31,2009
                
                
                2008
                
                
                2007Net
      cash used in operating activities
                
                $
                (711,882
                )
                
                $
                (2,867,631
                )
                
                $
                (143,735
                )Net
      cash (used in) provided by investing activities
                
                
                -
                
                
                
                (40,724,800
                )
                
                
                136,257Net
      cash provided by financing activities
                
                
                723,144
                
                
                
                43,589,329
                
                
                
                -Net
      increase (decrease) in cash
                
                
                11,262
                
                
                
                (3,102
                )
                
                
                (7,478
                )Cash
      at beginning of year
                
                
                -
                
                
                
                3,102
                
                
                
                10,580Cash
      at end of year
                
                $
                11,262
                
                
                $
                -
                
                
                $
                3,102





The
adoption of ASC 470-20 as discussed in Note 3 has resulted in a reduction in the
carrying value of the Company’s convertible notes and debt issuance costs, an
increase in deferred taxes and due from intercompany related to capitalized
interest. The adoption had no impact on the 2007 condensed parent company’s
financial statements.  The following table sets forth the effect of
the retroactive application of ASC 470-20 on certain previously reported
financial statement captions for the condensed balance sheets and condensed
statements of income:





December 31, 2008As previously
                      
                      
                      
                      
                      
                      
                      
                      
                      As retroactivelyreported
                      
                      
                      Adjustments
                      
                      
                      Reclassification
                      
                      
                      adjustedIntercompany
      loan receivable
                      
                      $
                      55,882,911
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      55,882,911Due
      from inter-company
                      
                      
                      289,161
                      
                      
                      
                      361,934
                      
                      
                      
                      -
                      
                      
                      
                      651,095Investment
      in unconsolidated subsidiaries
                      
                      
                      172,493,493
                      
                      
                      
                      (1,418
                      )
                      
                      
                      -
                      
                      
                      
                      172,492,075Debt
      issuance cost, net
                      
                      
                      3,925,157
                      
                      
                      
                      (829,084
                      )
                      
                      
                      -
                      
                      
                      
                      3,096,073Deferred
      income tax assets
                      
                      
                      260,056
                      
                      
                      
                      
                      
                      
                      
                      (260,056
                      )
                      
                      
                      -Total
      assets
                      
                      $
                      232,850,778
                      
                      
                      $
                      (468,568
                      )
                      
                      $
                      (260,056
                      )
                      
                      $
                      232,122,154Accrued
      expenses
                      
                      $
                      476,250
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      476,250Income
      taxes payable
                      
                      
                      1,283,951
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,283,951Long-term
      convertible notes, net
                      
                      
                      95,250,000
                      
                      
                      
                      (17,323,690
                      )
                      
                      
                      -
                      
                      
                      
                      77,926,310Deferred
      income tax liabilities
                      
                      
                      -
                      
                      
                      
                      5,647,318
                      
                      
                      
                      (260,056
                      )
                      
                      
                      5,387,262Total
      shareholder's equity
                      
                      
                      135,840,577
                      
                      
                      
                      11,207,804
                      
                      
                      
                      -
                      
                      
                      
                      147,048,381Total
      liabilities and shareholder's equity
                      
                      $
                      232,850,778
                      
                      
                      $
                      (468,568
                      )
                      
                      $
                      (260,056
                      )
                      
                      $
                      232,122,154




F-29





For the Year Ended December 31, 2008As previously
                  
                  
                  
                  
                  
                  As retroactivelyreported
                  
                  
                  Adjustments
                  
                  
                  adjustedEquity
      in earnings of unconsolidated subsidiaries
                  
                  $
                  35,991,985
                  
                  
                  $
                  (1,418
                  )
                  
                  $
                  35,990,567Operating
      expenses
                  
                  
                  (715,024
                  )
                  
                  
                  -
                  
                  
                  
                  (715,024
                  )Interest
      expense
                  
                  
                  (4,766,681
                  )
                  
                  
                  (2,689,737
                  )
                  
                  
                  (7,456,418
                  )Interest
      income
                  
                  
                  1,752,800
                  
                  
                  
                  -
                  
                  
                  
                  1,752,800Gain
      on repurchase of long-term convertible notes
                  
                  
                  9,018,169
                  
                  
                  
                  (3,506,682
                  )
                  
                  
                  5,511,487Earnings
      before income taxes
                  
                  
                  41,281,249
                  
                  
                  
                  (6,197,837
                  )
                  
                  
                  35,083,412Income
      taxes
                  
                  
                  1,245,798
                  
                  
                  
                  (2,190,688
                  )
                  
                  
                  (944,890
                  )Net
      income
                  
                  $
                  40,035,451
                  
                  
                  $
                  (4,007,149
                  )
                  
                  $
                  36,028,302





There was
no effect on the condensed statement of cash flows for the year ended December
31, 2008.





F-30




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, 20063.2
              
              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).


-64-





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).





-65-





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).




-66-





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).




-67-





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, 2008.10.55
                
                Project
      Investment Contract dated August 28, 2009 by and between the Company and
      the local government of Hanshan County, Anhui Province, People’s Republic
      of China (incorporate by reference to Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K filed on September 3, 2009).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)




-68-





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 Subsidiaries31.1*
              
              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




-69-


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: March
      15, 2010
                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
                            
                            March
      15, 2010(Xiangzhi
      Chen)
                            
                            (Principal
      Executive Officer)/s/
      Anhui Guo
                            
                            Director
      and Chief Operating Officer
                            
                            March
      15, 2010(Anhui
      Guo)/s/A.
      Carl Mudd
                            
                            Director
                            
                            March
      15, 2010(A.
      Carl Mudd)/s/
      Sheldon B. Saidman
                            
                            Director
                            
                            March
      15, 2010(Sheldon
      B. Saidman)/s/ Dongquan
      Zhang
                            
                            Director
                            
                            March
      15, 2010(Dongquan
      Zhang)




-70-