UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K






(Mark
      One)x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d)
              OF
      THE SECURITIES EXCHANGE ACT OF 1934 (“EXCHANGE
  ACT”)





For the
fiscal year ended December 31, 2009





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





For the
transition period from __________ to __________




Commission
file number 333-85306.




PUDA
COAL, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            65-1129912(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)





426
      Xuefu Street, Taiyuan, Shanxi Province,
              The
      People’s Republic of China
            
            030006(Address
      of principal executive
      offices)
            
            (Zip
      Code)





011
      86 351 228 1302(Registrant’s
      telephone number, including area
code)




Securities
registered under Section 12(b) of the Exchange Act:





Title
      of each class: N/A
            
            Name
      of each exchange on which registered:
N/A




Securities
registered under Section 12(g) of the Exchange Act:




Title of
Class: N/A




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. oYes xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


oYes xNo


Indicate by check mark whether the
registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filingrequirements for the past 90 days.
YesxNo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, any Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈ Yes     ̈ No.





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x




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




Large
accelerated filer o                       Accelerated
filer  o


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





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


Yes o  Nox





As of
June 30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, the aggregate market value of the registrant’s voting and
non-voting common equity held by non-affiliates, computed by reference to the
price at which the common equity was last sold, was approximately
$22,169,314.  Solely for the purposes of this calculation, “affiliate”
has the meaning defined in Rule 12b-2 of the Exchange Act.





The total
number of shares of common stock of the registrant that were outstanding on the
latest practicable date, March 17, 2010, was
19,449,832  shares.







TABLE
OF CONTENTS




PagePART
      IItem
      1. Business
            
            4Item
      1A. Risk Factors
            
            13Item
      2. Properties
            
            20Item
      3. Legal Proceedings
            
            21Item
      4. Removed and Reserved
            
            21PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder
      Matters  and Issuer Purchases of Equity
    Securities
            
            22Item
      6. Selected Financial Data
            
            24Item
      7.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            25Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
            
            31Item
      8. Financial Statements and Supplementary Data
            
            33Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            
            71Item
      9A(T). Controls and Procedures
            
            71Item
      9B. Other Information
            
            73PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
            
            74Item
      11. Executive Compensation
            
            77Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
            
            83Item
      13. Certain Relationships and Related Transactions and Director
      Independence
            
            84Item
      14. Principal Accountant Fees and Services
            
            85PART
      IVItem
      15. Exhibits, Financial Statement Schedules
            
            87Signatures
            
            90Certifications


2




Forward-Looking Statements





This
Annual Report on Form 10-K of Puda Coal, Inc. (“Puda” or the “Company”) contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements include the plans and objectives of
management for the future growth of the Company and its subsidiaries, including
plans and objectives related to the consummation of acquisitions and future
private and public issuances of Puda’s equity and debt securities. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of Puda. Although Puda believes that the assumptions
underlying the forward-looking statements are reasonable at the time they were
made, there can be no assurance that the forward-looking statements included in
this Form 10-K and the underlying assumptions will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included in this Form 10-K, the inclusion of such
information should not be regarded as a representation by Puda or any other
person that the objectives and plans of Puda will be achieved.





The words
“we,” “us”, “our” and “Puda” refer to Puda Coal, Inc. and its subsidiaries. The
words or phrases “would be,” “will allow,” “intends to,” “will likely result,”
“are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” and
similar expressions are intended to identify forward-looking statements. Actual
results could differ materially from those contained in the forward-looking
statements as a result of a number of risks and uncertainties, including but not
limited to:





·
            our
      dependence on distributions from our subsidiaries to meet our financial
      obligations




·
            our successful execution of our
      strategy of growth through coal mine
  acquisitions




·
            fluctuations in raw material
      prices, which we may not be able to pass on cost increases to
      customers




·
            downturns in the economy that may
      reduce demand for our
product




·
            the
      continuing performance and renewal of Shanxi Coal’s coal sales
      agreements




·
            increases
      in transportation costs




·
            our
      ability to meet quality specifications required by our
      customers




·
            increased
      competition that could reduce our sales, earnings and
      profitability




·
            our
      dependence on key persons, the loss of any of whom could adversely
      affect our operations




·
            our
      ability to pay off the obligations secured by the lien held by a company
      controlled by the Zhaos to which our assets are
    subject




·
            the
      evolving state of the Chinese economy, political, legislative and
      regulatory systems, including any changes in the interpretations of
      existing laws and the enactment of new
  laws




·
            unanticipated
      costs because of the unpredictability of the Chinese legal
      system




·
            our
      ability to remain in compliance with all applicable
      regulations




·
            the
      ability of our shareholders to commence a legal action against our company
      as we have no assets in the United States and our directors and officers
      who are not located in China




·
            our
      ability to obtain operating capital, move funds out of China and pay
      dividends in light of China’s currency
  restrictions




·
            currency
      fluctuations from our Chinese operations and fluctuations in the exchange
      rate




·
            the
      possibility that information about our operations are not readily
      available from independent third-party sources because our operations are
      all in China




·
            regulatory
      and physical risks posed by climate
changes




·
            the
      volatility and fluctuation in our stock
price




·
            the
      downward impact on our stock price decrease if a substantial number of
      shares are sold under Rule 144




·
            our
      principal stockholders’ ability to exert significant control in matters
      requiring stockholder vote and to delay, deter or prevent a change in
      control of our company




·
            our
      principal stockholders’ significant control over the company and conflicts
      of interest with the company




·
            the
      dilution of your ownership in the company and the decrease of the value of
      your investment as a result of additional equity issuance or conversion of
      outstanding derivative
securities




·
            our
      intention not to pay dividends in the foreseeable
  future




·
            our
      ability to satisfy regulatory requirements relating to our internal
      controls over financial reporting




·
            other
      risk factors discussed in our filings with the
  SEC





3




PART
I




Item
1. Business




Overview




We are a
supplier of high-grade metallurgical coking coal to the industrial sector in the
People’s Republic of China (the “PRC” or “China”). Our processed coking coal is
primarily purchased by coke and steel producers for the purpose of making the
coke required for the steel manufacturing process. Our operations are conducted
exclusively by an entity in China, Shanxi Puda Coal Group Co., Ltd (“Shanxi
Coal”), which we control through 90% indirect equity ownership.




We clean
raw coking coal sourced from third-party coal mines primarily located in Liulin
County, Shanxi Province, and market the cleaned, high quality coking coal to
coke and steel makers in our geographic market. Our current primary geographic
markets include Shanxi Province, Inner Mongolia Autonomous Region,
Hebei Province, Beijing and Tianjin, China.




We focus
on value-added coal washing processes and specialize in providing the high
quality, cleaned coking coal, which is the quality level required to produce
steel. The demand for the form of high quality coking which we produce is
primarily driven by China’s industrial expansion and advancement, which depends
on the availability of large amounts of steel for building
infrastructure.  We currently purchase raw coal from a diversified
pool of local coal mines in Shanxi Province.




The
central area of Shanxi Province, where our three coal washing plants are
located, is known for its high quality coking coal reserves.  We
are strategically located in proximity to some of the highest quality coking
coal reserves suitable for steel making. Our three coal washing plants are
located in Liulin County, Zhongyang County and Linshi County, all
of which are within approximately 150 miles of our headquarters in
Taiyuan City.  Our accumulated coal washing capacity is about 3.5
million MT per year. As a large-volume supplier, we expect to continue to enjoy
certain advantages as we believe that our primary customers will continue to
focus on suppliers that can deliver large volume, consistently high-quality
coking coal. We also expect to be well positioned to serve the demand for steel
production in China - mostly, coking companies that supply the steel mills and
steel mills with their own coking facilities. These customers are mostly located
in Shanxi Province, Inner Mongolia Autonomous Region, Hebei Province,
Beijing and Tianjin, all of which are accessible by railroad which is the
most cost effective method for coal transportation.




We have
three coal washing plants:  Shanxi Liulin Jucai Plant,located in Liulin County,
about 2 miles away from Jucai Coal, has an annual cleaning capacity of 1.1
million MT;Shanxi
Zhongyang Ruixu Plant, located in Zhongyang
County, has an annual clean coal washing capacity of 1.2 million MT;Linshi Dongqiang Plant,
located in Linshi County, has an annual coal washing capacity of 1.2 million MT.
In 2009, we produced about1.9 million MT cleaned coal, which is 54% of the 3.5
million MT annual production capacity.





To
diversify our source of revenue and increase our gross margin, our board of
directors has approved a change in its business strategy to permit us to enter
into coal mining business, which can be operated separately from or
synergistically with, our coal washing business.  In December 2009,
Puda announced that our subsidiary, Shanxi Coal, had entered into agreements
with two companies to acquire assets and mining rights with respect to two
coal mines.





On May
14, 2009, Shanxi Coal entered into an Agreement of Shares Transfer with two
unrelated individuals to purchase their 18% ownership in Shanxi Jianhe Coal
Industry Limited Company (“Jianhe Coal”) for an aggregate purchase price of RMB
100 million (approximately $14.6 million).  The transaction was closed
on December 3, 2009.  According to the agreement, Shanxi Coal, will be
paid dividends semiannually based on its 18% ownership in Jianhe Coal and
aggregate dividend to be declared will be no less than 80% of the net profits of
Jianhe Coal.  In addition, Shanxi Coal has first priority in the right to
purchase other shares of Jianhe Coal within the 24-month period following
execution of the agreement.





On
September 28, 2009, the Shanxi provincial government appointed Shanxi Coal as a
consolidator of eight coal mines in Pinglu County Yucheng City. Shanxi Coal has
the government’s permission to acquire and consolidate the eight coal mines into
five, which should increase their total annual capacity from approximately 1.6
million to 3.6 million metric tons.





On
December 11, 2009, Shanxi Coal entered into a Mining Right and Mining Assets
Transfer Agreement  (the “Da Wa Agreement”) with Pinglu County Da Wa
Coal Industry Co., Ltd. (“Da Wa Coal”), pursuant to which Shanxi Coal will
purchase from Da Wa Coal all its tangible assets and coal mining right with
respect to a coal mine located in Pinglu County, Yuncheng City, Shanxi Province
of China.  As consideration, Shanxi Coal will pay Da Wa Coal an
aggregate purchase price of RMB 190 million (approximately $27.8 million) in
cash, of which RMB 46.6 million ($6.8 million) is for the tangible assets and
RMB 143.4 million ($21.0 million) is for the mining right and compensation to Da
Wa Coal.  On December 11, 2009, Shanxi Coal also entered into a Mining
Right and Mining Assets Transfer Agreement (the “Guanyao Agreement”) with Pinglu
County Guanyao Coal Industry Co., Ltd. (“Guanyao Coal”), pursuant to which,
Shanxi Coal will purchase from Guanyao Coal all its tangible assets and coal
mining right with respect to a coal mine located in Pinglu County, Yuncheng City
and Yuanqu County, Shanxi Province of China.  As consideration, Shanxi
Coal will pay Guanyao Coal an aggregate purchase price of RMB 94.80 million
(approximately $13.9 million) in cash, of which RMB 37.6 million ($5.5 million)
is for the tangible assets and RMB 57.2 million ($8.4 million) is for the mining
rights and compensation of Guanyao Coal.




4




As of the
date of this report, we have paid 15% of the purchase price of each of the Da Wa
Agreement and Guanyao Agreement. The consummation of the transactions are
expected to take place in April 2010 upon the transfer of the registrations,
ownership certificates of the mining rights and land and property
deeds.





Following
the appointment by the Shanxi provincial government as the consolidator of eight
coal mines located Pinglu County, Yuncheng City, Shanxi Province, Shanxi Coal
received an approval in March 2010 by the Shanxi provincial government to
acquire and consolidate four additional coking coal mines into one coal mine
located in Huozhou County, Lingfen City of Shanxi
Province.  Management believes that after the consolidation, the total
annual capacity of the mines should increase from current approximately 720,000
metric tons to 900,000 metric tons. As of the reporting date, no definitive
agreement was signed on the project.




Our
principal executive office is located at 426 Xuefu Street, Taiyuan City, Shanxi
Province, China. Our telephone number is +86 (351) 2281302 and our facsimile
number is +86 (351) 7034404.




History
and Background of the Company





Puda
Coal, Inc. (formerly Purezza Group, Inc.) (the “Company” or “Puda”) was
initially incorporated in Florida on August 9, 2001 under
Florida law.  On July 30, 2009, the Company was reincorporated in
the State of Delaware.  From September 8, 2005 to September 22, 2009,
the Company’s common stock was traded on the over-the-counter Bulletin Board.
Since September 22, 2009, the Company’s common stock has been trading on the
NYSE Amex LLC Exchange (the “NYSE Amex”) under the
ticker symbol “PUDA.”





On July
15, 2005, through a reverse merger, the Company acquired all the outstanding
capital stock and ownership interests of Puda Investment Holding Limited
(“BVI”), an International Business Company organized in the British Virgin
Islands with registered capital of $50,000, and BVI became a wholly-owned
subsidiary of the Company. In exchange, Puda issued to the BVI Members (Ming
Zhao, Yao Zhao and Worldwide Gateway Co. Ltd.)  1,000,000 shares of
Series A convertible preferred stock, par value $0.01 per share, of the Company,
which are convertible into 678,500,000 shares of Puda’s common stock. The
purchase agreement provided that the preferred shares would immediately and
automatically be converted into shares of Puda’s common stock (the “Mandatory
Conversion”), following an increase in the number of authorized shares of Puda’s
common stock from 100,000,000 to 150,000,000, and a 1-for-10 reverse stock split
of Puda’s outstanding common stock (the “Reverse Split”). The share data
has been retroactively adjusted for the Reverse Split.




On August
2, 2005, the authorized number of shares of common stock of the Company was
increased from 100,000,000 shares to 150,000,000 shares. On September 8, 2005,
Puda completed the Reverse Split. Following the Mandatory Conversion of
preferred shares and the Reverse Split, the BVI Members received, in the
aggregate, approximately 67,850,000 shares of the total of 73,750,000 of Puda’s
common stock, representing 92% of the outstanding shares of Puda’s common
stock.





BVI, in
turn, owns all of the registered capital of Shanxi Putai Resources Limited
(formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
enterprises laws of the People’s Republic of China (“PRC”). Putai was
incorporated on November 5, 2004 and has a registered capital of $20,000. Putai
did not have any operating activities from November 5, 2004 (inception) until
June 24, 2005 when it entered into certain Operating Agreements with Shanxi Puda
Coal Group Co., Ltd. (formerly, Shanxi Puda Resources Co. Ltd.) (“Shanxi Coal”),
a company with limited liability established under the laws of the PRC. The
Operating Agreements provided Putai control over Shanxi Coal, and the risks and
rewards associated with equity ownership.





Shanxi
Coal was established on June 7, 1995. Shanxi Coal mainly processes and washes
raw coal and sells from its plants in Shanxi Province, high-quality, low
sulfur refined coal for industrial clients mainly in Central and Northern China.
Shanxi Coal has a registered capital of RMB22,500,000 ($2,717,000) which is
fully paid.





Prior to
our acquisition of 90% of the capital stock of Shanxi Coal on November 8, 2007,
the owners of Shanxi Coal were Mr. Ming Zhao (80%) and Mr. Yao Zhao (20%). Ming
Zhao is the chairman and chief executive officer of Puda before June2008. Yao
Zhao was the chief operating officer of Puda until his resignation became
effective on November 20, 2006. Ming Zhao and Yao Zhao are
brothers.




5




On
September 13, 2007, pursuant to an Exclusive Option Agreement between
Putai and Shanxi Coal, Putai exercised the Option to acquire 90% of the total
registered capital of Shanxi Coal at an acquisition price of RMB20,250,000
(approximately $2,692,000). Upon the Option exercise, Putai entered into a Share
Transfer Agreement with the owners of Shanxi Coal, Ming Zhao and Yao Zhao,
respectively. The acquisition price of $2,692,000 was fully paid as of December
31, 2008.  After the acquisition, Putai became a 90% owner of Shanxi
Coal, and the Exclusive Option Agreement, Exclusive Consulting Agreement,
Operating Agreement, Technology License Agreement and Authorization, each
entered into on June 24, 2005, among Putai, Shanxi Coal, Ming Zhao and Yao Zhao,
were terminated.





As of
December 31, 2009, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in
the Group companies are as follows:





·
            Puda
      Coal, Inc.: Mr. Ming Zhao (approximately 48%); Mr. Yao Zhao (approximately
      12%) held directly.





·
            Puda
      Investment Holding Limited: Mr. Ming Zhao (approximately 48%); Mr. Yao
      Zhao (approximately 12%) held indirectly through
  Puda.





·
            Shanxi
      Putai Resources Limited: Mr. Ming Zhao (approximately 48%); Mr. Yao Zhao
      (approximately 12%) held indirectly through Puda and
  BVI.





·
            Shanxi
      Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao (2%) held
      directly, Mr. Ming Zhao (approximately 43%); Mr. Yao Zhao (approximately
      11%) held indirectly through Puda, BVI and
  Putai.





Effective
on July 30, 2009 (the “Effective Date”), the Company completed a reincorporation
from a Florida corporation to a Delaware corporation.  Each issued and
outstanding share of common stock, par value $0.001 per share, of the
Florida-incorporated Company was automatically converted into 0.142857 issued
and outstanding share of common stock, par value $0.001 per share, of the
Delaware-incorporated Company (the “7-to-1 Share Conversion”).  No
fractional shares were or will be issued in connection with the conversion;
instead, the Company rounded up any fractional share to the nearest whole
number. Any common shares exercised from the warrants or stock options which
were issued before the Effective Date were also subject to the conversion
ratio of 7 to 1. The total number of authorized shares of common stock and
preferred stock did not change as a result of the
conversion.  Although the 7-to-1 Share Conversion occurred on July 30,
2009, it was retroactively reflected in the consolidated financial statements as
if the reverse split was effective from January 1, 2007.




Corporate
Structure





Our
company has an offshore holding structure commonly used by public companies with
operations in China. We are a Delaware corporation which owns Puda Investment
Holding Limited or BVI, an International Business Company incorporated in the
British Virgin Islands; BVI owns Putai, a wholly foreign-owned enterprise
established under the laws of the PRC. Our operations are conducted exclusively
through our 90% subsidiary Shanxi Coal, a PRC limited liability
company.





As of
December 31, 2009, our organizational structure is as follows:





Puda
      Coal, Inc.
              “Puda”|
      100%Puda
      Investment
              Holding
      Limited
              “BVI”
            
            Ming
      Zhao (8%)
              and
              Yao
      Zhao (2%)|  100%
            
            |Shanxi
      Putai Resources Limited
              "Putai"
            90%

              —>
            Shanxi
      Puda Coal Group Co., Ltd.
              “Shanxi
      Coal”


6




Our
Business




Coal
Cleaning




Coal
cleaning is the physical process and the stage in coal production when the raw
“run-of-mine” coal is processed into a range of cleaned, graded and uniform coal
products suitable for the commercial market. Shanxi Coal specializes in
providing cleaned coking coal for the steel making industry and is located in
Shanxi Province - the heartland of China’s raw coal and coke production.
High-quality, cleaned coking coal is best suited for making coke for purposes
such as steel manufacturing.




Cleaned
coking coal contains fewer impurities, and the cleaning process can reduce the
ash content of raw coal by 50% and lower emissions of carbon dioxide (CO2) and
sulfur dioxide (SO2). High-quality, cleaned coking coal provides increased
commercial value, reduced ash content, reduced SO2 and CO2 emissions, and
reduced transportation requirements compared to raw coking coal. Depending on
customers’ specifications and requirements, we purchase different qualities of
raw coking coal as inputs, mix them together and prepare them into a consistent
quality, cleaned coking coal. With Shanxi Coal’s over ten years experience
in mixing coal and our raw coal supply sources, we consistently provide cleaned
coking coal with an external, or total, ash content of less than 9.5% and
maximum 0.6% sulfur content, the industry specification for coking coal, which
can be further processed (through a coking process) into coke - a primary
feedstock for iron and steel making. We consistently meet or exceed these
industry specifications for cleaned coking, although most steel and coke makers
are forced to accept off-specification coking coal (external ash content
exceeding 9.5%) due to the limited supply of specification grade coking
coal.





To
produce consistent quality clean coking coal meeting steel makers specifications
(less than 9.5% external ash content and 0.6% maximum sulfur content), we mix
about 55% to 60% of high quality raw coking coal by weight with 40% to 45% lower
quality raw coking coal by weight. Although the supply of high quality raw
coking coal is limited even in Shanxi Province, we currently have direct
access to an adequate supply of the high quality raw coking coal through Jucai
Coal, two related party mines and two non-related party mines. Meanwhile, the
lower quality raw coking coal is available in more supply and is less difficult
to source.




Two coal
cleaning processes predominate in the industry: dense medium (“DM”) separation
and jig washing. Both processes are widely applied throughout the world. Jig
washing is perceived as a simpler, lower-cost option than DM separation and a
range of improved jigs has continued to find wide application in Germany, India,
and China. During the coal cleaning process, either water (for wet washing
method) or air (dry washing method) can be used as the medium for the cleaning
and beneficiation. The dry coal beneficiation process was widely used in Europe
and the United States during the period 1930-1965, but was later abandoned
largely because separation was not accurate, available technology severely
restricted feed size and throughput and moisture presented a major inhibiting
factor on performance. There remain a small number of dry coal beneficiation
units in operation, particularly in some areas of China where water is
scarce.




Our
cleaning facilities use a proprietary, water supported jig washing technology
that management believes gives it a competitive advantage in providing high
quality, cleaned coking coal for China’s steel making industry.




We also
have our own wells as a water source for our coal cleaning process and, together
with the recycling of water from the coal cleaning system, our plants have a
sufficient and reliable supply of water for our existing
operations.




Coal
Washing Industry in China




Coal
plays a fundamental role in the global economy. China is both one of the largest
consumers and producers of coal in the world. Based on China’s official
statistics, in 2009, the raw coal production was 2.96 billion MT, a 12.7%
increase over 2008, when the raw coal production was 2.626 billion MT.Coal, in its raw or
processed forms, is mainly used in four major industries:  coal fired
power plants, steel manufacturing, metallurgy of non-ferrous metals and cement
production.




Steel
production is highly dependent on high quality coking coal feedstock. Based on
the statistics of International Iron and Steel Institute, China was the largest
steel producer in the world, who produced about 567 million MT and 500
million MT raw steel in 2009 and 2008 respectively, representing 46% and
38% of the world’s total steel production in 2009 and 2008. Large Chinese
steel industry led China's coking coal industry, which stimulates cleaned
coal industry.





However,
in recent years, as China’s demand for steel grows, government authorities have
taken the initial steps to modernize the coal, coking and steel making
industries. On September 2, 2008, the Shanxi government issued an
implementation opinion on accelerating mergers and acquisitions of the coal
mining enterprises. Pursuant to the opinion, through different alternative ways
such as merger, transfer, joint restructuring and equity investing, large coal
production enterprises are encouraged to merge with or acquire small coal mines,
and restructuring within large coal enterprises is also encouraged.




7




By
utilizing modern cleaning facilities and adhering to Shanxi Province’s
emissions standards, we believe we have adopted a business strategy that should
fit the industry’s development path. Because of our long-standing relations with
our customers - mostly, coking companies that supply the steel mills and steel
mills with their own coking facilities - we may in the future increase our
market share of cleaned coking coal sold in Shanxi Province.




In China,
many coal mines do not have their own coal cleaning facilities or have
inadequate cleaning capacities. Coal cleaning companies, such as Shanxi Coal,
were established to meet the demand for cleaned coal. With our capacity of 3.5
million MT of annual cleaned coal, we believe that we should be able to
participate in the early stages of China’s modernization of the coal, coking and
steel making industries.




Although
there are many coal cleaning plants located in the northeast China, the lower
quality of the raw coal in that region makes these plants less competitive in
the cleaned coal market, especially in the coking coal market which serves the
steel making industry and coal-fired electric utilities. Lower quality coal
markets include metallurgy of non-ferrous metals and cement production - neither
of which are attractive market segments for us.




Raw
Coal Supply




One of
our competitive advantages is our access to the high-quality raw coking coal in
Liulin County, Shanxi Province - an area known as China’s “King of Coal”, which
has the highest processing yield and the lowest processing cost of any coking
coal in China. As of the date of this report, we are not a coal mining operation
and do not own any coal mines. However,
our coal cleaning facilities are located in Shanxi Province, where high
quality of coking coal reserves exists. Proximity to this high quality raw
coking coal is critical to us for many reasons, including:




·
            High-quality
      raw coking coal is needed to consistently meet our customer specifications
      for cleaned coking coal, with our larger customers insisting on even
      greater levels of quality consistency to improve the operating efficiency,
      pollution control and profits of our own
  operations.




·
            If
      we are required to use a lower quality of raw coking coal, the yield, or
      the volume of cleaned coking coal produced from a MT of raw coking coal,
      will be reduced and adversely affect our gross
  margins.




·
            The
      further the cleaning facilities are from the mines, the higher the cost to
      transport raw coal from the mines to the cleaning facilities, a cost
      typically absorbed by the coal cleaning facility. Our current and new
      cleaning facilities are all located in close proximity to our major raw
      coking coal sources, especially Jucai Coal and the other two related party
      mines.




Liulin County
has the largest reserves of high-quality raw coking coal in China. Raw coking
coal, which has a range of quality characteristics, has a maximum sulfur content
of 0.6%, an internal ash content of 4% to 7%, and an external ash content of 10%
to 14%. External ash content is the measure of the total ash content of the
coal. The process of coal washing is applied to raw coking coal in order to
reduce the amount of its external ash content, or total ash content, so that it
can be used by steel manufacturers. Steel and coke makers generally require,
although they do not always receive, cleaned coking coal to meet a minimum
specification of maximum 0.6% sulfur content and 9.5% external, or total, ash
content. Since the coal cleaning process does not reduce the internal ash
content, higher quality raw coking coal is preferred for producing a
consistent quality, cleaned coking coal meeting the steel and coke makers’
specifications.




We are
supplied with raw coking coal by 17 coal mines, of which 12 mines are located in
Liuling County in Shanxi Province. The high-quality raw coking coal we
need to source and process to meet the quality level required by steel makers is
more difficult to access in China than medium and low quality raw coal, which is
a commodity and more readily available.




8




One of
our suppliers of high quality raw coking coal is Jucai Coal, a coal mine that is
owned 75% by Yao Zhao, a manager at the coal washing plants of Shanxi Coal
and brother of our Chairman, Ming Zhao, and a 19.79% (9.08% after the
warrant exercise) stockholder of Puda. In addition to us, Jucai Coal also
supplies high grade coal to other unrelated parties. Jucai Coal sold us
188,691MT and 343,758MT in 2009 and 2008, respectively. We currently have a
preferred supply arrangement with Jucai Coal. This agreement gives us priority
over its other customers and subject to its output capacity, Jucai Coal has
agreed to supply us with our entire high quality raw coking coal requirements
pursuant to a coal supply agreement. We receive favorable pricing terms which
are at a RMB 30 (approximately $4) to RMB 50 (approximately
$7)  discount per MT from the price Jucai Coal sells to its other
customers. Payment terms are based on industry standards of 75% of the total
purchase price is paid to Jucai Coal at delivery with the balance due within 30
days after delivery. Furthermore, Jucai Coal is required to maintain the quality
of the coking coal at high quality which requires that such coking coal shall
have a maximum 4% internal ash content, maximum 0.6% sulfur content, and
external ash content of less than 10%. This preferred supply agreement expires
by its terms on November 17, 2015 and may be terminated sooner if both parties
agree to do so.





We are
supplied and have access to lower quality coking coal from a number of other
coal mines in Shanxi Province which produce raw coking coal with an
internal ash content in excess of 7%. Sources of lower quality coking coal are
plentiful around our cleaning facilities, and this lower quality coking coal
typically sells at a discount to the prevailing high quality raw coking
coal.




By the
end of fiscal year 2009, we had 17 suppliers, with no one supplier who supplied
more than 10% of our total raw coal purchase for year 2009.  In 2008,
we had 19 raw coal suppliers, with no one supplier who supplied more than 10% of
our raw coal purchase.





We also
source raw coking coal from two major coal mines located in Liulin County near
our cleaning facilities. These mines produce quality coking coal, although not
at the quality level which Jucai Coal produces. These suppliers provide raw
coking coal with maximum 0.6% sulfur content, 7% internal ash content, and 12 to
14% external ash content. These suppliers are:




·
            Liujiazhuang
      Coal Mine- Shanxi
      Coal purchased about $8,065,596, $12,152,000 and $13,249,964 of raw coal
      from this mine in 2007, 2008 and 2009,
  respectively.





·
            Liulin
      Dadongzhuang Coal Mine- Shanxi Coal purchased about
      $7,880,949, $12,839,000 and $13,180,846 of raw coal from this mine in
      2007, 2008 and 2009,
respectively.





Operations




We have
three coal washing plants, of which one is located in Liulin County, one is
located in Zhongyang County and one is located in Lingshi County. In
2009, we produced about 1.9 million MT clean coal, which is 54% of the total 3.5
million MT annual production capacity. The details about the three plants are as
follows:




·
            Shanxi Liulin Jucai
      Plant - located in Liulin County about 2 miles away from Jucai
      Coal, has an annual cleaning capacity of 1.1 million MT. Shanxi Coal
      purchased facility from Resources Group, a related party, at cost for
      approximately $5,800,000, of which $900,000 is for the 50-year land use
      rights, $1,000,000 is for the plant and $3,900,000 is for the equipment.
      Shanxi Coal purchases the plant under financial lease agreement with
      Resources Group. The financial lease loan due to Resources Group is
      amortized over 10 years and bears interest at a rate of 6% per annum
      payable quarterly.




·
            ShanxiZhongyangRuixuPlant - located in
      Zhongyang County, started production in April of 2006. It has an
      annual clean coal washing capacity of 1.2 million MT. This plant plus
      land-use right is acquired by Shanxi Coal at a price of $7.2 million.
      Shanxi Coal purchases the plant under financial lease agreement with
      Resources Group. The financial lease loan due to Resources Group is
      amortized over 10 years and bears interest at a rate of 6% per annum
      payable quarterly.




·
            LinshiDongqiangPlant - This facility,
      which is located in Linshi County, has an annual coal washing
      capacity of 1.2 million MT. We purchased this facility through an asset
      exchange with Linshi Jinliao Coal & Chemical Co. on June 22,
      2007.





Shanxi
Coal, our operating company, has over 10 years of experience in sourcing and
mixing different quality of raw coals. Since 1995, Shanxi Coal began the
business of processing different quality raw coals, and we believe that
long-term experience should allow us to produce the optimum raw coking coal mix
which typically results in lower effective cost per MT of raw coking coal
blended input. An optimum raw coal blended input also is a primary determinate
in achieving high processing yield.




As
substantially all of our business operations are conducted in China, our results
of operations, financial condition and prospects are subject to economic,
political and legal developments in China, currency fluctuations and other risks
relating to doing business in China. For a detailed description of these risks,
see risk factors sections under the sub-heading “Risks Relating to Doing
Business in China,” starting from page 16.


9




Strategic
Expansion





By
significant expansion of coking coal cleaning capacity, over the years, Puda’s
coal washing business has grown steadily and it has become a mature and
sustainable business, generating sufficient cash flows for daily
operations. We believe that we should be well positioned to participate in the
early stages of China’s modernization of the coal, coking and steel making
industries. To diversify our source of revenue, achieve higher gross margin and
continue to enhancing shareholder value, we have made a strategic move to
enter the coal mining segment, which should enable the Company to enhance
overall profit margins and solidify its position in the coal processing
value chain.





On
September 2, 2008, the Shanxi government issued an implementation opinion on
accelerating the coal mining enterprises mergers and
acquisitions.  Pursuant to the opinion, through different alternative
ways such as merger, transfer, joint restructuring and equity investing, large
coal production enterprises are encouraged to merge with or acquire small coal
mines, and restructuring within large coal enterprises is also
encouraged.  Electric power, metallurgy and chemical engineering
enterprises, which are related to the coal industry, are encouraged to
participate in, by investing as minority shareholders, mergers and acquisitions
of coal mines in order to realize the holding of specialized management, coal
and related industrial integration management.





On
September 28, 2009, the Shanxi provincial government appointed Shanxi Coal as a
consolidator of eight coal mines in Pinglu County. Shanxi Coal has the
government’s permission to acquire and consolidate the eight coal mines into
five, which could increase their total annual capacity from approximately 1.6
million to 3.6 million metric tons.





On
December 4, 2009, Shanxi Coal purchased 18% ownership of Jianhe Coal for an
aggregate purchase price of RMB 100 million (approximately $14.6
million).





On
December 11, 2009, Shanxi Coal entered into a Mining Right and Mining Assets
Transfer agreement with Da Wa Coal, pursuant to which Shanxi Coal will purchase
from Da Wa Coal all its tangible assets and coal mining right located in Pinglu
County.  As consideration, Shanxi Coal will pay Da Wa Coal an
aggregate purchase price of RMB 190 million (approximately $27.8 million) in
cash, of which RMB 46.6 million ($6.8 million) is for the tangible assets and
RMB 143.4 million ($21.0 million) is for the mining right and compensation to Da
Wa Coal.  On the same date, Shanxi Coal also entered into a Mining
Right and Mining Assets Transfer Agreement with Guanyao Coal, pursuant to which,
Shanxi Coal will purchase from Guanyao Coal all its tangible assets and coal
mining right located in Pinglu County. As consideration, Shanxi Coal will pay
Guanyao Coal an aggregate purchase price of RMB 94.80 million (approximately
$13.9 million) in cash, of which RMB 37.6 million ($5.5 million) is for the
tangible assets and RMB 57.2 million ($8.4 million) is for the mining right and
compensation of Guanyao Coal.





As of the
date of this report, the above two transactions have not been closed. The
consummation of the two transactions is expected to take place in April 2010
upon the transfer of the registrations, ownership certificates of the mining
right and land and property deeds.





Following
the appointment by the Shanxi provincial government as the consolidator of eight
coal mines located Pinglu County Yuncheng City Shanxi Province, Shanxi Coal
received an approval in March 2010 by the Shanxi provincial government to
acquire and consolidate four additional coking coal mines into one coal mine.
After the consolidation, management believes that the Jianhe Project will have
the ability to increase the total annual capacity of the four coal mines from
720,000 metric tons to 900,000 metric tons.





As of the
reporting date, we have not signed any definitive agreement with any of the four
coal mines.





Customers




Most of
our current customers are China coke producers (who then sell their coke to
major steel makers) and steel mills that have their own coking facilities. In
2008, we sold 2,342,059 MT of cleaned coking coal to 19 different customers. In
2009, we sold 1,928,888 MT of cleaned coking coal to 19 different customers.
This represents a decrease of 18% from 2008, due primarily to the weak demand
from our customers and the economic downturn which had a negative impact on the
steel plants’ production and sales.





In 2009
and 2008, we had 19 and 19 customers, respectively. In 2009 and 2008, no
customer counted for more than 10% of our annual sales.


10




With
railway access to Shanxi Province, Inner Mongolia Antonomous Region,
Hebei Province, Beijing and Tianjin, we can readily service the growing
demand for steel production among our long-standing coke producing and steel
mill customers. Our current primary geographic markets include
Shanxi Province, Inner Mongolia Autonomous Region, Hebei Province,
Beijing and Tianjin.




In
Shanxi Province alone, the independent coke producers supply 50% of China’s
coke and 80% of China’s exported coke. We believe that much of the demand for
coking coal is currently satisfied by off-specification grade coking coal of a
lower quality, in which case, management believes that the gap between market
demand for and supply of premium cleaned coal presents an opportunity for
us. This is the market which we intend to continue to pursue aggressively as we
believe steel makers will continue to focus on suppliers that can deliver large
volume, consistent quality, and specification grade coking coal at competitive
prices.


11




Employees





We had
approximately 333 employees as of December 31, 2009 as compared to 328 employees
as of December 31, 2008.  All of our employees are full-time
employees. The following table shows the breakdown of the number of employees by
department.




Department
              
              Job
      Title / Responsibility
              
              Number
      of
                EmployeesCorporate
              
              President,
      Vice Presidents, Managers
              
              8Finance
              
              Finance
      and Accounting
              
              9Supply; Marketing
      and Sales
              
              Purchase
      raw coal and maintain relationship with suppliers; Sell cleaned coal,
      maintain relationship with customers, and acquire new
      customers
              
              26Transportation
              
              Short-range
      truck drivers (within plant)
              
              15Production
              
              Produce
      cleaned coal
              
              213Quality
      Control
              
              Quality
      check on input (raw coal) and output (cleaned coal)
              
              21Reception
      and Security
              
              Administrative
      matters on reception and security
              
              41Total
              
              
              
              333





Distribution





We sell
our clean coking coal through a direct sales force of approximately
19 full-time employees who market directly to our customers, who are mostly
coking companies that supply steel mills and steel mills with their own coking
facilities. We do not have any agreements with any third-party distributors or
wholesalers. While individual sales might be made to a customer who is not
subject to a supply agreement if requested and we had adequate capacity at the
time, most of our sales are pursuant to agreements which are signed for one-year
terms, with annual renewals. Our customers are mostly located in
Shanxi Province, Inner Mongolia Autonomous Region, Hebei Province,
Beijing and Tianjin, all of which are accessible by rail lines, which is the
most cost effective method for coal transport.




Intellectual
Property





Our
cleaning facilities use a proprietary, water supported jig washing technology
that management believes gives it a competitive advantage in providing high
quality, cleaned coking coal for China’s steel making industry.





We have
no patents, trademarks, other licenses, franchises, concessions or royalty
agreements. In 2009, 2008 and 2007, we did not incur any expenditure on research
and development activities.





Governmental
Approvals





We are
not required to obtain any special governmental approvals for our products and
we do not expect any probable government regulations on our products in the
foreseeable future.





Available
Information





We file
electronically with the Securities and Exchange Commission, or SEC, our annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
The SEC maintains an Internet site that contains reports, proxy information and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of that website is http:www.sec.gov.
The materials are also available at the SEC’s public Reference Room, located at
100 F Street, Washington, D.C. 20549. The public may obtain information
through the public reference room by calling the SEC at
1-800-SEC-0330.


12




Item
1A.  Risk Factors





We are
subject to a number of risks, including those enumerated below. An investment in
our common stock is speculative and involves a high degree of risk. You should
carefully consider the following important risks and uncertainties in connection
with any investment in our common stock. If the damages threatened by any of the
following risks actually occur, our business, financial condition or results of
operations, and cash flows would likely suffer significantly. In any of those
cases, the value of our common stock could decline significantly, and you
may lose all of part of your investment.




Risks
Relating to Our Business




We
are primarily a holding company and depend on distributions from our
subsidiaries to meet our financial obligations.




Our company has an offshore holding
structure commonly used by foreign investors with operations in China. We are a
corporation which owns BVI, and BVI owns Putai. Our operations are conducted
exclusively through Shanxi Coal, in which we own 90% of the equity interest. The
operations of Shanxi Coal are our sole source of revenues. We have no operations
independent of those of Putai and its subsidiaries. As a result, we are
dependent upon the performance of Putai and its subsidiaries and will be subject
to the financial, business and other factors affecting such subsidiaries as well
as general economic and financial conditions. As substantially all of our
operations are conducted through our subsidiaries, we are dependent on the cash
flow of our subsidiaries to meet our obligations.





Because virtually all of our assets are
held by our operating subsidiaries, the claims of our shareholders will be
structurally subordinate to all existing and future liabilities and obligations,
and trade payables of such subsidiaries. In the event of a bankruptcy,
liquidation or reorganization of the Company, our assets and those of our
subsidiaries’ will be available to satisfy the claims of our shareholders only
after all of Putai and its subsidiaries’ liabilities and obligations have been
paid in full.





If
we do not successfully execute our strategy of growth through coal mine
acquisitions, our future performance, particularly our profit margins, could be
adversely affected.





We have
adopted a business strategy to enter into coal mining business, including
acquisitions of coal mines.  If we are unable to obtain or manage
these external growth opportunities successfully, we will not be able to grow
our business in the way that we currently expect.  The availability of
high quality coal mines is limited and we are not certain that we will be able
to identify suitable candidates or complete transactions on terms that are
acceptable to us.  In order to pursue such opportunities, we may
require significant additional financing, which may not be available to us on
favorable terms, if at all.  The availability of such financing is further
limited by the current global economic downturn. In addition, even if we are
able to successfully identify and complete acquisitions, we may not be able to
integrate them or take full advantage of them and therefore may not realize the
benefits that we expect.  If we are unsuccessful in our external
growth strategy, we may not be able to grow our business significantly and we
may incur asset impairment charges as a result of acquisitions that are not
successful.




Our
future operating results have been and may continue to be affected by
fluctuations in raw material prices. We may not be able to pass on cost
increases to customers.




Our
operating profits have been and may continue to be negatively affected by
fluctuations in the price of raw coking coal. We are subject to short-term coal
price volatility and have purchased and may continue to have to
purchase  raw coking coal at higher prices. In the past, we were
unable to pass the cost increase of raw coal on to customers and may not be able
to do so in the future either. This has adversely affected and may continue to
adversely affect our gross margins and profitability. Our sales agreements with
customers generally contain provisions that permit the parties to adjust the
contract price of the cleaned coking coal upward or downward at specified times.
For example, we may adjust these contract prices because of increases or
decreases in the price of raw coal from our mining suppliers, general inflation
or deflation, or changes in the cost of producing raw or cleaned coking coal
caused by such things as changes in taxes, fees, royalties or the laws
regulating the mining, production, sale or use of coal. However, if we fail to
agree on a price with our customer under these provisions, many agreements
permit customers to terminate the contract or refuse to buy all of the
quantities contracted for. Market prices for raw coking coal fluctuate in most
regions in China. From the beginning of 2008 the price of raw coking coal rose
significantly and the price arrived to historically highest level in October
2008, and then decreased afterwards. In 2009, the raw coal prices remained
at a relatively higher level due to shortage in supply because many coal mines
were temporarily shut down by the Shanxi provincial government during the
processing of coal mine consolidation. We were not able to fully pass these cost
increases on to our customers and may not be able to do so with any future
increases in the cost of raw materials. Top quality raw coking coal is critical
to our maintaining operating efficiencies and delivering cleaned coal to our
customers which meets their specifications. Since top quality raw coking coal is
more limited in supply, its price tends to be more volatile. A general rise in
coking coal prices also may adversely affect the price of, and demand for, coke
and products made with coke such as pig iron, steel and concrete. This may in
turn lead to a fall in demand for our products.




13




The
demand for our product is cyclical and is affected by industrial economic
conditions. Downturns in the economy may reduce demand for our product and our
revenues could decline.




Because
we do not export our product out of China, our business and operating results
are primarily dependent upon China’s domestic demand for cleaned coking coal.
However, because the domestic demand for coal in China is impacted by the
international demand for coal, we are also susceptible to fluctuations in the
international markets. The domestic and international coking coal markets are
cyclical and exhibit fluctuation in supply and demand from year to year and are
subject to numerous factors beyond our control, including, but not limited to,
the economic conditions in China, the global economic conditions and
fluctuations in industries with high demand for coal, such as the steel and
power industries. A significant decline in demand or excess supply for cleaned
coking coal may have a material adverse effect on our business and results of
operations.




In
addition, nearly all of our sales are concentrated in the central and northern
area of China. Accordingly, we are susceptible to fluctuations in business
caused by adverse economic conditions in those regions. Difficult economic
conditions in other geographic areas into which we may expand may also adversely
affect our business, operations and finances.




If
any of Shanxi Coal’s coal sales agreements terminates or expires, our revenues
and operating profits could suffer.




A
substantial portion of our sales are made under coal sales agreements, which are
important to the stability and profitability of our coal washing operations. It
is common business practice in China that coal purchase and sale agreements are
signed for one year terms, with annual renewals. This practice makes it
difficult for us to forecast long-term purchase and sale quantities and can
negatively affect our ability to manage inventory. These agreements may expire
or be terminated. Cleaned coal sales agreements also typically contain force
majeure provisions allowing temporary suspension of performance by us or the
customer during the duration of specified events beyond the control of the
affected party. Moreover, even if sales agreements are in force, buyers are
generally not obligated to take the quantities specified in the
contracts.




Increases
in transportation costs could make our operations less competitive and result in
the loss of customers.




Coal
producers and processors depend upon rail, barge, trucking, overland conveyor
and other systems to deliver coal to markets. While our customers typically
arrange and pay for transportation of cleaned coking coal from our facilities to
the point of use, any disruption of these transportation services because of
weather-related problems, strikes, lock-outs or other events could temporarily
impair our ability to supply coal to customers and thus could adversely affect
our results of operations. For example, the high volume of raw coal shipped from
all Shanxi Province mines could create temporary congestion on the rail
systems servicing that region. If transportation for our cleaned coking coal
becomes unavailable or uneconomic for our customers, our ability to sell cleaned
coking coal could suffer. Transportation costs can represent a significant
portion of the total cost of cleaned coal. Since our customers typically pay
that cost, it is a critical factor in a distant customer’s purchasing decision.
If transportation costs from our facilities to the customer’s are not
competitive, the customer may elect to purchase from another company. Moreover,
certain coal sales agreements permit the customer to terminate the contract if
the cost of transportation increases by specified amounts in any given 12-month
period.





We may not be able to meet quality specifications required by
our customers and as a result could incur economic penalties or cancelled
agreements which would reduce our sales and profitability.




Most of
our coal sales agreements contain provisions requiring us to deliver coking coal
meeting quality thresholds for certain characteristics such as BTUs, sulfur
content, ash content, grindability and ash fusion temperature. If we are not
able to meet these specifications, because, for example, we are not able to
source coal of the proper quality, we may incur economic penalties, including
price adjustments, the rejection of deliveries or termination of the
contracts.




Our
business is highly competitive and increased competition could reduce our sales,
earnings and profitability.




The coal
crushing, washing and processing business is highly competitive in China and we
face substantial competition in connection with the marketing and sale of our
products. Most of our competitors are well established, have greater financial,
marketing, personnel and other resources, have been in business for longer
periods of time than we have, and have products that have gained wide customer
acceptance in the marketplace. The greater financial resources of our
competitors will permit them to implement extensive marketing and promotional
programs. We could fail to expand our market share, and could fail to maintain
our current share.




14




Increased
competition could also result in overcapacity in the Chinese coal industry in
general. The coal industry in China has experienced overcapacity in the past.
During the mid-1970s and early 1980s, a growing coal market and increased demand
for coal in China attracted new investors to the coal industry, spurred the
development of new mines and resulted in added production capacity throughout
the industry, all of which led to increased competition and lower processed coal
prices. Similarly, an increase in future processed coal prices could encourage
the development of expanded capacity by new or existing coal processors. Any
overcapacity could reduce processed coal prices in the future and our
profitability would be impaired.




We
depend on key persons and the loss of any key person could adversely affect
our operations.




We and
our operating company, Shanxi Coal are highly dependent on the marketing ability
and credit of Ming Zhao, our Chairman, and the loss of his service and support
would have a material and adverse impact on our operations. We are also
dependent upon our relationship with Ming Zhao and his brother, Yao Zhao’s other
controlled businesses. None of our companies have applied for key-man life
insurance on the lives of our executives. If we were to lose the services of
Ming Zhao, our ability to operate would be impaired.





Significant
assets are subject to a lien held by a company controlled by the Zhaos and their
family. If we default on the payment of the obligations secured by the lien we
could lose title to assets which are necessary for the operation of our
business.




We
financed the acquisition of the Shanxi Liulin Jucai Plant and the Zhongyang
Plant through Resources Group, an entity owned 80% by Ming Zhao, 10% by Yao
Zhao, 5% by Xue Ning, Ming Zhao’s wife, and 5% by Xue Yue, a second-generation
cousin of Xue Ning, for an aggregate cost of $13 million paid through a 6%
secured Facilities Loan amortized over 10 years. The note is secured by the
assets purchased. If we default on the loan, the security could be enforced and
title to the assets could be lost, having a significant negative impact on our
ability to produce our products.




Since the
Zhaos are equity owners of Resources Group they may have a conflict of interest
with the Company. If the lien is enforced after a default, the secured assets
would be transferred to an entity which is owned by them. Ming Zhao and Yao Zhao
may have, or may develop in the future, conflicts of interest with us. As the
equity owners of 10% of the registered capital of Shanxi Coal, they might
personally profit if Shanxi Coal’s benefits of operation are not directed to us.
In addition, the loan used to finance our recent facility expansions are held by
Resources Group, a company which is owned by the Zhaos and their family. It
could be in their economic interest to cause us to default on the payment of the
loan with Resources Group since Resources Group could acquire the assets which
are subject to the lien as a result of enforcement of the lien after a default.
With their combined ownership of us (as of the date of report, 39.14% and
9.79%of our
outstanding common stock), they can largely control the actions which we take.
Ming Zhao is our Chairman of the board of directors. In addition, the Zhao
brothers also control the mine, Jucai, of which is one of our suppliers. By
limiting or eliminating our supply, they could adversely impact our production
and revenue, which in turn could cause us to default on our loan to Resources
Group. See also the risk below, “Our principal stockholders have significant
control over the company and may have conflicts of interest with the
company.”




We
do not have any registered patents or other intellectual property and we may not
be able to maintain the confidentiality of our processes.




We have
no patents covering our cleaning processes and we rely on the confidentiality of
our cleaning processes in producing a competitive product. The confidentiality
of our know-how may not be maintained and we may lose any meaningful competitive
advantage which might arise through our proprietary processes.





The
current credit and financial market conditions have a negative impact on global
business environment and may exacerbate certain risks affecting our
business.





The
financial markets are currently experiencing a downturn around the world. Many
of our customers and suppliers may encounter much uncertainty and risks due to
the weakened business environment and credit availability.  As a
result, these customers and suppliers may be unable to satisfy their contract
obligations, may delay payment, or may not repay our credit advance to them,
which could negatively affect our business and financial
performance.




15




Terrorist
attacks or military conflict could result in disruption of our
business.




Terrorist
attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition and
results of operations. Our business is affected by general economic conditions,
fluctuations in consumer confidence and spending, and market liquidity, which
can decline as a result of numerous factors outside of our control, such as
terrorist attacks and acts of war. Future terrorist attacks, rumors or threats
of war, actual conflicts involving China or its allies, or military or trade
disruptions affecting our customers may materially adversely affect our
operations. As a result, there could be delays or losses in transportation and
deliveries of processed coal to our customers, decreased sales of coal and
extensions of time for payment of accounts receivable from customers. Strategic
targets such as energy-related assets may be at greater risk of terrorist
attacks than other targets. In addition, disruption or significant increases in
energy prices could result in government-imposed price controls. Any, or a
combination, of these occurrences could have a material adverse effect on Shanxi
Coal’s business, financial condition and results of operations.




Risks
Relating to Doing Business in China




Our
Chinese operations pose certain risks because of the evolving state of the
Chinese economy, political, and legislative and regulatory systems. Changes in
the interpretations of existing laws and the enactment of new laws may
negatively impact our business and results of operation.




Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to economic,
political and legal developments in China. China’s economy differs from the
economies of most developed countries in many respects, including its levels of
government involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. Doing business in China involves
various risks including internal and international political risks, evolving
national economic policies as well as financial accounting standards,
expropriation and the potential for a reversal in economic conditions. Since the
late 1970s, the Chinese government has been reforming its economic system. These
policies and measures may from time to time be modified or revised. While the
Chinese economy has experienced significant growth in the past 20 years, growth
has been uneven across different regions and among various economic sectors of
China. Furthermore, while the Chinese government has implemented various
measures to encourage economic development and guide the allocation of
resources, some of these measures may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Also, since early 2004, the Chinese
government has implemented certain measures to control the pace of economic
growth including certain levels of price controls on raw coking coal. Such
controls could cause our margins to be decreased. In addition, such measures may
cause a decrease in the level of economic activity in China, which in turn could
adversely affect our results of operations and financial condition. Adverse
changes in economic policies of the Chinese government or in the laws and
regulations, if any, could have a material and adverse effect on the overall
economic growth of China, and could adversely affect our business
operations.




There are
substantial uncertainties regarding the application of Chinese laws, especially
with respect to existing and future foreign investments in China. The
interpretation and application of existing Chinese laws, regulations and
policies, and the stated positions of the Chinese authorities may change and
possible new laws, regulations or policies will impact our business and
operations. For example, due to the uncertainties surrounding the interpretation
of the transfer pricing rules relating to related party transactions in China,
it is possible that tax authorities in China may challenge the transfer prices
that we have used for related party transactions among our entities in China in
the future. Because of the evolving nature of the law, it will be difficult for
us to manage and plan for changes that may arise. Our business is and will
continue to be subject central, provincial, local and municipal regulation and
licensing in China. Compliance with such regulations and licensing can be
expected to be a time-consuming, expensive process. Compliance with foreign
country laws and regulations affecting foreign investment, business operations,
currency exchange, repatriation of profits, and taxation, will increase the risk
of investing in our stock.




We
may have to incur unanticipated costs because of the unpredictability of the
Chinese legal system.




The
Chinese legal system has many uncertainties. The Chinese legal system is based
on written statutes. Prior court decisions may be cited for reference but have
limited precedential value. Since 1979, Chinese legislation and regulations have
enhanced the protections afforded to various forms of foreign investments in
China. However, China has not developed a fully integrated legal system and
recently-enacted laws and regulations may not sufficiently cover all
aspects of economic activities in China. In particular, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, the Chinese
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. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and
management attention.




16




Our
industry is heavily regulated and we may not be able to remain in compliance
with all such regulations and we may be required to incur substantial costs in
complying with such regulation.




We are
subject to extensive regulation by China’s Mining Ministry, and by other
provincial, county and local authorities in jurisdictions in which our products
are processed or sold, regarding the processing, storage, and distribution of
our product. Our processing facilities are subject to periodic inspection by
national, province, county and local authorities. We may not be able to comply
with current laws and regulations, or any future laws and regulations. To the
extent that new regulations are adopted, we will be required to adjust our
activities in order to comply with such regulations. We may be required to incur
substantial costs in order to comply. Our failure to comply with applicable laws
and regulations could subject us to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions, which
could have a material and adverse effect on our business, operations and
finances. Changes in applicable laws and regulations may also have a negative
impact on our sales. Certain of our contracts with customers permit the
customers to terminate the contract in the event of changes in regulations
affecting the industry that increase the price of coal beyond specified
limits.




The
government regulation of our coal processing operations imposes additional costs
on us, and future regulations could increase those costs or limit our ability to
crush, clean and process coking coal. China’s central, provincial and local
authorities regulate the coal mining industry with respect to matters such as
employee health and safety, permitting and licensing requirements, air quality
standards, water pollution, plant and wildlife protection, reclamation and
restoration of mining properties after mining is completed, the discharge of
materials into the environment, surface subsidence from underground mining and
the effects that mining has on groundwater quality and availability. We are
required to prepare and present to China’s central, provincial and local
authorities data pertaining to the effect or impact that any proposed processing
of coal may have upon the environment. The costs, liabilities and requirements
associated with these regulations may be costly and time-consuming and may delay
commencement, expansion or continuation of our coal processing operations. The
possibility exists that new legislation and/or regulations and orders may be
adopted that may materially and adversely affect our operations, our cost
structure and/or our customers’ ability to use coal. New legislation or
administrative regulations (or judicial interpretations of existing laws and
regulations), including proposals related to the protection of the environment
that would further regulate and tax the coal industry, may also require us and
our customers to change operations significantly or incur increased costs.
Certain sales agreements contain provisions that allow a purchaser to terminate
its contract if legislation is passed that either restricts the use or type of
coal permissible at the purchaser’s plant or results in specified increases in
the cost of coal or its use. These factors and legislation, if enacted, could
have a material adverse effect on our financial condition and results of
operations.




It
will be difficult for any shareholder of our company to commence a legal action
against our executives. Other than the stock of our subsidiaries, we have no
assets in the United States.




We
conduct substantially all of our operations through our control of Shanxi Coal.
Shanxi Coal and substantially all of Shanxi Coal’s assets are located in Shanxi
Province, China. Other than our stock in our direct subsidiary, Puda Investments
Holding Limited, an International Business Company incorporated in the British
Virgin Islands, we have no assets in the United States. In addition, all of our
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside of China
upon our senior executive officers, including with respect to matters arising
under U.S. federal securities laws or applicable state securities laws.
Moreover, our Chinese counsel has advised us that China does not have treaties
with the United States or many other countries providing for the reciprocal
recognition and enforcement of judgments of courts.




Restrictions
on Chinese currency may limit our ability to obtain operating capital and could
restrict our ability to move funds out of China and to pay
dividends.




The
Chinese currency, “Renminbi”, or “RMB”, is not a freely convertible currency,
which could limit our ability to obtain sufficient foreign currency to support
Shanxi Coal’s business operations in the future and could impair the ability of
Shanxi Coal to pay dividends or other distributions to Puda. We rely on the
Chinese government’s foreign currency conversion policies, which may change at
any time, in regard to our currency exchange needs. Shanxi Coal receives all of
its revenues in Renminbi, which is not freely convertible into other foreign
currencies. Under our current structure, our income is derived from payments
from Shanxi Coal through Putai and BVI. In China, the government has control
over Renminbi reserves through, among other things, direct regulation of the
conversion of Renminbi into other foreign currencies and restrictions on foreign
imports. Although foreign currencies which are required for “current account”
transactions can be bought freely at authorized Chinese banks, the proper
procedural requirements prescribed by Chinese law must be met. Current account
items, including profit distributions, interest payments and expenditures from
trade-related transactions, can be made in foreign currencies without prior
approval from the Chinese State Administration of Foreign Exchange by complying
with certain procedural requirements. However, approval from appropriate
government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment
of bank loans denominated in foreign currencies. At the same time, Chinese
companies are also required to sell their foreign exchange earnings to
authorized Chinese banks and the purchase of foreign currencies for capital
account transactions still requires prior approval of the Chinese government.
This type of heavy regulation by the Chinese government of foreign currency
exchange restricts certain of our business operations and a change in any of
these government policies, or any other, could further negatively impact our
operations.




17





In order
to pay dividends, a conversion of Renminbi into U.S. dollar is required. Under
current Chinese law, the conversion of Renminbi into foreign currency generally
requires government consent. Government authorities may impose restrictions that
could have a negative impact in the future on the conversion process and upon
the ability of Shanxi Coal to meet its cash needs, and to pay dividends to Puda.
However, Putai is presently classified as a wholly-owned foreign enterprise, or
WFOE, in China that has verifiable foreign investment in China, funding having
been made through an official Chinese banking channel. Because Putai qualifies
for treatment as a WFOE, it can convert Renminbi, declare dividends and its
funds can be repatriated to Puda in the United States under current laws and
regulations in China, subject to limitations and restrictions imposed by
Chinese laws, such as the SAFE notices issued by the State Administration of
Foreign Exchange. However, the Chinese laws governing foreign currency exchange
are evolving, and changes in such laws or their interpretation or application
may adversely affect the ability to convert Renminbi, declare dividends and
repatriate funds to the United States. Because our cash flow is dependent on
dividend distributions from our subsidiaries in China, we may be restricted from
distributing dividends to stockholders if we do not receive distributions of
dividends from our subsidiaries.





We
are subject to currency fluctuations from our Chinese operations and
fluctuations in the exchange rate may negatively affect our expenses and results
of operations, as well as the value of our assets and liabilities.




Effective
July 21, 2005, The People’s Bank of China announced that the Renminbi exchange
rate regime is reformed by moving from a fixed rate of exchange based upon the
U.S. dollar to a managed floating exchange rate regime based upon market supply
and demand of a basket of currencies. As of July 26, 2005, the exchange rate
against the Renminbi was adjusted to 8.11 Renminbi per U.S. dollar from 8.28
Renminbi per U.S. dollar, which represents an adjustment of approximately two
percent. As of December 31, 2009, the last trading day in 2009, Renminbi
appreciated to approximately 6.8259 Renminbi per U.S. dollar.  It is
expected that the revaluation of the Renminbi and the exchange rate of the
Renminbi may continue to change in the future. Fluctuations in the exchange rate
between the Chinese RMB and the United States dollar could adversely affect our
operating results. Results of Shanxi Coal’s operations are translated at average
exchange rates into United States dollar for purposes of reporting results.
As a result, fluctuations in exchange rates may adversely affect our expenses
and results of operations as well as the value of our assets and liabilities.
Fluctuations may adversely affect the comparability of period-to-period results.
We do not use hedging techniques to eliminate the effects of currency
fluctuations. Thus, exchange rate fluctuations could have a material adverse
impact on our operating results and stock prices.




Because
our operations are located in China, information about our operations are not
readily available from independent third-party sources.




Because
our sole operating company, Shanxi Coal, is based in China, shareholders may
have greater difficulty in obtaining information about Shanxi Coal on a timely
basis than would shareholders of an entirely U.S.-based company. Shanxi Coal’s
operations will continue to be conducted in China and shareholders may have
difficulty in obtaining information about Shanxi Coal from sources other than
Shanxi Coal itself. Information available from newspapers, trade journals, or
local, regional or national regulatory agencies such as issuance of construction
permits and contract awards for development projects will not be readily
available to shareholders. Shareholders will be dependent upon Shanxi Coal’s
management for reports of Shanxi Coal’s progress, development, activities and
expenditure of proceeds.




Climate
change poses both regulatory and physical risks that could adversely impact our
business, financial position, results of operations and liquidity.





Climate
change could have a potential economic impact on us and climate change
mitigation programs and regulations could increase our costs. Energy costs could
be higher as a result of climate change regulations. Our costs could increase if
utility companies pass on their costs, such as those associated with carbon
taxes, emission cap and trade programs, or renewable portfolio standards. In
addition, climate change may increase the frequency or intensity of natural
disasters. As such, we cannot assure you that climate change will not adversely
impact our business, financial position, results of operations and
liquidity.




18




Risks
Associated with Our Common Stock




Our
stock price has been extremely volatile and may continue to fluctuate
significantly, which may make it more difficult for you to resell shares when
you want at prices you find attractive.





The
trading price of our common stock has been and may continue to be subject to
significant daily fluctuations.  During the three months ended
December 31, 2009, the closing sale prices of our ordinary shares on the NYSE
Amex ranged from $5.16 to $8.46 per share.  Our stock price may
fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of material customer agreements
or acquisition, the operating and stock price performance of other companies
that investors may deem comparable, new government restrictions or regulations
and news reports relating to trends in our markets.  In addition, the
stock market in general, and the market prices for China-related companies
recently have experienced extreme volatility that often has been unrelated to
the operating performance of such companies.  These broad market and
industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance.




Our
stock prices could decrease if a substantial number of shares are sold under
Rule 144.




A
substantial number of Puda’s outstanding shares of common stock are “restricted
securities” within the meaning of Rule 144 under the Securities Act. As
restricted shares, these shares may be resold only pursuant to an effective
registration statement or under the requirements of Rule 144 or other applicable
exemption from registration under the Act and as required under applicable state
securities laws. Rule 144 provides in essence that a person who has held
restricted securities for a period of at least one year may, under certain
conditions, sell every three months, in brokerage transactions, a number of
shares that does not exceed 1.0% of a our outstanding common stock. There is no
limit on the amount of restricted securities that may be sold by a non-affiliate
after the restricted securities have been held by the owner for a period of two
years or more. The SEC amended Rule 144 and, effective February 15, 2008,
non-affiliates may sell restricted securities without volume limitations or
other requirements after having held the securities for six months. If a
substantial number of shares of our stock are sold under the amended Rule 144 or
other exemption, it could cause the price our stock to go down.




Our
principal stockholders have the ability to exert significant control in matters
requiring stockholder vote and could delay, deter or prevent a change in control
of our company.




As of the
date of this report, Ming Zhao and Yao Zhao own in total approximately 48.93% of
the Company’s outstanding shares, and upon the exercise of all of the
outstanding warrants, they will own in total approximately 45.12% of our
outstanding stock and, acting together, will be able to exert a significant
degree of influence over our management and affairs and all actions requiring
stockholder approval, such as the election of directors and approval of
significant corporate transactions. In addition, corporate law provides that
certain actions may be taken by consent action of stockholders holding a
majority of the outstanding shares. In the event that the requisite approval of
stockholders is obtained by consent action, without any meeting of stockholders,
dissenting or non-participating stockholders generally would be bound by such
vote. Through their concentration of voting power, the Zhao brothers could
delay, deter or prevent a change in control of our company or other business
combinations that might otherwise be beneficial to our other stockholders.
Accordingly, this concentration of ownership may harm the market price of our
common stock. In addition, the interest of the Zhao brothers may not always
coincide with the interest of the Company’s other stockholders. In deciding how
to vote on such matters, the Zhao brothers may be influenced by interests that
conflict with yours. You should not buy our common stock unless you are
willing to entrust all aspects of operational control to Puda’s current
management team.





Our
principal stockholders have significant control over the company and may have
conflicts of interest with the company.




Ming Zhao
and Yao Zhao may have, or may develop in the future, conflicts of interest with
us. First, the loan used to finance our recent facility expansions are held by
Resources Group, a company which is owned by the Zhaos. It could be in their
economic interest to cause us to default on the payment of the loan with
Resources Group since Resources Group could acquire the assets which are subject
to the lien as a result of enforcement of the lien after a default. With their
combined ownership of us (48.93%, and 45.12% after the warrant exercise),
they can control the actions which we take. Ming Zhao is our Chairman of the
board of directors. Second, the Zhao brothers control the mine which is one of
our raw coal suppliers. We currently secure raw coal from local Liulin County
coal mines, including Jucai Coal, a coal mine that is 75% owned by Yao Zhao, Mr.
Ming Zhao’s brother and a manager of the coal washing plants of Shanxi Coal. By
limiting or eliminating our supply, the Zhao brothers, who control our coal mine
supplies, could adversely impact our production and revenue, which in turn could
cause us to default on our loan to Resources Group. In addition, the Zhao
brothers may declare dividends out of Shanxi Coal, in which they own 10% of the
direct equity interest even though it would be in the interests of Puda for
Shanxi Coal, to reinvest its profits into the business.




19




The
conversion of outstanding derivative securities could cause your ownership in
the company to be diluted and may decrease the value of your
investment.




Outstanding
derivative securities and current and future obligations to issue Puda’s
securities to various parties may dilute the value of your investment. In
November 2005, we issued warrants with 5 years term to certain
investors.  For as long as the warrants are outstanding, the holders
thereof will have an opportunity to profit from a rise in the market price of
our common stock without assuming the risks of ownership. This may have an
adverse effect on the terms upon which we can obtain additional capital. It
should be expected that the holders of such derivative securities would exercise
or convert them at a time when we would be able to obtain equity capital on
terms more favorable than the exercise or conversion prices provided by the
warrants or options. There are no preemptive rights in connection with Puda’s
common stock.





We
do not intend to pay dividends in the foreseeable future.




In 2005,
Shanxi Coal, our 90% subsidiary, declared dividends of $1,715,470, payable to
Ming Zhao (80%) and Yao Zhao (20%), of which $543,470 was paid in 2005 and
$1,172,000 was paid in October 17, 2008. In September 2008, Shanxi Coal declared
RMB 8 million ($1,170,754) dividend to its shareholders, which has not been paid
as of the date of this report.  No dividend was declared in 2006,
2007, 2008 or 2009. We do not intend to pay any dividends in the foreseeable
future. We do not plan on making any cash contributions in the manner of a
dividend or otherwise. Our board of directors presently intends to follow a
policy of retaining earnings, if any. See “Dividend” on page 24.




The
Company has the right to issue additional common stock and preferred stock
without the consent of shareholders. This would have the effect of diluting your
ownership in the company and could decrease the value of your
stock.




There are
additional authorized but unissued shares of our common stock that may be later
issued by our board of directors for any purpose without the consent or vote of
the stockholders that would dilute a stockholder’s percentage ownership of the
company.




In
addition, our articles of incorporation authorize the issuance of shares of
preferred stock, the rights, preferences, designations and limitations of which
may be set by the board of directors. While no preferred stock is currently
outstanding or subject to be issued, the articles of incorporation have
authorized issuance of up to 5,000,000 shares of preferred stock in the
discretion of the board of directors. Such preferred stock may be issued upon
filing of amended Articles of Incorporation and the payment of required fees; no
further shareholder action is required. If issued, the rights, preferences,
designations and limitations of such preferred stock would be set by the board
of directors and could operate to the disadvantage of the outstanding common
stock. Such terms could include, among others, preferences as to dividends and
distributions on liquidation.





We
may be subject to regulatory scrutiny and sustain a loss of public confidence if
we are unable to satisfy regulatory requirements relating to our internal
controls over financial reporting and/or we have material internal control
weaknesses which may result in material financial reporting errors.





Section
404 of the Sarbanes Oxley Act of 2002 requires us to perform an evaluation of
our internal controls over financial reporting beginning with our Annual Report
filed for a fiscal year ending on or after December 15, 2007 and have our
independent registered public accounting firm attest to such evaluation for
fiscal years ending on or after June 15, 2010.  Compliance with these
requirements can be expensive and time consuming. While we believe that we met
and will continue to be able to meet the applicable deadlines, no assurance can
be given that we will meet the required deadlines in future
years.  If we fail to timely complete this evaluation, or if our
auditors cannot timely attest to our evaluation when we are required to have
such attestation, we may be subject to regulatory scrutiny and a loss of public
confidence in our internal controls.





Item
2. Properties




Shanxi
Coal has the following facilities for the production of cleaned coking
coal:





The lease
for the Shanxi Liulin Jucai Plant, which Shanxi Coal leased from Jucai Coal,
expired on December 31, 2005 and was not renewed.  Shanxi Coal has
significantly increasing its coal cleaning capacity through its acquisition of a
new facility in Liulin County, which has an annual capacity of 1.1 million MT,
as well as through its acquisition of a new facility and related land use rights
in Zhongyang County, Shanxi Province which has an annual capacity of 1.2 million
MT.




20




The two
plants, related land-use rights and coal washing equipment were acquired by
Shanxi Coal from Resources Group on November 17, 2005, which is controlled by
Ming Zhao (80%) and by Yao Zhao (10%). The Shanxi Liulin County Plant, which is
located in Liulin County, Shanxi province, started production in December of
2005. The Shanxi Liulin County Plant, land-use rights and related equipment were
purchased for a cost of $5.8 million. The Zhongyang County Plant, which is
located in Zhongyang County, Shanxi province, started production in April of
2006. The Zhongyang County Plant, land-use rights and related equipment were
purchased for a cost of $7.2 million. The purchase price paid by Shanxi Coal to
Resources Group, which totals $13 million, is amortized over 10 years and bears
interest at a rate of 6% per annum payable quarterly. The loan is secured by the
Shanxi Liulin Jucai Plant and the Zhongyang Plant. Shanxi Coal pledged the
Liulin and Zhongyang coal washing plants and related equipment to Resources
Group until such time when the purchase price and interest thereon is fully paid
by Shanxi Coal to Resources Group. The annual purchase price payment made by
Shanxi Coal to Resources Group in 2008 and 2009 were
$1,300,000.




Our Linshi Plant, which is located in
Linshi County, has an annual coal washing capacity of 1.2 million MT. We
purchased this facility through an asset exchange with Linshi Coal &
Chemical on June 22, 2007. Upon the closing of the asset exchange, Shanxi Coal
acquired all the assets of a coal washing plant of Linshi Coal & Chemical,
which has an annual coal washing capacity of 1.2 million MT and a book value of
RMB 57 million (approximately $7.4 million). In exchange, Linshi Coal &
Chemical received RMB 45.5 million (approximately $5.9 million) in cash from
Shanxi Coal and all the assets of a coal washing plant of Shanxi Coal located in
Liulin County of the same province, which has an annual coal washing capacity of
400,000 ton and a book value of RMB 11.5 million (approximately $1.5
million).




The
management believes that the above facilities are in good condition and suitable
for the cleaned coking coal production.





Shanxi
Coal entered into agreements with Resources Group in 2001 to lease 200 square
meters office as headquarters office of Shanxi Coal, which is in Taiyuan,
Shanxi, and certain equipment (“the office lease agreement”). The rent was
RMB50,000 per year with the lease term of 8 years ended December 31, 2008. On
January 10, 2009, the office lease agreement was renewed with rent of RMB 90,000
per month for 1500 square meters office and lease term of 5 years ending
December 31, 2013.





We do not
own or lease any undeveloped property, and all the above facilities are
currently in good working condition. We do not have any plan for property
improvement or development in the foreseeable future.





In  2009,
Shanxi Coal maintained property insurances coverage in the amount of $31,329,000
(RMB214,000,000) through The People’s Insurance Company of China
(“PICC”).





Item
3. Legal Proceedings




There is
currently no material, pending legal proceedings against us or with respect to
any of our property.




Item
4. Removed and Reserved


21




PART
II




Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities




Market
Information





Effective
on July 30, 2009, we completed a reincorporation from Florida to Delaware.
Following the reincorporation, each issued and outstanding share of common
stock, par value $0.001 per share, of the Florida-incorporated company was
automatically converted into 0.142857 issued and outstanding share of common
stock, par value $0.001 per share, of the Delaware-incorporated
company.





On
September 17, 2009, the NYSE Amex informed us that it had authorized the listing
of our common stock on the NYSE Amex.  Our common stock ceased trading
on the OTC and commenced trading on the NYSE Amex on September 22, 2009 under
the ticker symbol “PUDA.”





Our
common stock is quoted under the symbol “PUDA” on NYSE Amex exchange market, The
high and low sales prices for the periods presented have been adjusted to
reflect the 7-to-1 Share Conversion:




High*
            
            
            Low*2008March
      31, 2008
            
            
            6.37
            
            
            
            1.89June
      30, 2008
            
            
            4.76
            
            
            
            2.31September
      30, 2008
            
            
            3.57
            
            
            
            1.75December
      31, 2008
            
            
            2.38
            
            
            
            1.262009March
      31, 2009
            
            
            2.03
            
            
            
            1.19June
      30, 2009
            
            
            4.34
            
            
            
            1.75September
      30, 2009
            
            
            6.65
            
            
            
            3.15December
      31, 2009
            
            
            8.46
            
            
            
            5.16





*
            Source:
      Yahoo! Finance





Holders




As of
December 31, 2009 there were 15,686,720shares outstanding and
approximately136holders of record of our
common stock. See “Security Ownership of Certain Beneficial Owners and
Management.”




Dividend




In 2005,
Shanxi Coal declared dividends, adjusted at exchange rate, equals to $1,715,470,
payable to Ming Zhao (80%) and Yao Zhao (20%), of which $543,470 was paid
in 2005 and $1,172,000 was paid in October 17, 2008. In September 2008, Shanxi
Coal declared dividends equal to $1,170,754 to its shareholders as
follows:  $1,053,678 to Putai, a 90% equity owner; $93,661 to Mr. Ming
Zhao, an 8% owner, and $23,415 to Mr. Yao Zhao, a 2% owner. As of the date of
this report, the declared dividend has not been paid.





Any
future determination as to the declaration and payment of dividends on Puda’s
common stock will be made at the discretion of Puda’s board of directors out of
funds legally available for such purpose. Puda is under no contractual
obligations or restrictions to declare or pay dividends on its common stock. In
addition we currently have no plans to pay such dividends. However, even if we
wish to pay dividends, because our cash flow is dependent on dividend
distributions from our subsidiaries, we may be restricted from distributing
dividends to our holders of common stock in the future if at the time we were
unable to obtain sufficient dividend distributions from Shanxi Coal or Putai. We
acquired 90% of the total capital stock of Shanxi Coal. Under current law there
is no restriction on a PRC company’s ability to pay dividends to its
shareholders because its shareholders are not Chinese, however, various factors
could limit the ability of Shanxi Coal and Putai to distribute dividends to
their shareholders, including the obligations of Shanxi Coal and Putai under the
laws of China to maintain and continuously fund certain Chinese government
mandated reserve accounts and foreign currency exchange regulations. The board
of directors currently intends to retain all earnings for use in the business
for the foreseeable future. See “Risk Factors.”





22





Securities
Authorized for Issuance under Equity Compensation Plans




The
following table sets forth, as of December 31, 2009, information with respect to
our equity compensation plans:





Plan
      Category
            
            Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            
            Weighted-
              Average
      Exercise Price
              of
      Outstanding Options, Warrants and Rights
            
            
            Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation PlansEquity
      compensation plans approved by security holders:Puda
      Coal, Inc. 2008 Equity Incentive Plan *
            
            
            1,429
            
            
            $
            17.5
            
            
            
            503,088
            (1)Equity
      compensation plans not approved by security holders:
            
            None
            
            
            
            N/A
            
            
            
            N/A







*
            after
      the 7-to-1 Share Conversion




(1)
            This
      number represents the number (after 7 to 1 Share Conversion) of securities
      available for future issuance under the Plan, excluding the shares that
      the Company is obligated to issue to the directors under the directors
      contracts and the shares issuable upon the exercise of 1,429 warrants hold
      by Mr. Ni.




Sales
of Unregistered Securities





None.





Purchases
of Equity Securities by Issuer





None.


23




Item
6. Selected Financial Data





SELECTED
FINANCIAL DATA





The
following selected financial data for the five years ended December 31, 2009 are
derived from the audited consolidated financial statements of Puda Coal, Inc.
The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information.




Year
      ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005OPERATIONS
      DATA
            
            $’000
            
            
            $’000
            
            
            $’000
            
            
            $’000
            
            
            $’000Revenues
            
            $
            214,066
            
            
            $
            242,338
            
            
            $
            165,267
            
            
            $
            137,771
            
            
            $
            51,710Net
      income
            
            
            5,481
            
            
            
            17,061
            
            
            
            10,874
            
            
            
            1,354
            
            
            
            965Option
      holder  preference dividend
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,717)
            
            
            
            (2,717)Income/(loss)
      applicable to common
              shares
            
            $
            5,481
            
            
            $
            17,061
            
            
            $
            10,874
            
            
            $
            (1,363)
            
            
            $
            (1,752)Income/(loss)
      per common share -
              basic
      and diluted
            
            $
            0.36
            
            
            $
            1.12
            
            
            $
            0.77
            
            
            $
            (0.14)
            
            
            $
            (0.21)Cash
      dividends declared per common
              Share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            --
            
            
            $
            --
            
            
            $
            0.14BALANCE
      SHEET DATATotal
      assets
            
            $
            111,201
            
            
            $
            98,632
            
            
            $
            81,264
            
            
            $
            62,984
            
            
            $
            46,701Convertible
      notes and warrants
            
            $
            7,620
            
            
            $
            4,086
            
            
            $
            7,421
            
            
            $
            13,894
            
            
            $
            18,925Other
      Long-term debt
            
            $
            6,500
            
            
            $
            7,800
            
            
            $
            9,100
            
            
            $
            10,400
            
            
            $
            11,700Shareholders'
      equity
            
            $
            83,959
            
            
            $
            72,277
            
            
            $
            48,581
            
            
            $
            23,037
            
            
            $
            6,082





QUARTERLY
FINANCIAL DATA




Unaudited
quarterly results of operations for the years ended December 31, 2009 and 2008
should be read in conjunction with the consolidated financial statements,
related notes and other financial information and the Company's quarterly
reports on Form 10-Q for the fiscal years 2009 and 2008.




First
            
            
            Second
            
            
            Third
            
            
            FourthQuarter
            
            
            Quarter
            
            
            Quarter
            
            
            Quarter
            
            
            YearYEAR
      ENDED December 31, 2009Revenues
            
            $
            49,721
            
            
            
            47,990
            
            
            
            56,106
            
            
            $
            60,249
            
            
            $
            214,066Gross
      profit
            
            $
            3,871
            
            
            
            3,602
            
            
            
            5,375
            
            
            $
            5,309
            
            
            $
            18,157Net
      income/(loss)
            
            $
            2,116
            
            
            
            1,729
            
            
            
            (621)
            
            
            $
            2,257
            
            
            $
            5,481Option
      holder preference dividend
            
            $
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            --
            
            
            $
            --Income
      applicable to common
              shares
            
            $
            2,116
            
            
            
            1,729
            
            
            
            (621)
            
            
            $
            2,257
            
            
            $
            5,481Income/(loss)
      per common share -
              basic and
      diluted
            
            $
            0.14
            
            
            
            0.11
            
            
            
            (0.04)
            
            
            $
            0.15
            
            
            $
            0.36YEAR
      ENDED December 31, 2008Revenues
            
            $
            50,598
            
            
            
            53,188
            
            
            
            74,051
            
            
            $
            64,501
            
            
            $
            242,338Gross
      profit
            
            $
            7,453
            
            
            
            6,697
            
            
            
            10,190
            
            
            $
            5,996
            
            
            $
            30,336Net
      income
            
            $
            4,295
            
            
            
            2,863
            
            
            
            6,539
            
            
            $
            3,364
            
            
            $
            17,061Option
      holder preference dividend
            
            $
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            --
            
            
            $
            --Income
      applicable to common
              shares
            
            $
            4,295
            
            
            
            2,863
            
            
            
            6,539
            
            
            $
            3,364
            
            
            $
            17,061Income
      per common share -
              basic and
      diluted
            
            $
            0.28
            
            
            
            0.21
            
            
            
            0.42
            
            
            $
            0.21
            
            
            $
            1.12





24




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





You
should read the following description of our results of operations and financial
condition in conjunction with the audited financial statements contained herein.
Unless otherwise specified, all dollar amounts are in U.S. dollars.





Overview




We
process high-grade metallurgical coking coal and supply it to coke and steel
manufacturers. High-grade, cleaned coking coal is an important input in the
steel manufacturing process. We source raw coal from third-party coal mines
located in Shanxi Province, China and after we process it to a quality
which is required to produce steel, we sell it to our customers in and around
Shanxi Province.





Results
of Operations





Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008





Net
Revenue. Net revenue was $214,066,000 for the year ended December 31, 2009,
compared to $242,338,000 for the year ended December 31, 2008, a decrease of
$28,272,000, or 12%. The decrease in revenue was primarily due to decreased
tonnage sales of cleaned coal, which was partially offset by increased selling
price.  The tonnage sales of cleaned coal decreased approximately
413,000 MT, or 18%, from approximately 2,342,000 MT for the year ended December
31, 2008 to approximately 1,929,000 MT for the year ended December 31, 2009.
Approximately $42,539,000 of the total revenue decrease in the year ended
December 31, 2009 is attributed to the decrease in tonnage sales of cleaned
coal.  The selling price of cleaned coal increased approximately $8 or
8%, from approximately $103 per ton for the year ended December 31, 2008 to
approximately $111 per ton for the year ended December 31, 2009.  This
increase in average selling price offset the decrease in total revenue by
approximately $15,432,000.  The decrease in tonnage sales were
primarily due to decreased orders of cleaned coal from customers for the year
ended December 31, 2009 as a result of general economic downturn.




Cost of
Revenue. Cost of revenue was $195,909,000 for the year ended December 31, 2009,
compared to $212,002,000 for the year ended December 31, 2008, a decrease of
$16,093,000, or 8%.  This was primarily due to decreased tonnage sales
of cleaned coal, which was partially offset by increased raw coal unit
cost.  Approximately $35,518,000 of the decrease in the total cost of
revenue in the year ended December 31, 2009 is attributable to the decrease in
tonnage sales of cleaned coal.  The average unit cost of raw coal
increased $9 or 10%, from approximately $86 per ton for the year ended
December 31, 2008 to approximately $95 per ton for the year ended December
31, 2009.  This increase in average raw coal unit cost offset the
decrease in cost of revenue by approximately $17,361,000.





Gross
Profit. Gross profit was $18,157,000 for the year ended December 31, 2009,
compared to $30,336,000 for the year ended December 31, 2008, a decrease of
$12,179,000, or 40%. Gross profit margins for the year ended December 31, 2009
and 2008 were 8% and 13%, respectively. Such decrease in gross profit margins
was primarily due to an increase in average purchase price of raw coal across
the year ended December 31, 2009 which exceeded the increase in selling
price.





Selling
Expenses. Selling expenses were $2,453,000 for the year ended December 31, 2009,
compared to $3,191,000 for the year ended December 31, 2008. This
represents a decrease of $738,000, or 23%, primarily due to the decrease in
sales volume in the year ended December 31, 2009.





General
and Administrative Expenses. General and administrative expenses
were $1,167,000 for the year ended December 31, 2009, compared to
$2,207,000 for the year ended December 31, 2008. This represents a decrease
of $1,040,000, or 47%, which was primarily a result of $979,000 reverse of
accrual on overprovided staff welfare benefits.





Income
from Operations. Income from operations was $14,537,000 for the year ended
December 31, 2009, compared to $24,938,000 for the year ended December 31, 2008.
The decrease of $10,401,000, or 42%, was primarily the result of decrease
in gross profit of $12,179,000, which was partially offset by a decrease in
operating expenses of $1,778,000.





Interest
Income.  Interest income was $89,000 for the year ended
December 31, 2009, compared to $406,000 for the year ended December 31,
2008.  This represents a decrease of $317,000, or 78%.  The
decrease is primarily due to a decrease in interest income from a short-term
loan to an unrelated party.




25




Interest
Expense. Interest expense was $518,000 for the year ended December 31,
2009, compared to $763,000 for the year ended December 31, 2008.  This
represents a decrease of $245,000, or 32%, and such decrease was primarily due
to a decrease in interest payments of $169,000 for the 8%
convertible notes, and a decrease in interest payments of $76,000 for the
6% loan from Resources Group for the purchase of the Liulin and Zhongyang
plants.





Debt
Financing Costs. Debt financing costs were $nil for the year ended December
31, 2009, compared to $778,000 for the year ended December 31, 2008.  
The decrease was primarily due to a decrease in amortization of discount on
convertible notes and warrants of $399,000, and a decrease in penalty payment of
$379,000 for not having the registration statement effective by March 17,
2006.





Derivative
Unrealized Fair Value Loss. Derivative unrealized fair value loss of $5,036,000
for the year ended December 31, 2009 and derivative unrealized fair value gain
of $394,000 for the year ended December 31, 2008, respectively represented
a change in fair value of the warrants.





Other
Income (Expense). Other income of $59,000 in the year ended December 31, 2009
represented the interest payments unclaimed by the convertible note
investors.  Other expense of $719,000 in the year ended December 31,
2008 represented the donation for earthquake rescue efforts in Sichuan Province,
PRC.





Income
Before Income Taxes. Income before income taxes was $9,131,000 for the year
ended December 31, 2009, compared to $23,478,000 for the year ended December 31,
2008. The decrease of $14,347,000, or 61%, was primarily the result of a
decrease in operating profit of $10,401,000, an increase in derivative
unrealized fair value loss of $5,430,000, and a decrease in interest income of
$317,000, which was offset by a decrease in debt financing costs of
$778,000, a decrease in other expense of $778,000, and a decrease in interest
expense of $245,000 in the year ended December 31, 2009.




Income
Taxes. Income taxes were $3,650,000 for the year ended December 31, 2009,
compared to $6,417,000 for the year ended December 31, 2008, a decrease of
$2,767,000, or 43%.  Income tax was imposed by the China Tax Bureau on
income of Shanxi Coal, as calculated under Chinese GAAP and tax
rules.  The decrease was primarily the result of the decrease in
operating profit of Shanxi Coal from $25,160,000 in the year ended December 31,
2008 to $15,469,000 in the year ended December 31, 2009.





Net
Income. Net income was $5,481,000 for the year ended December 31, 2009,
compared to $17,061,000 for the year ended December 31, 2008, a decrease of
$11,580,000, or 68%, mainly due to, a decrease in operating profit of
$10,401,000, an increase in derivative unrealized fair value loss of $5,430,000,
and a decrease in interest income of $317,000, which was offset by a decrease in
income taxes of $2,767,000, a decrease in debt financing costs of $778,000,
a decrease in other expense of $778,000, and a decrease in interest expense of
$245,000 in the year ended December 31, 2009.





Inflation
had no significant impact on the Company’s results of operations for the years
ended December 31, 2009 and 2008.





Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007





Net
Revenue. Net revenue was $242,338,000 for the year ended December 31, 2008,
compared to $165,267,000 for the year ended December 31, 2007, an increase of
$77,071,000, or 47%. The increase in revenue was primarily due to increased
tonnage sales of cleaned coal and increased selling price.  The
tonnage sales of cleaned coal increased approximately 329,000 MT, or 16%, from
approximately 2,013,000 MT for the year ended December 31, 2007 to approximately
2,342,000 MT for the year ended December 31, 2008. Approximately $26,978,000 of
the total revenue increase in the year ended December 31, 2008 is attributed to
the increase in tonnage sales of cleaned coal.  The selling price of
cleaned coal increased approximately $21 or 26%, from approximately $82 per ton
for the year ended December 31, 2007 to approximately $103 per ton for the year
ended December 31, 2008.  Approximately $49,182,000 of the total
revenue increase in the year ended December 31, 2008 is attributed to the
increase in average selling price. The increase in tonnage sales and selling
price were primarily due to increased orders of cleaned coal from existing and
new customers for the year ended December 31, 2008.




Cost of
Revenue. Cost of revenue was $212,002,000 for the year ended December 31, 2008,
compared to $136,652,000 for the year ended December 31, 2007, an increase of
$75,350,000, or 55%.  This was primarily due to increased tonnage
sales of cleaned coal and increased raw coal unit cost.  
Approximately $21,385,000 of the increase in the total cost of revenue in the
year ended December 31, 2008 is attributable to the increase in tonnage sales of
cleaned coal.  The average unit cost of raw coal increased $21 or 32%,
from approximately $65 per ton for the year ended December 31, 2007
to approximately $86 per ton for the year ended December 31, 2008.
Approximately $49,182,000 of the increase in total cost of revenue in the year
ended December 31, 2008 is attributable to the increase in raw coal unit
cost.




26




Gross
Profit. Gross profit was $30,336,000 for the year ended December 31, 2008,
compared to $28,615,000 for the year ended December 31, 2007, an increase of
$1,721,000, or 6%. Gross profit margins for the year ended December 31, 2008 and
2007 were 13% and 17%, respectively. Such decrease in gross profit margins was
primarily due to an increase in average purchase price of raw coal across the
year ended December 31, 2008.





Selling
Expenses. Selling expenses were $3,191,000 for the year ended December 31, 2008,
compared to $2,975,000 for the year ended December 31, 2007. This
represents an increase of $216,000, or 7%, primarily due to the increase in
sales volume in the year ended December 31, 2008.





General
and Administrative Expenses. General and administrative expenses
were $2,207,000 for the year ended December 31, 2008, compared to
$2,215,000 for the year ended December 31, 2007. This represents a decrease
of $8,000, which was a result of cost saving policies implemented in the
fourth quarter of 2008.





Income
from Operations. Income from operations was $24,938,000 for the year ended
December 31, 2008, compared to $23,425,000 for the year ended December 31, 2007.
The increase of $1,513,000, or 6%, was primarily the result of an increase
in gross profit of $1,721,000, which was offset by an increase in operating
expenses of $208,000.





Interest
Income.  Interest income was $406,000 for the year ended
December 31, 2008, compared to $83,000 for the year ended December 31,
2007.  This represents an increase of $323,000, or
389%.  The increase is primarily due to an increase in interest income
from a short-term loan to an unrelated party.




Interest
Expense. Interest expense was $763,000 for the year ended December 31,
2008, compared to $1,577,000 for the year ended December 31,
2007.  This represents a decrease of $814,000, or 52%, and such
decrease was primarily due to a decrease of $663,000 for the expensed portion of
the discount on the conversion feature and warrants related to converted
notes and exercised warrants, a decrease in interest payments of $80,000
for the 6% loan from Resources Group for the purchase of the Liulin and
Zhongyang plants, and a decrease in interest payments of $71,000 for the 8%
convertible notes.





Debt
Financing Costs. Debt financing costs were $778,000 for the year ended
December 31, 2008, compared to $2,422,000 for the year ended December 31,
2007.  This represents a decrease of $1,644,000, or 68%, primarily due
to a decrease in penalty payment of $1,142,000 for not having the registration
statement effective by March 17, 2006, a decrease in amortization of
discount on convertible notes and warrants of $496,000, and a decrease in
amortization of debt issue cost of $6,000.





Derivative
Unrealized Fair Value Gain. Derivative unrealized fair value gain of $394,000
for the year ended December 31, 2008 and derivative unrealized fair value loss
of $343,000 for the year ended December 31, 2008 and 2007, respectively
represented a change in fair value of the warrants.





Other
Expense. Other expense of $719,000 in the year ended December 31, 2008
represented the donation for earthquake rescue efforts in Sichuan Province,
PRC.





Income
Before Income Taxes. Income before income taxes was $23,478,000 for
the year ended December 31, 2008, compared to $19,166,000 for the year
ended December 31, 2007. The increase of $4,312,000, or 22%, was primarily
the result of a decrease in debt financing costs of $1,644,000, an increase
in operating profit of $1,513,000, a decrease in interest expense of $814,000,
an increase in derivative unrealized fair value gain of $737,000, and an
increase in interest income of $323,000, which was offset by an increase in
other expense of $719,000 in the year ended December 31, 2008.





Income
Taxes. Income taxes were $6,417,000 for the year ended December 31, 2008,
compared to $8,292,000 for the year ended December 31, 2007, a decrease of
$1,875,000, or 23%.  Income tax was imposed by the China Tax Bureau on
income of Shanxi Coal, as calculated under Chinese GAAP and tax
rules.  The decrease was primarily the result of reduction in the
income tax rate from 33% to 25%, effective since January 1, 2008, which was
offset by an increase in operating profit of Shanxi Coal from $23,980,000 in the
year ended December 31, 2007 to $25,160,000 in the year ended December 31,
2008.





Net
Income. Net income was $17,061,000 for the year ended December 31, 2008,
compared to $10,874,000 for the year ended December 31, 2007, an increase of
$6,187,000, or 57%, mainly due to, a decrease in income taxes of $1,875,000, a
decrease in debt financing costs of $1,644,000, an increase in operating
profit of $1,513,000, a decrease in interest expense of $814,000, an increase in
derivative unrealized fair value gain of $737,000, and an increase in interest
income of $323,000, which was offset by an increase in other expense of $719,000
in the year ended December 31, 2008.





Inflation
had no significant impact on the Company’s results of operations for the years
ended December 31, 2008 and 2007.




27




Business
Outlook





China’s 4
trillion yuan economic stimulus package, which was put in place in year 2009 has
encouraged steel-intensive infrastructure development projects such as the
construction of railway and motor vehicle manufacturing as well as real estate
projects. It has driven the demand for steel, which is expected to increase over
the next several years across infrastructure projects such as railroads, real
estate and automobile construction.





China is
expected to produce approximately 600mm MT of steel in 2010, roughly half the
world’s total output, according to China Coal Resource.





In
response to record high steel prices driven by the demand in the infrastructure
construction sector in China, the steel industry has begun increasing production
levels.  We anticipate tonnage sales in 2010 will improve from current
levels as steel inventories decline and our customers increase order
volumes.





We expect
that such demand will provide significant opportunities for suppliers of cleaned
coking coal like Puda Coal.  As a result, the management believes the
outlook for its coal washing operations is attractive, as the Company has
maintained a stable increased customer base and supply tunnels.





It should
be noted that, however, the financial markets are currently experiencing
unprecedented volatility, stress, illiquidity and disruption around the world.
Many of our customers and suppliers may encounter much uncertainty and risks due
to the weakened business environment and credit availability. As a result, these
customers and suppliers may be unable to satisfy their contract obligations, may
delay payment, or may not repay our credit advance to them, which could
negatively affect our business and financial performance.  See
discussions under Item 1A “Risk Factors”.




The
Company is currently operating at approximately 54% utilization of its
production capacity and has the capacity to meet any reasonable increases in
future demand. In addition, the Company has taken steps to execute its strategy
of entering the coal mining business to increase
profitability.   On May 14, 2009, Shanxi Coal entered into an
agreement to purchase 18% ownership in Shanxi Jianhe Coal Industry Limited
Company (“Jianhe Coal”) for an aggregate purchase price of RMB 100 million
($14,650,000).   The governmental registration of the share
transfer was completed on December 3, 2009 and the purchase price was fully paid
as of December 31, 2009.




On
September 28, 2009, the Shanxi provincial government appointed Shanxi Coal as a
consolidator of eight coal mines in Pinglu County. Shanxi Coal has the
government’s permission to acquire and consolidate the eight coal mines into
five, which could increase their total annual capacity from approximately 1.6
million to 3.6 million metric tons.





On
December 11, 2009, Shanxi Coal entered into a Mining Right and Mining Assets
Transfer Agreement with Da Wa Coal, pursuant to which Shanxi Coal will purchase
from Da Wa Coal all its tangible assets and coal mining right located in Pinglu
County.  As consideration, Shanxi Coal will pay Da Wa Coal an
aggregate purchase price of RMB 190 million (approximately $27.8 million) in
cash, of which RMB 46.6 million ($6.8 million) is for the tangible assets and
RMB 143.4 million ($21.0 million) is for the mining right and compensation to Da
Wa Coal.  On the same date, Shanxi Coal also entered into a Mining
Right and Mining Assets Transfer Agreement with Guanyao Coal, pursuant to which,
Shanxi Coal will purchase from Guanyao Coal all its tangible assets and coal
mining right located in Pinglu County. As consideration, Shanxi Coal will pay
Guanyao Coal an aggregate purchase price of RMB 94.80 million (approximately
$13.9 million) in cash, of which RMB 37.6 million ($5.5 million) is for the
tangible assets and RMB 57.2 million ($8.4 million) is for the mining right and
compensation of Guanyao Coal. The consummation of the above transactions is
expected to take place around April 2010 upon the transfer of the registrations,
ownership certificates of the mining right and land and property
deeds.  Shanxi Coal’s obligation for payment is guaranteed by Ming
Zhao.





If the
Company is unable to manage coal mines successfully, it will not be able to grow
its business in the way that it currently expects. Also, in order to pursue such
acquisition opportunities, depending on the size of the coal mine acquisition,
the Company may need significant additional financing, which may not be
available to it on favorable terms, if at all. The availability of such
financing is further limited by the recent tightening of the global credit
markets and the lack of investors’ confidence in the equity markets. See
discussions under Item 1A “Risk Factors”.





Liquidity and Capital
Resources





Net cash
provided by operating activities was $1,423,000 for the year ended December 31,
2009, compared to $26,513,000 for the year ended December 31, 2008, a decrease
of $25,090,000. This decrease was primarily due to an increase in working
capital needs resulting from increased accounts receivable and a decrease in net
income.




28




Net cash
used in investing activities of $20,909,000 for the year ended December 31, 2009
was related to the 18% equity interest in Jianhe Coal, and the prepayments for
the purchase of mining rights and assets of $6,259,000 in connection with the
acquisition of Dawa Coal and Guanyao Coal.  Net cash used in investing
activities of $895,000 for the year ended December 31, 2008 was related to the
payment of $893,000 to Ming Zhao and Yao Zhao for the purchase of equity
interest in Shanxi Coal, and the cash paid to acquire fixed assets of
$2,000.





Net cash
provided by financing activities of $578,000 for the year ended December 31,
2009 include $1,878,000 from the exercise of warrants, which was offset by
$1,300,000 for the repayment of the long-term debt to Resources Group. Net cash
used in financing activities of $4,487,000 for the year ended December 31, 2008
was for the repayment of convertible notes upon maturity of $2,015,000, the
repayment of long-term debt of $1,300,000, and the payment of 2005 dividends to
owners of a subsidiary of $1,172,000.





Our
principal on-going capital requirements are to finance our coal
washing operations and to fund the payment of the loans to Resources Group,
with the outstanding balance of $7,800,000 as of December 31, 2009, for
the acquisition of the  Liulin County plant and the Zhongyang
County plant, and for the acquisition of coal mines and coal mining
assets.





Warrants
were also issued in the November 2005 Private Placement to acquire up
to 1,831,475 shares of our common stock which are exercisable at price of
$4.20 per share, or an aggregate of $7,692,000. We believe that the
likelihood of  these warrants being exercised increases as our
stock price increases and decreases as our stock price decreases, with a
corresponding effect on the likelihood of our realizing proceeds from their
exercise.





Our business is heavily
dependent on our coal inventory. Because of certain coal mining accidents,
the Chinese government has been closing mines throughout China. In
addition, in Shanxi Province, the authorities are not approving new mines
that produce less than 300,000 MT output per year, are closing mines
that produce less than 90,000 MT per year and are consolidating existing
mines into larger mines with outputs between 300,000 MT and 900,000 MT.
These activities may lead to increased competition for coal and result in
higher prices for the raw coal we purchase, increasing our need for capital
resources and reducing our gross profit margins if we are not able to increase
the selling price of our products sufficiently to offset our increased
costs.





In
addition, while the Chinese steel industry has been expanding,
over-supply could have the effect of depressing steel prices, reducing our
net revenue and making the collection of our accounts receivable more
difficult.





Our cash
balance was $19,918,000 as of December 31, 2009. On February 18, 2010, we
completed the offering and sale of 3,284,000 shares (including 428,348
overallotment shares to underwriters), for net proceeds of $14.5
million.  We believe that our cash will be adequate to satisfy our
anticipated cash requirements for our legacy coal cleaning business as well as
to fulfill our commitments to purchase the coal mining assets of Dawa and
Guanyao in fiscal 2010, including requirements to maintain current operations,
complete projects already underway and achieve stated objectives or plans,
commitment for capital or other expenditure and other reasonably likely future
needs. Cash requirements for developing our coal mining strategy and long-term
business needs, including the funding of capital expenditure and debt
service for outstanding financings, are expected to be financed by a
combination of internally generated funds, the proceeds from the sale of
our securities, borrowings and other external financing sources, etc.,
although adequate financing may not be available to us on acceptable terms when
we need it.  Our belief concerning our liquidity is based on
current information. If the current information proves to be inaccurate, or
if circumstances change, we may not be able to meet our
cash needs.




CRITICAL
ACCOUNTING ESTIMATES





The
discussion and analysis of Puda’s financial condition and results of operations
is based upon Puda’s consolidated financial statements which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires Puda
to make estimates and judgments that affect the reported amounts of assets and
liabilities. On an on-going basis, Puda evaluates its estimates including the
allowance for doubtful accounts, the salability and recoverability of inventory,
income taxes and contingencies. Puda bases its estimates on historical
experience and on various other assumptions that Puda believes to be reasonable
under the circumstances, the results of which form Puda’s basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





Allowance
for doubtful accounts





Puda must
make estimates of the collectability of accounts receivable. Puda analyzes
historical write-offs, changes in its internal credit policies and customer
concentrations when evaluating the adequacy of its allowance for doubtful
accounts. Differences may result in the amount and timing of expenses for any
period if Puda makes different judgments or uses different
estimates.




29




Impairment
of long-lived assets





Property
and equipment are evaluated for impairment whenever indicators of impairment
exist. Accounting standards require that if  impairment indicators are
present, Puda must assess whether the carrying amount of the asset is
recoverable by estimating the sum of the future cash flows expected to result
from the asset, including its use and eventual disposition, undiscounted and
without interest charges. If the carrying amount is less than the recoverable
amount, an impairment charge must be recognized, based on the fair value of the
asset.





Impairment
of investments





Investments
are evaluated for impairment.  Investments carried at cost are
adjusted for other-than-temporary declines in realizable value and additional
investments.  When the decline is determined to be
other-than-temporary, the cost basis for the investment is reduced and a loss is
realized in the consolidated statement of operations in the period in which it
occurs. When the decline is determined to be temporary, the unrealized losses
are included in the shareholders' equity section in the consolidated balance
sheets.  The Company makes such determination based upon a number of
factors, including financial condition, operating results, sales forecasts and
earnings growth of the investee.





Fair
value measures




Puda
adopted Statement of Accounting Standard Codifications (“ASC”) 820 “Fair Value
Measurements and Disclosures”. The Company utilizes the income approach to
measure fair value for its financial assets and liabilities. Our major
category of financial assets and liabilities required to be measured at fair
value is derivatives.   The income approach includes option
pricing models, such as Black-Scholes.  The option-pricing model is
affected by our stock price as well as assumptions regarding a number of
variables, including the expected stock price volatility over the term of the
warrants (from which the derivatives arise), risk-free interest rate and
expected dividends.





Share-based
compensation




Share-based
compensation expenses are recognized in accordance with ASC 718
“Compensation-Stock Compensation”, which requires us to estimate the fair value
of share-based payment awards on the date of grant using an option-pricing
model.




CRITICAL
ACCOUNTING POLICIES




Revenue
recognition




Revenue
from sales of processed coal is generally recognized when the coal is delivered,
title passes to the customer and collectability is reasonably
assured.  We assess collectability based primarily on the
creditworthiness of the customer and customer’s payment history.





Foreign
currency translation





Shanxi
Coal’s functional currency is China’s Renminbi (“RMB”) and its reporting
currency is the U.S. dollar. Shanxi Coal’s results of operations and cash flow
are translated at average exchange rates during the period, and assets and
liabilities are translated at the end of period exchange rates. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in stockholders’ equity. Transaction gains and losses that
arise from exchange rate fluctuations from transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. Transaction gains and losses are not material to the
consolidated financial statements for the years ended December 31, 2009, 2008
and 2007.  At December 31, 2009, 2008 and 2007, the exchange rates per
US$1.00 were RMB 6.83, RMB 6.82 and RMB 7.30, respectively.





The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on Puda because it has not previously engaged in any
significant transactions that are subject to the restrictions.




Off
Balance Sheet Arrangements





None.




30





Tabular
Disclosure of Contractual Obligations





The contractual obligations presented
in the table below represent our estimates of future payments under fixed
contractual obligations and commitments as of December 31, 2009.





(In
thousand dollars)




Obligations
            
            Total Ending
              Balance
            
            
            Less Than
              One
      Year
            
            
            1-3 Years
            
            
            3-5 Years
            
            
            More than 5
              YearsLong
      Term Debt Obligations
            
            $
            7,800
            
            
            $
            1,300
            
            
            
            2,600
            
            
            
            2,600
            
            
            
            1,300Capital
      Lease Obligations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      Lease Obligations
            
            $
            632
            
            
            $
            158
            
            
            
            474
            
            
            
            -
            
            
            
            -Purchase
      Obligations
            
            
            35,500
            
            
            
            27,100
            
            
            
            8,400
            
            
            
            -
            
            
            
            -Repayment
      Obligations under Line of Credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            43,932
            
            
            $
            28,558
            
            
            
            11,474
            
            
            
            2,600
            
            
            
            1,300





Item 7A. Quantitative and Qualitative Disclosures about Market
Risk





Market risk represents the risk of loss
that may impact our financial position, results of operations or cash flows due
to adverse changes in market prices, including interest rate risk, foreign
currency exchange rate risk, security market risk, commodity price risk, and
other relevant market rate or price risks. We do not have any significant risks
related to equity investments, security markets or derivative financial
instruments as we do not have equity investments in privately held companies,
security markets or derivative financial instruments. Nor do we have any
significant interest rate risk, as we do not have bank loans, and its promissory
notes and loans to related parties have fixed interest rates. We are exposed to
foreign currency exchange rate risk, commodity price risk and credit
risk.




Although our reporting currency is the
U.S. dollar, the financial records of our operating subsidiaries are maintained
in their local currency, the RMB, which is our functional currency.
Approximately 100% of our revenues and 99% of our costs and expenses for the
year ended December 31, 2009 are denominated in RMB, with the balance
denominated in U.S. dollars. Approximately 99% of our assets were denominated in
RMB as of December 31, 2009. Assets and liabilities of our operating
subsidiaries are translated into U.S. dollars at the exchange rate at the
balance sheet date, their equity accounts are translated at historical exchange
rate and their income and expenses items are translated using the average rate
for the period. Any resulting exchange differences are recorded in accumulated
other comprehensive income or loss. We have not reduced our exposure
to exchange rate fluctuations by using hedging transactions. While we may
choose to do so in the future, the availability and effectiveness of any hedging
transactions may be limited and we may not be able to successfully hedge our
exchange rate risks. Accordingly, we may experience economic losses and negative
impacts on earnings and equity as a result of foreign exchange rate
fluctuations. If the RMB depreciates against the U.S. dollar, the value of our
RMB revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. See “We are subject to currency fluctuations from our
Chinese operations and fluctuations in the exchange rate may negatively affect
our expenses and results of operations, as well as the value of our assets and
liabilities” in Part I Item 1A of the annual report on Form 10-K for the
fiscal year ended December 31, 2009 under the heading “Risk Factors.” During the
year 2009, the foreign currency translation adjustment to our comprehensive
income was $2.64 million, primarily as a result of aggregate effect of foreign
currency translation on property, plants and equipment due to RMB appreciating
against the U.S. dollar. An average appreciation (depreciation) of the RMB
against the U.S. dollar of 10% could increase (decrease) our net income by $1.1
million for the year 2009. As of December 31, 2009, our accumulated other
comprehensive income was $10.133 million.





Commodity Price
Risk





Our operating profits may be negatively
affected by fluctuations in the price of raw coking coal. We are subject to
short-term coal price volatility and may be forced to purchase raw coking coal
at higher prices and may be unable to pass the cost increase of raw coal on to
customers. This may adversely affect gross margins and
profitability.  Our sales agreements with customers generally contain
provisions that permit the parties to adjust the contract price of the cleaned
coking coal upward or downward at specified times. For example, we may adjust
these contract prices because of increases or decreases in the price of raw coal
from our mining suppliers, general inflation or deflation, or changes in the
cost of producing raw or cleaned coking coal caused by such things as changes in
taxes, fees, royalties or the laws regulating the mining, production, sale or
use of coal. However, if we fail to agree on a price with our customers under
these provisions, many agreements permit the customers to terminate the contract
or refuse to buy all of the quantities contracted for.  In China, the
purchase price of raw coal increased slightly stable from approximately RMB475
per ton in 2008 to approximately RMB 483 per ton in 2009. Top quality raw
coking coal is critical for us to maintain our operating efficiencies and
deliver cleaned coal to our customers meeting their specifications. Since top
quality raw coking coal is more limited in supply, its price tends to be more
volatile. A general rise in coking coal prices also may adversely affect the
price of, and demand for, coke and products made with coke such as pig iron,
steel and concrete. This may in turn lead to a fall in demand for our products.
An increase (decrease) in raw coal purchase price of 5% could decrease
(increase) our income from operations by approximately $10.0 million for the
year 2009. We generally have not employed forward contracts or other financial
instruments to hedge commodity price risk.




31




Credit
Risk




We are exposed to credit risk from our
cash at bank and contract receivables. At December 31, 2009, we had a credit
risk exposure of cash at bank of approximately $19,918,000. The credit risk on
cash at bank is limited because the bank in which our cash is deposited is a
very reputable bank and it is not expected to have significant credit risk. We
do not require collateral or other securities to support financial instruments
that are subject to credit risk. We grant credit to our customers in China.
Accounts receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectability
of contract receivables by assessing, among other factors, the customer's
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers. Our customers have
good payment history and our accounts are current, and we currently do not
have significant bad debt provision.




32




Item
8. Financial Statements and Supplementary Data





PUDA
COAL, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


December
31, 2009, 2008 and 2007


Together
With Report Of


Independent
Registered Public Accounting Firm


PUDA
COAL, INC.




INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
            
            34Consolidated
      Balance Sheets
            
            35-36Consolidated
      Statements of Operations
            
            37Consolidated
      Statements of Changes in Stockholders’ Equity
            
            38-39Consolidated
      Statements of Cash Flows
            
            40-41Notes
      to Consolidated Financial Statements
            
            42-70





33




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


Puda
Coal, Inc.





We have
audited the accompanying consolidated balance sheets of Puda Coal, Inc. and
subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009. 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 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
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 Puda Coal, Inc. and
subsidiaries as of December 31, 2009 and 2008 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 31, 2010,
expressed an unqualified opinion.




Moore
Stephens





Certified
Public Accountants


Hong
Kong





March 31,
2010




34




PUDA
COAL, INC.


CONSOLIDATED
BALANCE SHEETS


December
31, 2009 and 2008


(In
thousands of United States dollars)





Note(s)
            
            
            December
      31, 2009
            
            
            December
      31, 2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            
            23
            
            
            $
            19,918
            
            
            $
            39,108Accounts
      receivable, net
            
            
            3
            
            
            
            25,340
            
            
            
            14,645Other
      receivables
            
            
            
            
            
            
            -
            
            
            
            7Advances
      to suppliers-
      Related parties
            
            
            4
            
            
            
            1,020
            
            
            
            879-
      Third parties
            
            
            
            
            
            
            3,552
            
            
            
            5,635Inventories
            
            
            5
            
            
            
            22,531
            
            
            
            21,589Total
      current assets
            
            
            
            
            
            
            72,361
            
            
            
            81,863PREPAYMENTS
            
            
            6
            
            
            
            6,259
            
            
            
            -PROPERTY,
      PLANT AND EQUIPMENT, NET
            
            
            7
            
            
            
            13,986
            
            
            
            13,370INTANGIBLE
      ASSETS, NET
            
            
            8
            
            
            
            3,945
            
            
            
            3,399INVESTMENT,
      AT COST
            
            
            9
            
            
            
            14,650
            
            
            
            -TOTAL
      ASSETS
            
            
            
            
            
            $
            111,201
            
            
            $
            98,632LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESCurrent
      portion of long-term debt-
      Related party
            
            
            4,10
            
            
            $
            1,300
            
            
            $
            1,300Accounts
      payable
            
            
            
            
            
            
            4,839
            
            
            
            4,272Other
      payables-
      Related parties
            
            
            4
            
            
            
            1,031
            
            
            
            1,030-
      Third parties
            
            
            
            
            
            
            2,650
            
            
            
            2,831Accrued
      expenses
            
            
            
            
            
            
            1,076
            
            
            
            1,991Income
      taxes payable
            
            
            
            
            
            
            1,091
            
            
            
            1,319VAT
      payable
            
            
            
            
            
            
            1,135
            
            
            
            1,726Derivative
      warrants
            
            
            11
            
            
            
            7,620
            
            
            
            -Total
      current liabilities
            
            
            
            
            
            
            20,742
            
            
            
            14,469LONG-TERM
      LIABILITIESLong-term
      debt-
      Related party
            
            
            4,
      10
            
            
            
            6,500
            
            
            
            7,800Derivative
      warrants
            
            
            11,
      26
            
            
            
            -
            
            
            
            4,086Total
      long-term liabilities
            
            
            
            
            
            
            6,500
            
            
            
            11,886




35




PUDA
COAL, INC.


CONSOLIDATED
BALANCE SHEETS (Continued)


December
31, 2009 and 2008


(In
thousands of United States dollars)





Note(s)
            
            
            December
      31,2009
            
            
            December
      31,2008COMMITMENTS
      AND CONTINGENCIES
            
            
            12STOCKHOLDERS’
      EQUITYPreferred
      stock, authorized 5,000,000 shares, par value $0.01, issued and
      outstanding None
            
            
            
            
            
            
            -
            
            
            
            -Common
      stock, authorized 150,000,000 shares, par value $0.001, issued and
      outstanding 15,828,863 (2008: 15,333,680)
            
            
            
            
            
            
            15
            
            
            
            15Paid-in
      capital
            
            
            
            
            
            
            35,212
            
            
            
            31,647Statutory
      surplus reserve fund
            
            
            13
            
            
            
            1,366
            
            
            
            1,366Retained
      earnings
            
            
            
            
            
            
            37,233
            
            
            
            31,752Accumulated
      other comprehensive income
            
            
            
            
            
            
            10,133
            
            
            
            7,497Total
      stockholders’ equity
            
            
            
            
            
            
            83,959
            
            
            
            72,277TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            
            
            
            $
            111,201
            
            
            $
            98,632





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




36




PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the years ended December 31, 2009, 2008 and 2007


(In
thousands of United States dollars, except per share data)





Years
      ended December 31,Note(s)
            
            
            2009
            
            
            2008
            
            
            2007NET
      REVENUE
            
            
            
            
            $
            214,066
            
            
            $
            242,338
            
            
            $
            165,267COST
      OF REVENUE
            
            
            
            
            
            195,909
            
            
            
            212,002
            
            
            
            136,652GROSS
      PROFIT
            
            
            
            
            
            18,157
            
            
            
            30,336
            
            
            
            28,615OPERATING
      EXPENSESSelling
      expenses
            
            
            
            
            
            2,453
            
            
            
            3,191
            
            
            
            2,975General
      and administrative expenses
            
            
            
            
            
            1,167
            
            
            
            2,207
            
            
            
            2,215TOTAL
      OPERATING EXPENSES
            
            
            
            
            
            3,620
            
            
            
            5,398
            
            
            
            5,190INCOME
      FROM OPERATIONS
            
            
            
            
            
            14,537
            
            
            
            24,938
            
            
            
            23,425INTEREST
      INCOME
            
            
            
            
            
            89
            
            
            
            406
            
            
            
            83INTEREST
      EXPENSE
            
            
            14
            
            
            
            (518
            )
            
            
            (763
            )
            
            
            (1,577
            )DEBT
      FINANCING COSTS
            
            
            15
            
            
            
            -
            
            
            
            (778
            )
            
            
            (2,422
            )DERIVATIVE
      UNREALIZED FAIR VALUE (LOSS)/GAIN
            
            11(c)(ii),
      16
            
            
            
            (5,036
            )
            
            
            394
            
            
            
            (343
            )OTHER
      INCOME/(EXPENSE)
            
            
            17
            
            
            
            59
            
            
            
            (719
            )
            
            
            -INCOME
      BEFORE INCOME TAXES
            
            
            
            
            
            
            9,131
            
            
            
            23,478
            
            
            
            19,166INCOME
      TAXES
            
            
            18
            
            
            
            (3,650
            )
            
            
            (6,417
            )
            
            
            (8,292
            )NET
      INCOME
            
            
            
            
            
            
            5,481
            
            
            
            17,061
            
            
            
            10,874OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
            
            
            
            
            
            
            2,636
            
            
            
            3,498
            
            
            
            2,860COMPREHENSIVE
      INCOME
            
            
            
            
            
            $
            8,117
            
            
            $
            20,559
            
            
            $
            13,734EARNINGS
      PER SHARE - BASIC
            
            
            
            
            
            $
            0.36
            
            
            $
            1.12
            
            
            $
            0.77-
      DILUTED
            
            
            
            
            
            $
            0.36
            
            
            $
            1.12
            
            
            $
            0.77WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC
            
            
            19
            
            
            
            15,409,726
            
            
            
            15,184,086
            
            
            
            14,057,845-
      DILUTED
            
            
            19
            
            
            
            15,593,201
            
            
            
            15,228,950
            
            
            
            14,370,162




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




37




PUDA COAL,
INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For
the years ended December 31, 2009, 2008 and 2007


(In
thousands of United States dollars)





COMMON
      STOCK
            
            
            PAID-IN
      CAPITAL
            
            
            STATUTORY
      SURPLUS RESERVE FUND
            
            
            RETAINED
              EARNINGS
            
            
            ACCUMULATED
      OTHER COMPREHENSIVE INCOME
            
            
            TOTAL
              STOCKHOLDERS’
      EQUITYNo.
      of sharesBalance,
      January 1, 2007 (after adjusting for the 7-to-1 Share Conversion (Note
      1)
            
            
            13,268,758
            
            
            $
            13
            
            
            $
            16,586
            
            
            $
            1,366
            
            
            $
            3,933
            
            
            $
            1,139
            
            
            $
            23,037Notes
      converted to common stock
            
            
            760,000
            
            
            
            1
            
            
            
            2,659
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,660Exercise
      of warrants, at $4.20 per share
            
            
            857,143
            
            
            
            1
            
            
            
            3,599
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,600Cashless
      exercise of placement agent warrants
            
            
            150,125
            
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1Derivative
      conversion feature transferred to equity upon conversion
            
            
            -
            
            
            
            -
            
            
            
            1,306
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,306Derivative
      note warrants transferred to equity upon exercise (Note
    11(c))
            
            
            -
            
            
            
            -
            
            
            
            1,527
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,527Derivative
      placement agent warrants transferred to equity upon exercise (Note
      11(c))
            
            
            -
            
            
            
            -
            
            
            
            2,716
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,716Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,874
            
            
            
            -
            
            
            
            10,874Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,860
            
            
            
            2,860Balance,
      December 31, 2007
            
            
            15,036,026
            
            
            $
            15
            
            
            $
            28,394
            
            
            $
            1,366
            
            
            $
            14,807
            
            
            $
            3,999
            
            
            $
            48,581Derivative
      conversion feature transferred to equity upon maturity (Note
      11(c))
            
            
            -
            
            
            
            -
            
            
            
            1,100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,100Issue  of
      penalty shares
            
            
            294,009
            
            
            
            -
            
            
            
            2,104
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,104Issue
      of directors shares (Note 22)
            
            
            3,645
            
            
            
            -
            
            
            
            49
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            49Dividend
      distribution
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (116
            )
            
            
            -
            
            
            
            (116
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17,061
            
            
            
            -
            
            
            
            17,061Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,498
            
            
            
            3,498Balance,
      December 31, 2008
            
            
            15,333,680
            
            
            $
            15
            
            
            $
            31,647
            
            
            $
            1,366
            
            
            $
            31,752
            
            
            $
            7,497
            
            
            $
            72,277




38




PUDA COAL,
INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)


For
the years ended December 31, 2009, 2008 and 2007


(In
thousands of United States dollars)





COMMON
      STOCK
            
            
            PAID-IN
      CAPITAL
            
            
            STATUTORY
      SURPLUS RESERVE FUND
            
            
            RETAINED
              EARNINGS
            
            
            ACCUMULATED
      OTHER COMPREHENSIVE INCOME
            
            
            TOTAL
              STOCKHOLDERS’
      EQUITYNo.
      of shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            No.
      of sharesIssue
      of directors shares (Note 22)
            
            
            27,721
            
            
            
            -
            
            
            
            65
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            65Exercise
      of warrants, at $4.20 per share
            
            
            439,954
            
            
            
            -
            
            
            
            1,848
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,848Exercise
      of placement agent warrants
            
            
            24,316
            
            
            
            -
            
            
            
            30
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            30Derivative
      note warrants transferred to equity upon exercise (Note
    11(c))
            
            
            
            
            
            
            -
            
            
            
            1,369
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,369Derivative
      placement agent warrants transferred to equity upon exercise (Note
      11(c))
            
            
            -
            
            
            
            -
            
            
            
            133
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            133Stock-based
      compensation (Note 22)
            
            
            -
            
            
            
            -
            
            
            
            120
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            120Round
      up fractional shares for 7-to-1 Share Conversion
            
            
            3,192
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,481
            
            
            
            -
            
            
            
            5,481Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,636
            
            
            
            2,636Balance,
      December 31, 2009
            
            
            15,828,863
            
            
            $
            15
            
            
            $
            35,212
            
            
            $
            1,366
            
            
            $
            37,233
            
            
            $
            10,133
            
            
            $
            83,959




The
accompanying notes are an integral part of these consolidated financial
statements.
  39


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the years ended December 31, 2009, 2008 and 2007


(In
thousands of United States dollars)





Years
      ended December 31,2009
            
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            5,481
            
            
            $
            17,061
            
            
            $
            10,874Adjustments
      to reconcile net income to net cash provided by operating
      activitiesAmortization
      of land-use rights
            
            
            86
            
            
            
            85
            
            
            
            78Depreciation
            
            
            1,678
            
            
            
            1,650
            
            
            
            1,252(Reverse)/provision
      for doubtful debts
            
            
            (69
            )
            
            
            17
            
            
            
            1Amortization
      of debt issue costs
            
            
            -
            
            
            
            -
            
            
            
            6Amortization
      of discount on convertible notes and warrants
            
            
            -
            
            
            
            399
            
            
            
            895Derivative
      unrealized fair value loss/(gain)
            
            
            5,036
            
            
            
            (394
            )
            
            
            343Discount
      on converted shares and exercised warrants
            
            
            -
            
            
            
            -
            
            
            
            663Stock
      compensation expense
            
            
            234
            
            
            
            74
            
            
            
            46Issue
      of common stock for penalty
            
            
            -
            
            
            
            379
            
            
            
            -Changes
      in operating assets and liabilities:Increase
      in accounts receivable
            
            
            (10,626
            )
            
            
            (5,844
            )
            
            
            (444
            )Decrease
      in other receivables
            
            
            7
            
            
            
            4
            
            
            
            41Decrease/(increase)
      in advances to suppliers
            
            
            1,937
            
            
            
            (4,243
            )
            
            
            (799
            )(Increase)/decrease
      in inventories
            
            
            (952
            )
            
            
            16,600
            
            
            
            (18,518
            )Increase/(decrease)
      in accounts payable
            
            
            569
            
            
            
            1,754
            
            
            
            (596
            )(Decrease)/increase
      in accrued expenses
            
            
            (963
            )
            
            
            526
            
            
            
            289(Decrease)/increase
      in other payables
            
            
            (178
            )
            
            
            (991
            )
            
            
            660Decrease
      in income tax payable
            
            
            (227
            )
            
            
            (1,042
            )
            
            
            (415
            )(Decrease)/increase
      in VAT payable
            
            
            (590
            )
            
            
            245
            
            
            
            90Increase
      in penalty payable
            
            
            -
            
            
            
            -
            
            
            
            1,521Decrease
      in restricted cash
            
            
            -
            
            
            
            233
            
            
            
            -Net
      cash provided by/(used in) operating activities
            
            
            1,423
            
            
            
            26,513
            
            
            
            (4,013
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Prepayments
      for purchase of mining assets
            
            
            (6,259
            )
            
            
            -
            
            
            
            -Investment
      in coal mine
            
            
            (14,650
            )
            
            
            -
            
            
            
            -Purchase
      of property, plant and equipment
            
            
            -
            
            
            
            (2
            )
            
            
            (6,111
            )Payment
      for the purchase of equity interest in Shanxi Coal
            
            
            -
            
            
            
            (893
            )
            
            
            (1,799
            )Net
      cash used in investing activities
            
            
            (20,909
            )
            
            
            (895
            )
            
            
            (7,910
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Exercise
      of warrants
            
            
            1,878
            
            
            
            -
            
            
            
            3,600Repayment
      of long-term debt
            
            
            (1,300
            )
            
            
            (1,300
            )
            
            
            (1,300
            )Repayment
      of convertible notes
            
            
            -
            
            
            
            (2,015
            )
            
            
            -Distribution
      paid to owners of a subsidiary
            
            
            -
            
            
            
            (1,172
            )
            
            
            -Net
      cash provided by/(used in) financing activities
            
            
            578
            
            
            
            (4,487
            )
            
            
            2,300Effect
      of exchange rate changes on cash
            
            
            (282
            )
            
            
            1,596
            
            
            
            1,061





40





PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


For
the years ended December 31, 2009, 2008 and 2007


(In
thousands of United States dollars)





Years
      ended December 31,Note
            
            2009
            
            
            2008
            
            
            2007Net
      (decrease)/increase in cash and cash equivalents
            
            
            
            
            (19,190
            )
            
            
            22,727
            
            
            
            (8,562
            )Cash
      and cash equivalents at beginning of year
            
            
            
            
            39,108
            
            
            
            16,381
            
            
            
            24,943Cash
      and cash equivalents at end of year
            
            
            
            $
            19,918
            
            
            $
            39,108
            
            
            $
            16,381Supplementary
      cash flow information:
            
            20




The
accompanying notes are an integral part of these consolidated financial
statements.
  41


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.
The Company





Puda
Coal, Inc. (formerly Purezza Group, Inc.)(the “Company” or “Puda”) is a
corporation organized under Delaware Law and headquartered in Shanxi Province,
China.  The Company was originally incorporated on August 9, 2001 in
Florida.





On July
15, 2005, the Company acquired all the outstanding capital stock and ownership
interests of Puda Investment Holding Limited (“BVI”) and BVI became a
wholly-owned subsidiary of the Company.  In exchange, Puda issued to
the BVI members 1,000,000 shares of its Series A convertible preferred stock,
par value $0.01 per share, of the Company, which are convertible into
678,500,000 shares of Puda’s common stock. The purchase agreement provided that
the preferred shares would immediately and automatically be converted into
shares of Puda’s common stock (the “Mandatory Conversion”), following an
increase in the number of authorized shares of Puda’s common stock from
100,000,000 to 150,000,000, and a 10 to 1 reverse stock split of Puda’s
outstanding common stock (the “10-to-1 Reverse Split”).   On
August 2, 2005, the authorized number of shares of common stock of the Company
was increased from 100,000,000 shares to 150,000,000 shares.  On
September 8, 2005, Puda completed the 10-to-1 Reverse Split.





Effective
on July 30, 2009 (the “Effective Date”), the Company completed a reincorporation
from a Florida corporation to a Delaware corporation.  Each issued and
outstanding share of common stock, par value $0.001 per share, of the
Florida-incorporated Company was automatically converted into 0.142857 issued
and outstanding share of common stock, par value $0.001 per share, of the
Delaware-incorporated Company (the “7-to-1 Share Conversion”).  No
fractional shares were or will be issued in connection with the conversion;
instead, the Company rounded up the fractional share to the nearest whole
number. Any common shares exercised from the warrants or stock options which
were issued before the Effective Date were also subject to the conversion ratio
of 7 to 1. The total number of authorized shares of common stock and preferred
stock did not change as a result of the conversion.  Although the
7-to-1 Share Conversion occurred on July 30, 2009, it was retroactively
reflected in the consolidated financial statements as if the reverse split was
effective from January 1, 2007.





BVI is an
International Business Company incorporated in the British Virgin Islands on
August 19, 2004 and it has a registered capital of $50,000.  BVI has
not had any operating activities since its inception on August 19,
2004





BVI, in
turn, owns all of the registered capital of Shanxi Putai Resources Limited
(formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
enterprises laws of the People’s Republic of China (“PRC”).  Putai was
incorporated on November 5, 2004 and has a registered capital of
$20,000.  Putai owns 90% of  Shanxi Puda Coal Group Co.,
Ltd. (formerly, Shanxi Puda Resources Co. Ltd.)(“Shanxi Coal”), a company with
limited liability established under the laws of the PRC.





Shanxi
Coal was established on June 7, 1995.  Shanxi Coal mainly processes
and washes raw coal and sells from its plants in Shanxi Province, high-quality,
low sulfur refined coal for industrial clients mainly in Central and Northern
China.  Shanxi Coal has a registered capital of RMB22,500,000
($2,717,000) which is fully paid-up.  The owners of Shanxi Coal are
Putai (90%), Mr. Ming Zhao (8%) and Mr. Yao Zhao (2%).   Ming
Zhao is the chairman and was the president and chief executive officer of Puda
until his resignation on June 25, 2008.  Yao Zhao was the chief
operating officer of Puda until his resignation became effective on November 20,
2006. Ming Zhao and Yao Zhao are brothers.




42





PUDA
COAL, INC.


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




1.
The Company (continued)





As of
December 31, 2009, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in
the companies are as follows:





·
            Puda
      Coal, Inc.: Mr. Ming Zhao (approximately 48%); Mr. Yao Zhao (approximately
      12%) held directly.





·
            Puda
      Investment Holding Limited: Mr. Ming Zhao (approximately 48%); Mr. Yao
      Zhao (approximately 12%) held indirectly through
  Puda.





·
            Shanxi
      Putai Resources Limited: Mr. Ming Zhao (approximately 48%); Mr. Yao Zhao
      (approximately 12%) held indirectly through Puda and
  BVI.





·
            Shanxi
      Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%) held directly in his
      individual capacity; Mr. Yao Zhao (2%) held directly in his individual
      capacity, Mr. Ming Zhao (approximately 43%) and Mr. Yao Zhao
      (approximately 11%) held indirectly through Puda, BVI and
      Putai.





After the
above reorganization and as of December 31, 2009, the organizational structure
of the Group is as follows:


Puda
      Coal, Inc.
              “Puda”|
      100%Puda
      Investment
              Holding
      Limited
              “BVI”
            
            Ming
      Zhao (8%)
              and
              Yao
      Zhao (2%)|  100%
            
            |Shanxi
      Putai Resources Limited
              "Putai"
            90%
              —>
            Shanxi
      Puda Coal Group Co., Ltd.
              “Shanxi
      Coal”




2.
Summary of Significant Accounting Policies





(a)
Basis of Presentation and Consolidation





The
consolidated balance sheets as of December 31, 2009 and 2008 include Puda
(Registrant and Legal Parent), BVI, Putai and Shanxi Coal (Operating Company),
collectively referred to as “the Group”. The consolidated statements of
operations for the years ended December 31, 2009, 2008 and 2007 include Puda,
BVI, Putai and Shanxi Coal for the full year.  Intercompany items have
been eliminated.





43




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




2.
Summary of Significant Accounting Policies (continued)





(b)
Accounting Standards Codifications





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codifications (“ASC”) 105 “Generally Accepted Accounting
Principles”. This section designates ASC as the source of authoritative
U.S. GAAP.  ASC 105 is effective for interim or fiscal periods ending
after September 15, 2009.  The adoption of ASC 105 did not have a
material impact on our financial position, results of operation or cash
flows.





(c)
Use of Estimates





In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and revenues and expenses
during the reported periods. Significant estimates include depreciation and
allowance for doubtful accounts receivable.  Actual results could
differ from those estimates.





(d)
Cash and Cash Equivalents





The Group
considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents. As of December 31, 2009
and 2008, the Group did not have any cash equivalents.





(e)
Allowance for Doubtful Accounts





The Group
recognizes an allowance for doubtful accounts to ensure accounts receivable are
not overstated due to uncollectability. An allowance for doubtful accounts is
maintained for all customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical
experience. An additional reserve for individual accounts is recorded when the
Group becomes aware of a customer’s inability to meet its financial obligations,
such as in the case of bankruptcy filings or deterioration in the customer’s
operating results or financial position. If circumstances related to customers
change, estimates of the recoverability of receivables would be further
adjusted.





(f)
Inventories





Inventories
are comprised of raw materials and finished goods and are stated at the lower of
cost or market value. Substantially all inventory costs are determined using the
weighted average basis. Costs of finished goods include direct labor, direct
materials, and production overhead before the goods are ready for
sale.





44




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





2.
Summary of Significant Accounting Policies (continued)





(g)
Property, Plant and Equipment, Net





Property,
plant and equipment are stated at cost. Depreciation is provided principally by
use of the straight-line method over the useful lives of the related assets.
Expenditures for maintenance and repairs, which do not improve or extend the
expected useful lives of the assets, are expensed to operations while major
repairs are capitalized.





Management
considers that the Group has a 10% residual value for buildings, and a 5%
residual value for other property, plant and equipment. The estimated useful
lives are as follows:





Buildings
      and facilities
            20
      yearsMachinery
      and equipment
            10
      yearsMotor
      vehicles
            10
      yearsOffice
      equipment and others
            10
      years





The gain
or loss on disposal of property, plant and equipment is the difference between
the net sales proceeds and the carrying amount of the relevant assets, and, if
any, is recognized in the consolidated statement of operations.





(h)
Land-use Rights and Amortization





Land-use
rights are stated at cost, less amortization. Amortization of land-use rights is
calculated on the straight-line method, based on the period over which the right
is granted by the relevant authorities in Shanxi Province, PRC.





(i)  Investment





The Group
accounts for its equity investment, for which it does not possess the ability to
exercise significant influence using the cost method under ASC 325
“Investments”.  Significant influence generally does not exist if the
ownership interest in the voting stock of the investee is less than 20% and the
Group does not take part in the operational management of the
investee.  Under the cost method of accounting, investments are
carried at cost and are adjusted only for other-than-temporary declines in
realizable value and additional investments.  When the decline is
determined to be other-than-temporary, the cost basis for the investment is
reduced and a loss is realized in the consolidated statement of operations in
the period in which it occurs. When the decline is determined to be temporary,
the unrealized losses are included in the shareholders' equity section in the
consolidated balance sheets.  The Group makes such determination based
upon a number of factors, including financial condition, operating results,
sales forecasts and earnings growth of the investee, broad economic factor
impacting the investee’s industry, and the Group's intent and ability to retain
the investment over a period of time, which is sufficient to allow for any
recovery in market value.  Under the cost method of accounting,
dividend received is recognized as income (see Note 9).





(j)
Impairment of Long-Lived Assets





In
accordance with ASC 360 "Property, Plant, and Equipment", the Group evaluates
its long-lived assets to determine whether later events and circumstances
warrant revised estimates of useful lives or a reduction in carrying value due
to impairment. If indicators of impairment exist and if the value of the assets
is impaired, an impairment loss would be recognized.





45




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




2.
Summary of Significant Accounting Policies (continued)





(k)
Derivative Financial Instruments





Derivative
financial instruments are accounted for under ASC 815 “Derivatives and
Hedging”.  Under ASC 815, all derivative instruments are recorded on
the balance sheet as assets or liabilities and measured at fair
value.  Changes in the fair value of derivative instruments are
recorded in current earnings.





(l)
Income Taxes





The Group
accounts for income taxes under ASC 740 "Income Taxes".  Under ASC
740, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases.  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.  Under
ASC 740, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.  The Group reviewed the differences between the tax bases under
PRC tax laws and financial reporting under US GAAP, and no material differences
were found, thus, there were no deferred tax assets or liabilities as of
December 31, 2009 and 2008.




ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements and it prescribes a recognition threshold and
measurement attributable for the financial statements recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
740 also provides guidance on derecognizing, classification, interest and
penalties, accounting in interim periods, disclosures and
transitions.  Interest and penalties from tax assessments, if any, are
included in general and administrative expenses in the consolidated statements
of operations.




The Group
recognizes that virtually all tax positions in the PRC are not free of some
degree of uncertainty due to tax law and policy changes by the PRC government.
However, the Group cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current PRC government officials.




Based on
all known facts and circumstances and current tax law, the Group believes that
the total amount of unrecognized tax benefits as of December 31, 2009 is not
material to its results of operations, financial condition or cash flows. The
Group also believes that the total amount of unrecognized tax benefits as of
December 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Group further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Group’s results of operations, financial condition or
cash flows.




Under
current PRC tax laws, 10% withholding tax is imposed in respect to distributions
paid to foreign owners.  As the Group has no intention to pay
dividends in the foreseeable future, no withholding tax on undistributed
earnings has been accrued as of December 31, 2009.





(m)
Revenue Recognition





Revenue
from goods sold is recognized when (i) persuasive evidence of an arrangement
exists, which is generally represented by a contract with the buyer; (ii) title
has passed to the buyer, which generally is at the time of delivery; (iii) the
price is agreed with the buyer; and (iv) collectability is reasonably
assured.





Net
revenue represents the invoiced value of products, less returns and discounts
and net of VAT.




46





(n)
Foreign Currency Transactions





The
reporting currency of the Group is the U.S. dollar.  Shanxi Coal uses
its local currency, Renminbi, as its functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the end of period exchange
rates.  Translation adjustments resulting from this process are
included in accumulated other comprehensive income in stockholders’
equity.  Transaction gains and losses that arise from exchange rate
fluctuations from transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred. These
amounts are not material to the consolidated financial statements for the years
ended December 31, 2009, 2008 and 2007.





The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.





47




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





2.
Summary of Significant Accounting Policies (continued)





(o)
Fair Value of Financial Instruments





ASC 825
“Financial Instruments”, requires disclosing fair value to the extent
practicable for financial instruments that are recognized or unrecognized in the
balance sheets.  The fair value of the financial instruments disclosed
herein is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement.





For
certain financial instruments, including cash, accounts receivable, related
party and other receivables, accounts payable, other payables and accrued
expenses, it was assumed that the carrying amounts approximate fair value
because of the near term maturities of such obligations. For long-term debt, the
carrying amount is assumed to approximate fair value based on the current rates
at which the Group could borrow funds with similar remaining
maturities.





(p)
Earnings Per Share





Basic
earnings per share is computed by dividing the earnings for the year by the
weighted average number of common shares outstanding for the
year.  Diluted earnings per share reflects the potential dilution of
securities by including other potential common stock equivalents, including
stock options and warrants, in the weighted average number of common shares
outstanding for the year, if dilutive.





(q)
Accumulated Other Comprehensive Income





Accumulated
other comprehensive income represents the change in equity of the Group during
the years presented from foreign currency translation adjustments.





(r)
Share-Based Compensation Expense





ASC 718
“Compensation-Stock Compensation”, requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock purchases based on
estimated fair values.  ASC 718 requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of awards that are ultimately expected to vest
is recognized as expense over the requisite service periods in the Group’s
consolidated statements of operations.





48




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




2.
Summary of Significant Accounting Policies (continued)





(s)
New Accounting Pronouncements





In June
2009, the FASB issued FASB Statement No. 166, "Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140" ("Statement No. 166"),
codified in ASC 810-10.  Statement No. 166, among other things,
eliminates the concept of a "qualifying special-purpose entity," changes the
requirements for derecognizing financial assets, and requires additional
disclosures about transfers of financial assets.  Statement No. 166 is
effective for annual reporting periods beginning after November 15,
2009.  The adoption of the provisions of Statement No. 166 is not
anticipated to impact the Group's consolidated financial position or results of
operations.





In June
2009, the FASB issued FASB Statement No. 167, "Amendments to FASB Interpretation
No. ("FIN") 46(R)" ("Statement No. 167"), codified in ASC
810-10.  Statement No. 167, among other things, requires a qualitative
rather than a quantitative analysis to determine the primary beneficiary of a
variable interest entity ("VIE"), amends FIN 46(R)’s consideration of related
party relationships in the determination of the primary beneficiary of a VIE,
amends certain guidance in FIN 46(R) for determining whether an entity is a VIE,
requires continuous assessments of whether an enterprise is the primary
beneficiary of a VIE, and requires enhanced disclosures about an enterprise’s
involvement with a VIE.  Statement No. 167 is effective for annual
reporting periods beginning after November 15, 2009.  The adoption of
the provisions of Statement No. 167 is not anticipated to impact the Group's
consolidated financial position or results of operations.




3.
Allowance for Doubtful Receivables





Details
of allowance for doubtful receivables deducted from accounts receivable are as
follows:-





December
      31,2009
            
            
            December
      31,2008$’000
            
            
            
            $’000Balance,
      beginning of year
            
            $
            70
            
            
            $
            48(Reversal)/addition
            
            
            (70
            )
            
            
            22Balance,
      end of year
            
            $
            -
            
            
            $
            70





The Group
did not write off any bad debts in the years ended December 31, 2009, 2008 and
2007.





49




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




4.
Related Party Transactions





As of
December 31, 2009 and 2008, the Group had the following amounts due from/to
related parties:-








December 31,
              2009
            
            
            December
      31,
              2008$’000
            
            
            $’000Advance
      to Shanxi Liulin Jucai Coal Industry Co., Limited(“Jucai
      Coal”), a related company with a common owner
            
            $
            1,020
            
            
            $
            879Other
      payable to Shanxi Puda Resources Group Limited(“Resources
      Group”), a related company with common owners
            
            $
            795
            
            
            $
            796Other
      payable to Yao Zhao, manager and shareholder of Puda
            
            
            236
            
            
            
            234$
            1,031
            
            
            $
            1,030


Loan
      payable to Resources Group-current
      portion
            
            $
            1,300
            
            
            $
            1,300-long-term
      portion
            
            
            6,500
            
            
            
            7,800$
            7,800
            
            
            $
            9,100





The
balances, except for the loan payable to Resources Group, are unsecured,
interest-free and there are no fixed terms for repayment.





The
balance payable to Resources Group of $795,000 includes $901,000 of professional
and regulatory charges related to the public listing paid by Resources Group on
behalf of the Company, netted against other receivables of $106,000 due from
Resources Group.





The
amount payable to Yao Zhao represents land-use rights paid by him on behalf of
Shanxi Coal.





In 2001,
Shanxi Coal entered into agreements with Resources Group to lease office
premises.  In the years ended December 31, 2009, 2008 and 2007, rental
expenses paid to Resources Group were $158,000, $7,000 and $6,000, respectively
(see Note 12).





In the
years ended December 31, 2009, 2008 and 2007, Shanxi Coal purchased raw coal
from Jucai Coal in the amounts of $15,055,000, $16,083,000 and $18,320,000,
respectively.





On
November 17, 2005, Shanxi Coal entered into a coal supply agreement with Jucai
Coal, pursuant to which Shanxi Coal has priority to Jucai Coal’s high grade
metallurgical coking coal supply over Jucai Coal’s other
customers.  Under the terms of the agreement, Shanxi Coal receives a
discount of approximately RMB 30 (approximately $4) to RMB 50 (approximately $7)
per metric ton of coal from the price Jucai Coal charges to its other
customers.





50




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





4.
Related Party Transactions (continued)





On
November 17, 2005, Shanxi Coal entered into two conveyance agreements with
Resources Group.  The two agreements transfer two new coal washing
plants, related land-use rights and coal washing equipment in Liulin County and
Zhongyang County, Shanxi Province.  The Liulin County plant has an
annual clean coal washing capacity of 1.1 million metric tons while the
Zhongyang County plant has an annual clean coal washing capacity of 1.2 million
metric tons.  The Liulin County plant started formal production in
December 2005.  The Liulin County plant, land-use rights and related
equipment were purchased for a cost of $5,800,000.  The Zhongyang
County plant started formal production at the end of March 2006.  The
Zhongyang County plant, land-use rights and related equipment were purchased for
a cost of $7,200,000.  Each conveyance agreement provides that the
purchase price paid by Shanxi Coal to Resources Group, which totals $13,000,000,
should be amortized over ten years from December 31, 2005 and bears interest at
a rate of 6% per annum payable quarterly.  In the year ended December
31, 2009, Shanxi Coal paid principal of $1,300,000 (2008: $1,300,000, 2007:
$1,300,000) and interest of $518,000 (2008: $594,000, 2007: $674,000) to
Resources Group.  Shanxi Coal pledged the land use rights, plant and
equipment of the plants to Resources Group until such time when the purchase
price and interest thereupon is fully paid by Shanxi Coal to Resources
Group. If Shanxi Coal fails to pay the principal or interest of the
purchase price of the plants financed by Resources Group in full when due, the
properties acquired by Shanxi Coal, which have been pledged to Resources Group
as collateral, are revertible to Resources Group (see Notes 7, 8 and 10).




5.
Inventories





As of
December 31, 2009 and 2008, inventories consist of the following:





December
      31,
              2009
            
            
            December
      31,
              2008$’000
            
            
            $’000Raw
      materials
            
            $
            9,671
            
            
            $
            7,816Finished
      goods
            
            
            12,860
            
            
            
            13,773Total
            
            $
            22,531
            
            
            $
            21,589





There was
no allowance for losses on inventories as of December 31, 2009, 2008 and
2007.





6.  Prepayments





On
December 11, 2009, Shanxi Coal entered into a Mining Right and Mining assets
Transfer Agreement with Pinglu County Da Wa Coal Industry Co., Ltd. (“Da Wa
Coal”), pursuant to which Shanxi Coal will purchase from Da Wa Coal all its
tangible assets and coal mining right with respect to a coal mine located in
Pinglu County, Yuncheng City and Yuanqu County, Shanxi Province of
China.  As consideration, Shanxi Coal will pay Da Wa Coal an aggregate
purchase price of RMB 190 million (approximately $27.8 million) in cash, of
which RMB 46.6 million ($6.8 million) is for the tangible assets and RMB 143.4
million ($21.0 million) is for the mining right and compensation to Da Wa Coal.
As of December 31, 2009, Shanxi Coal has prepaid 15% of the purchase price of
RMB 28.5 million ($4,176,000) and a second installment in the amount of RMB
123.5 million (approximately $18.1 million) will be due within 15 days upon the
transfer of the registrations and ownership certificates of the mining right and
land and property deed, which is expected to take place around April 2010.
Shanxi Coal will pay the remainder of the purchase price, RMB 38 million
(approximately $5.6 million) upon the one year anniversary of completion of the
transfer.  Shanxi Coal’s obligation for payment is guaranteed by Ming
Zhao.




51





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




6.  Prepayments
(continued)





On
December 11, 2009, Shanxi Coal also entered into a Mining Right and Mining
Assets Transfer Agreement with Pinglu County Guanyao Coal Industry Co., Ltd.
(“Guanyao Coal”), pursuant to which, Shanxi Coal will purchase from Guanyao Coal
all its tangible assets and coal mining right with respect to a coal mine
located in Pinglu County, Yuncheng City and Yuanqu County, Shanxi Province of
China.  As consideration, Shanxi Coal will pay Guanyao Coal an
aggregate purchase price of RMB 94.80 million (approximately $13.9 million) in
cash, of which RMB 37.6 million ($5.5 million) is for the tangible assets and
RMB 57.2 million ($8.4 million) is for the mining right and compensation of
Guanyao Coal.  As of December 31, 2009, Shanxi Coal has prepaid 15% of
the purchase price of RMB 14.22 million ($2,083,000 and a second installment in
the amount of RMB 61.62 million (approximately $9 million) will be due within 15
days upon the transfer of the registrations and ownership certificates with
respect to the mining right and land and property deed, which is expected to
take place around April 2010.  Shanxi Coal will pay the remainder of
the purchase price, RMB 18.96 million (approximately $2.8 million) upon the one
year anniversary of completion of the transfer. Shanxi Coal’s obligation for
payment is guaranteed by Ming Zhao.





Da Wa
Coal and Guanyao Coal are both selling their coal mine assets and coal mining
right to Shanxi Coal as a result of the Chinese government’s requirement to
close, consolidate and restructure smaller coal mines and the government’s
approval of Puda Coal as one of the few coal mine consolidators that have the
capacity to acquire and consolidate such coal mines.  Da Wa Coal and
Guanyao Coal are closing their coal mine operation and are in the liquidating
process.  Shanxi Coal is merely acquiring the tangible assets and coal
mining right of them in their liquidation process; Shanxi Coal is not acquiring
or assuming any business, customers, vendors, business partners, contracts,
employees or goodwill from the sellers, nor will Shanxi Coal assume any
indebtedness or liabilities from them.  The Group plans to account for
these transactions as asset acquisitions.




As of
December 31, 2009, Shanxi Coal has prepaid the purchase price as
follows:





December
      31,
              2009
            
            
            December
      31,
              2008$’000
            
            
            $’000Da
      Wa mining assets
            
            $
            4,176
            
            
            $
            -Guanyao
      mining assets
            
            
            2,083
            
            
            
            -Total
            
            $
            6,259
            
            
            $
            -





52




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




7.
Property, Plant and Equipment, Net





As of
December 31, 2009 and 2008, property, plant and equipment consists of the
following:





December
      31, 2009
            
            
            December
      31, 2008$’000
            
            $’000Cost:Buildings
      and facilities
            
            $
            3,899
            
            
            $
            3,344Machinery
      equipment
            
            
            15,682
            
            
            
            13,611Motor
      vehicles
            
            
            114
            
            
            
            104Office
      equipment and others
            
            
            35
            
            
            
            3219,730
            
            
            
            17,091Accumulated
      depreciation:Buildings
      and facilities
            
            
            650
            
            
            
            427Machinery
      equipment
            
            
            5,063
            
            
            
            3,278Motor
      vehicles
            
            
            24
            
            
            
            13Office
      equipment and others
            
            
            7
            
            
            
            35,744
            
            
            
            3,721Carrying
      value:Buildings
      and facilities
            
            
            3,249
            
            
            
            2,917Machinery
      equipment
            
            
            10,619
            
            
            
            10,333Motor
      vehicles
            
            
            90
            
            
            
            91Office
      equipment and others
            
            
            28
            
            
            
            29$
            13,986
            
            
            $
            13,370





Shanxi
Coal pledged the Liulin and Zhongyang coal washing plant and related equipment
to Resources Group until such time when the purchase price and interest thereon
is fully paid by Shanxi Coal.   If Shanxi Coal fails to pay the
principal and interest of the purchase prices of the new plants financed by
Resources Group in full when due, the properties acquired by Shanxi Coal, which
have been pledged to Resources Group as the collateral, are revertible to
Resources Group(see
Notes 4 and 10).





Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was approximately
$1,678,000, $1,650,000 and $1,252,000, respectively.  In the year
ended December 31, 2009, the amount included in cost of sales and general and
administrative expenses was approximately $1,645,000 (2008: $1,618,000, 2007:
$1,238,000) and $33,000 (2008: $32,000, 2007: $14,000),
respectively.





There was
no impairment in the value of property, plant and equipment for the years ended
December 31, 2009, 2008 and 2007.





53




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




8.
Intangible Assets, Net





Land-use
      rightsDecember
      31,2009
            
            
            December
      31,2008$’000
            
            
            $’000Cost
            
            $
            4,297
            
            
            $
            3,634Accumulated
      amortization
            
            
            352
            
            
            
            235Carrying
      value
            
            $
            3,945
            
            
            $
            3,399





Land-use
rights of $2,242,000 in Liulin County purchased from Resources Group are located
in Shanxi Province and are amortized over fifty years up to August 4,
2055.  Land-use rights of $1,392,000 in Zhongyang County purchased
from Resources Group are located in Shanxi Province and are amortized over fifty
years up to May 20, 2055.  Shanxi Coal pledged these land-use rights
to Resources Group until such time when the purchase price and interest thereon
is fully paid by Shanxi Coal (see Notes 4 and 10).





Amortization
expense for the years ended December 31, 2009, 2008 and 2007 was approximately
$86,000, $85,000 and 78,000, respectively.  The estimated aggregate
amortization expense for the five years ending December 31, 2010, 2011, 2012,
2013 and 2014 amounts to approximately $86,000, $86,000, $86,000, $86,000 and
$86,000, respectively.





There was
no impairment in the value of intangible assets for the years ended December 31,
2009, 2008 and 2007.




9.  Investment,
at cost





On May
14, 2009, Shanxi Coal entered into an Agreement of Shares Transfer with two
unrelated individuals to purchase their equity, constituting 18% ownership, in
Shanxi Jianhe Coal Industry Limited Company (“Jianhe Coal”) for an aggregate
purchase price of $14,650,000. The governmental registration of the share
transfer was completed on December 3, 2009 and the purchase price was fully paid
as of December 31, 2009.  In addition, under the agreement, the
individual, owning the other 82% of Jianhe Coal, guaranteed Shanxi Coal first
priority in the right to purchase other shares of Jianhe Coal within the
24-month period following execution of the agreement. Shanxi Coal will not take
part in the operational management of the coal mine but will be paid dividends
semiannually based on its 18% ownership in Jianhe Coal, and the dividends
declared each year will be no less than 80% of the annual net profits of Jianhe
Coal.





The
investment was recorded at cost and there was no impairment in the value of
investment for the year ended December 31, 2009 (see Note 2(i)).





54




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




10.
Long-term Debt





December
      31,2009
            
            
            December
      31,2008$’000
            
            
            $’000Conveyance
      loan
            
            $
            7,800
            
            
            $
            9,100Less:
      current portion
            
            
            (1,300
            )
            
            
            (1,300
            )Long-term
      portion
            
            $
            6,500
            
            
            $
            7,800





The
conveyance loan is seller-financed, payable over ten years from December 31,
2005 and bears interest at a rate of 6% per annum, payable
quarterly.  In the year ended December 31, 2009, Shanxi Coal paid
principal of $1,300,000 (2008: $1,300,000, 2007: $1,300,000) and interest of
$518,000 (2008: $594,000, 2007: $674,000) to Resources Group.  Shanxi
Coal pledged the land-use rights and plant and equipment until such time when
the purchase price and interest thereon is fully paid by Shanxi Coal to
Resources Group (see Notes 4, 7 and 8).





The
future principal payments under the conveyance loan as of December 31, 2009 are
as follows:





Year Ending December 31,
            
            $’0002010
            
            $
            1,3002011
            
            
            1,3002012
            
            
            1,3002013
            
            
            1,3002014
            
            
            1,300Thereafter
            
            
            1,300$
            7,800




11.  Derivative
Warrants





(a) On
November 18, 2005, the Company issued $12,500,000 8% unsecured convertible notes
due October 31, 2008 and related warrants to purchase shares of common stock of
the Company.  The notes are convertible into common stock at $.50 per
share over the term of the debt.  As of December 31, 2009, $10,260,000
was converted into 2,931,429 shares (after adjusting for the 7-to-1 Share
Conversion) of common stock, $2,115,000 was redeemed upon maturity, and the
remaining $125,000 will be paid off upon the receipt of the original notes from
the investors.  The balance of $125,000 is included in other payables
in the consolidated balance sheet as of December 31, 2009.   The
related warrants to purchase 3,571,429 shares (after adjusting for the 7-to-1
Share Conversion) of common stock, exercisable at $4.2 per share (after
adjusting for the 7-to-1 Share Conversion), have a term of five years from the
date of issuance.  As of December 31, 2009, 1,739,933 warrants (after
adjusting for the 7-to-1 Share Conversion) were exercised into 1,739,933 shares
(after adjusting for the 7-to-1 Share Conversion) of common stock.





55




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





11.  Derivative
Warrants (continued)





(a)  Investors
were given "full ratchet" anti-dilution protection under the warrants, meaning
that the exercise price under the warrants will be adjusted to the lowest per
share price for future issuances of Puda's common stock should such per share
price be lower than  the exercise price of the warrants, with
carve-outs for (i) issuance of shares of common stock in connection with the
exercise of the warrants, or (ii) the issuance of common stock to employees or
directors pursuant to an equity incentive plan approved by Puda's
stockholders.  The exercise price of the warrants is also subject to
proportional adjustments for issuance of shares as payment of dividends, stock
splits, and rights offerings to shareholders in conjunction with payment of cash
dividends. Investors were also given registration rights in connection with the
resale of the common stock underlying the warrants, on a registration statement
filed with the SEC.  Puda may redeem all, but not less than all, of
the warrants at $0.001 per share subject to 30 business days’ prior notice to
the holders of the warrants, and provided that (i) a registration statement is
in effect covering the common stock underlying the warrants, (ii) the closing
bid price of the common stock of Puda exceeds $2.50 per share on an adjusted
basis for at least 20 consecutive trading days (prior to the adjustment for the
7-to-1 Share Conversion) and (iii) the average daily trading volume of the
common stock exceeds 50,000 shares per day during the same period.





The
warrants require the Company to register the resale of the shares of common
stock upon exercise of these securities.  The warrants are
freestanding derivative financial instruments.  The Group accounts for
the fair value of these outstanding warrants to purchase common stock in
accordance with ASC 815 “Derivatives and Hedging,” which requires the Group to
account for the warrants as derivatives.  Since the effective
registration of the securities underlying the warrants is an event outside of
the control of the Company, pursuant to ASC 815, the Group recorded the fair
value of the warrants as liabilities.  The Group is required to carry
these derivatives on its consolidated balance sheet at fair value and unrealized
changes in the values of these derivatives are reflected in the consolidated
statement of operations as “Derivative unrealized fair value
gain/(loss)”.





The
warrants are classified as a derivative liability because they embody an
obligation to issue a variable number of shares. This obligation is generated by
the Registration Rights and Late Filing Penalties described
above.  Warrants are being amortized over the term of five years using
the effective interest method up to October 31, 2010, and the amount amortized
in the years ended December 31, 2009, 2008 and 2007 was $nil, $33,000 and
$205,000, respectively.  Upon exercise, the pro rata % of the amount
actually exercised in relation to the total exercisable is multiplied by the
remaining derivative liability, and transferred to equity.  The amount
of derivative warrants transferred to equity in the years ended December 31,
2009, 2008 and 2007 was $1,369,000, $nil and $1,527,000,
respectively.  The portion of the discount of $nil, $nil and $15,000
related to the exercised warrants in the years ended December 31, 2009, 2008 and
2007, respectively, was recorded in interest expense.





56




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




11.  Derivative
Warrants (continued)





(b) In
conjunction with the issuance of the notes, the placement agent was issued five
year warrants, exercisable from November 18, 2005, to purchase 357,143 shares
(after adjusting for the 7-to-1 Share Conversion) of common stock of the Company
at an exercise price of $4.2 per share (after adjusting for the 7-to-1 Share
Conversion).  The warrants issued to the placement agent have the same
terms and conditions as the warrants issued to the investors, including "full
ratchet" anti-dilution protection, proportional exercise price adjustments based
on issuances of stock as dividends and share splits, and Puda’s right to redeem
the warrants subject to an effective registration statement covering the
underlying shares of the placement agent’s warrant, and certain share price and
trading volume requirements. However, the warrants issued to the placement
agent, unlike the warrants issued to the investors, have a cashless exercise
feature. With a cashless exercise feature, the warrant holders have the option
to pay the exercise price of $4.2 (after adjusting for the 7-to-1 Share
Conversion) not in cash, but by reducing the number of common share issued to
them.  As with the warrants related to the notes, the placement agent
warrants are classified as a derivative liability and are freestanding
derivative financial instruments and contain Registration Rights and Late Filing
Penalties identical to those held by the investors.  These warrants
are being amortized over the term of five years using the effective interest
method, up to October 31, 2010.  The amount amortized in the years
ended December 31, 2009, 2008 and 2007 was $nil, $nil and $166,000
respectively.  Upon exercise, the pro rata % of the amount actually
exercised in relation to the total exercisable is multiplied by the remaining
derivative liability, and transferred to equity.  The amount of
derivative placement agent warrants transferred to equity in the years ended
December 31, 2009, 2008 and 2007 was $133,000, $nil and $2,716,000,
respectively.  As of December 31, 2009, 289,867 (after adjusting for
the 7-to-1 Share Conversion) placement agent warrants were exercised and
resulted in the issuance of 209,039 shares (after adjusting for the 7-to-1 Share
Conversion) of common stock.





(c) The
derivative warrants as of December 31, 2009 and December 31, 2008:





December
      31,
              2009
            
            
            December
      31,
              2008$000
            
            
            $000Amount
      allocated to note warrants
            
            $
            6,363
            
            
            $
            6,363Placement
      agent warrants
            
            
            5,625
            
            
            
            5,625Less:
      amount transferred to equity upon exercise of note warrantsin
      2006
            
            
            (789
            )
            
            
            (789
            )Less:
      amount transferred to equity upon exercise of placementagent
      warrants in 2006
            
            
            (882
            )
            
            
            (882
            )Less:
      amount transferred to equity upon exercise of note
      warrantsin
      2007
            
            
            (1,527
            )
            
            
            (1,527
            )Less:
      amount transferred to equity upon exercise of placementagent
      warrants in 2007
            
            
            (2,716
            )
            
            
            (2,716
            )Less:
      change in fair value in 2005
            
            
            (700
            )
            
            
            (700
            )Less:
      change in fair value in 2006
            
            
            (1,237
            )
            
            
            (1,237
            )Add:
      change in fair value in 2007
            
            
            343
            
            
            
            343Less:
      change in fair value in 2008
            
            
            (394
            )
            
            
            (394
            )Less:
      amount transferred to equity upon exercise of note
      warrantsin
      2009
            
            
            (1,369
            )
            
            
            -Less:
      amount transferred to equity upon exercise of placementagent
      warrants in 2009
            
            
            (133
            )
            
            
            -Add:
      change in fair value in 2009
            
            
            5,036
            
            
            
            -$
            7,620
            
            
            $
            4,086





57





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





11.  Derivative
Warrants (continued)





In
August 2009, FASB issued Accounting Standards Update (“ASU”) 2009-05 “Fair
Value Measurements and Disclosure (Topic 820)”. ASU 2009-05 provides amendments
for the fair value measurement of liabilities and clarification on fair value
measuring techniques. ASU 2009-05 is effective for the first reporting period,
including interim periods, beginning after the issuance of the ASU. The Company
adopted this ASU in the year ended December 31, 2009 and the adoption of this
ASU did not have a material impact on our financial position or results of
operations.  The following table shows (i) fair values of derivative
instruments in our statement of financial position as of December 31, 2009, and
(ii) the effect of derivative instruments on the statement of financial
performance for the year ended December 31, 2009:





(i) Fair
values of derivative
instruments





Liability
      derivativesDecember
      31, 2009Balance
      sheet
              location
            
            Fair
              Value$
            000


Derivatives
not designated as hedging instruments under
ASC 815


Derivative
      warrants
            
            Current
      liabilities
            
            $
            7,620Total
      derivatives
            
            
            
            $
            7,620





(ii)
Effect of derivative instruments on the statement of operations





Derivatives
not designated as hedging instruments


under  ASC
815





Year
      ended December 31, 2009Location
      of gain or (loss) recognized in income on derivatives
            
            Amount
      of gain or (loss) recognized in income on derivatives$000Derivative
      warrants
            
            Derivative  unrealized
      fair value loss
            
            $
            (5,036
            )Total
            
            
            
            $
            (5,036
            )





58




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)








12.
Commitments and Contingencies





As of
December 31, 2009, the Group leased office premises under the operating lease
agreement expiring on December 31, 2013.





The
future minimum lease payments under the above-mentioned lease as of December 31,
2009 are as follows:





Year Ending December 31,
            
            $’0002010
            
            $
            1582011
            
            
            1582012
            
            
            1582013
            
            
            158$
            632





The above
future lease payments represent amounts payable to Resources Group (see Note
4).





As of
December 31, 2009, the Group had contractual commitment for the purchase price
under the mining right and mining assets transfer agreements as follows (see
Note 6):





$’000Dawa
      mining assets
            
            $
            23,700Guanyao
      mining assets
            
            
            11,800$
            35,500





As of
December 31, 2009 and 2008, the Group did not have any contingent
liabilities.




13.
Profit Appropriation





In
accordance with PRC regulations, Shanxi Coal is required to make appropriations
to the statutory surplus reserve fund, based on after-tax net income determined
in accordance with PRC GAAP.  According to the Memorandum and Articles
of Association of Shanxi Coal, appropriation to the statutory surplus reserve
fund should be at least 10% of the after-tax net income determined in accordance
with the PRC GAAP until the reserve fund is equal to 50% of the entity’s
registered capital. Appropriations to the statutory public welfare fund should
be at least 5% of the after-tax net income determined in accordance with the PRC
GAAP. Statutory surplus reserve is established for the purpose of remedying
Shanxi Coal’s losses, expanding operations, or increasing registered capital,
and is non-distributable other than in liquidation




14.
Interest Expense





Interest
expense for the year ended December 31, 2009 includes a $nil (2008: $169,000,
2007: $240,000) interest payment for the 8% convertible notes, a $518,000 (2008:
$594,000, 2007: $674,000) interest payment for the 6% loan from Resources Group
for the purchase of the Liulin and Zhongyang plants, and $nil (2008: $nil,
2007: $663,000) for the expensed portion of the discount on the conversion
feature and warrants related to converted shares and exercised
warrants.





59





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




15.
Debt Financing Costs





Debt
financing costs for the years ended December 31, 2009 include amortization of
debt issue costs of $nil (2008: $nil, 2007: $6,000), amortization of discount on
convertible notes and warrants of $nil (2008: $399,000, 2007: $895,000) and
penalty for the delay in getting the registration statement effective by March
17, 2006 of $nil (2008: $379,000, 2007: $1,521,000).




16.
Derivative Unrealized Fair Value (Loss)/Gain





Derivative
unrealized fair value loss of $5,036,000 in the year ended December 31, 2009
(2008: derivative unrealized fair value gain of $394,000, 2007: derivative
unrealized fair value loss of $343,000) represent the change in fair value of
the derivative warrants (see Note 11).




17.   Other
Income/(Expense)





Other
income of $59,000 in the year ended December 31, 2009 represented the interest
payments unclaimed by the convertible note investors. Other expense of $719,000
in the year ended December 31, 2008 represents the donation for earthquake
rescue efforts in Sichuan Province, PRC.




18.
Taxation





No
provision for taxation has been made for Puda, BVI and Putai for the years ended
December 31, 2009, 2008 and 2007, as they did not generate any taxable profits
during these periods.





Pursuant
to the PRC Income Tax Laws, Shanxi Coal is subject to enterprise income tax at a
statutory rate of 25%.





Details
of income taxes in the statements of operations are as follows:





Years
      ended December 31,2009
            
            
            2008
            
            
            2007$’000
            
            
            
            $’000
            
            
            
            $’000Current
      year provision
            
            $
            3,650
            
            
            $
            6,417
            
            
            $
            8,292




60




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




18.
Taxation (continued)





A
reconciliation between taxes computed at the United States statutory rate of 34%
and the Group’s effective tax rate is as follows:





Years
      ended December 31,2009
            
            
            2008
            
            
            2007$’000
            
            
            
            $’000
            
            
            
            $’000Income
      before income taxes
            
            $
            9,131
            
            
            $
            23,478
            
            
            $
            19,166Income
      tax on pretax income at statutory rate
            
            
            3,105
            
            
            
            7,982
            
            
            
            6,516Tax
      effect of expenses that are not deductiblein
      determining taxable profits
            
            
            1,575
            
            
            
            417
            
            
            
            1,560Tax
      effect of income that is not taxable indetermining taxable profits
            
            
            -
            
            
            
            (134
            )
            
            
            -Effect
      of different tax rates of subsidiary operating inother jurisdictions
            
            
            (1,392
            )
            
            
            (2,264
            )
            
            
            (240
            )Change
      in valuation allowance
            
            
            362
            
            
            
            416
            
            
            
            456Income
      tax at effective rate
            
            $
            3,650
            
            
            $
            6,417
            
            
            $
            8,292





As at
December 31, 2009 and 2008, the Group had accumulated net operating loss
carryforwards for United States federal income tax purposes of approximately of
$6,938,000 and $5,871,000, respectively, that are available to offset future
taxable income.  Realization of the net operating loss carryforwards
is dependent upon future profitable operations.  In addition, the
carryforwards may be limited upon a change of control in accordance with
Internal Revenue Code Section 382, as amended.  Accordingly,
management has recorded a valuation allowance to reduce deferred tax assets
associated with the net operating loss carryforwards to zero at December 31,
2009 and 2008.   The net operating loss carryforwards expire in
years 2021, 2022, 2023, 2024, 2025, 2026, 2027, 2028 and 2029 in the amounts of
$132,000, $394,000, $153,000, $371,000, $287,000, $1,968,000, $1,341,000,
$1,225,000 and $1,067,000, respectively.





The Group
has no intention to distribute earnings in the foreseeable future, and therefore
no US tax liability has been accrued on undistributed earnings.





At
December 31, 2009 and 2008, deferred tax assets consist of:





December
      31, 2009
            
            
            December
      31, 2008$’000
            
            
            
            $’000Net
      operating loss carryforwards
            
            $
            2,359
            
            
            $
            1,996Less:
      Valuation allowance
            
            
            (2,359
            )
            
            
            (1,996
            )Net
            
            $
            -
            
            
            $
            -





61




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




19.Basic and Diluted Weighted Average
Number of Shares





Years
      ended December 31,2009
            
            
            2008
            
            
            2007Basic
      weighted average number of shares (afteradjusting for the 7-to-1 Share Conversion)
            
            
            15,409,726
            
            
            
            15,184,086
            
            
            
            14,057,845Options
      outstanding (after adjusting for the 7-to-1Share
      Conversion)
            
            
            -
            
            
            
            -
            
            
            
            382Issuance
      of penalty shares (after adjusting for the7-to-1 Share Conversion)
            
            
            -
            
            
            
            -
            
            
            
            311,935Issuance
      of directors/employees shares (afteradjusting for the 7-to-1 Share Conversion)
            
            
            183,475
            
            
            
            44,864
            
            
            
            -Diluted
      weighted average number of shares
            
            
            15,593,201
            
            
            
            15,228,950
            
            
            
            14,370,162





The
7-to-1 Share Conversion at July 30, 2009 was retroactively reflected in the
calculation of weighted average number of shares as if the reverse split was
effective from January 1, 2007 (see Note 1).  The warrants have no
dilutive effect on the basic income per share for the year ended December 31,
2009, but this item could potentially dilute earnings per share in the
future.  If the exercise of warrants had not been anti-dilutive, the
number of additional shares that would have been assumed from the exercise is
1,898,772 shares for the year ended December 31, 2009.





20.
Supplementary cash flow information





Years
      ended December 31,2009
            
            
            2008
            
            
            2007$’000
            
            
            
            $’000
            
            
            
            $’000Interest
            
            $
            518
            
            
            $
            763
            
            
            $
            914Income
      taxes
            
            $
            3,876
            
            
            $
            7,454
            
            
            $
            8,706Major
      non-cash transactions:Notes
      converted into common shares
            
            $
            -
            
            
            $
            -
            
            
            $
            2,660Issue
      of common stock for penalty
            
            $
            -
            
            
            $
            2,104
            
            
            $
            -Dividend
      declared
            
            $
            -
            
            
            $
            116
            
            
            $
            -Cashless
      exercise of 33,811(2008: nil,2007:209,816) placement  agent warrants into17,119 (2008: nil, 2007: 150,125) commonshares
            
            $
            -
            
            
            $
            -
            
            
            $
            -




62




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




21.
Equity incentive plan





On
December 29, 2008, the shareholders of the Company approved a Puda Coal, Inc.
2008 Equity Incentive Plan (the “2008 Plan”).  Any employee or
director of the Company is eligible to participate in the 2008 Plan and may be
granted stock awards and/or options (collectively, “Awards”) by the
administrator of the 2008 Plan, which is the Board of Directors, the
Compensation Committee or their delegates.  The 2008 Plan became
effective upon its approval by the shareholders of the Company and will continue
in effect for a term of ten years unless terminated by the administrator of the
2008 Plan earlier.  The aggregate number of shares of common stock
that may be issued pursuant to the Awards under the 2008 Plan is 714,286 shares
(after adjusting for the 7-to-1 Share Conversion).  The aggregate
number of shares subject to the Awards under the 2008 Plan during any calendar
year to any one awardee will not exceed 71,429 shares (after adjusting for the
7-to-1 Share Conversion).  The fair market value of the common stock
should be determined by the administrator of the 2008 Plan in good faith using a
reasonable valuation method in a reasonable manner in accordance with Section
409A of the Internal Revenue Code of 1986, as amended.  Whenever
possible, the determination of fair market value should be based upon the
average of the highest and lowest quoted sales prices for such common stock as
of such date as reported in sources as determined by the
administrator.





A summary
of the restricted stock unit activity is as follows:





Restricted
              Stock
      Units
            
            
            Weighted-
              Average Grant
              Date
      Price per
              Share
            
            
            Aggregated
              Fair Market
              Value$'000Balance
      at January 1, 2008
            
            
            -
            
            
            $
            -Granted
            
            
            44,867
            
            
            $
            2.18Vested
            
            
            (22,434
            )
            
            $
            2.18
            
            
            $
            49Balance
      at December 31, 2008
            
            
            22,433
            
            
            $
            2.18Granted
            
            
            166,331
            
            
            $
            7.06Vested
            
            
            (28,099
            )
            
            $
            2.90
            
            
            $
            114Balance
      at December 31, 2009 (grantedbut not yet vested)
            
            
            160,665
            
            
            $
            7.11




A summary
of share-based awards available for grant is as follows:





Restricted
              Stock
      UnitsBalance
      at January 1, 2008
            
            
            -Shares
      reserved
            
            
            714,286Granted
            
            
            (44,867
            )Balance
      at December 31, 2008
            
            
            669,419Granted
            
            
            (166,331
            )Balance
      at December 31, 2009(available for grant)
            
            
            503,088




63




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




22.
Stock Compensation





On June
29, 2007, Puda entered into a contract with a director. Pursuant to the
contract, in consideration of his service to the Company as an independent
director commencing on July 1, 2007, he will receive compensation in the form of
warrants to purchase 1,429 (after adjusting for the 7-to-1 Share Conversion)
shares of common stock of the Company per year. The term of the warrants is 5
years and the exercise price is $17.50 (after adjusting for the 7-to-1 Share
Conversion) per share.  On December 29, 2008, Puda entered into an
amendment to the director’s contract dated June 29,
2007.  Pursuant to the amendment, in consideration of his continued
service to the Company as an independent director, the annual stock compensation
will be $25,000 worth of shares of common stock, calculated based on the closing
sale price of the Company’s common stock on the grant date of August 11, 2008
and then on each anniversary date of the grant date, and such stock grants are
subject to the 2008 Plan.





On August
3, 2007, Puda entered into a contract with another director.  Pursuant
to the contract, in consideration of his service to the Company as an
independent director commencing on August 3, 2007, he will receive an annual fee
of $40,000 in cash and 1,786 shares (after adjusting for the 7-to-1 Share
Conversion) of common stock of the Company.  On December 29, 2008,
Puda entered into an amendment to the director’s contract dated August 3,
2007.  Pursuant to the amendment, in consideration of his continued
service to the Company as an independent director, the annual fee will be
$40,000 cash plus stock compensation of $25,000 worth of shares of common stock
of the Company, calculated based on the closing sale price of the Company’s
common stock on the grant date of August 11, 2008 and then on each anniversary
date of the grant date, and such stock grants are subject to the 2008
Plan.





On
October 9, 2007, Puda entered into a contract with another
director.  Pursuant to the contract, in consideration of his service
to the Company as an independent director commencing on October 9, 2007, he will
receive an annual fee of $40,000 in cash and 1,861 shares (after adjusting for
the 7-to-1 Share Conversion) of common stock of the Company.   On
December 29, 2008, the Company entered into an amendment to the director’s
contract dated October 9, 2007.  Pursuant to the amendment, in
consideration of his continued service to the Company as an independent
director, the annual fee will be $25,000 cash plus stock compensation of $15,000
worth of shares of common stock, calculated based on the closing sale price of
the Company’s common stock on the grant date of October 9, 2008 and then on each
anniversary date of the grant date, and such stock grants are subject to the
2008 Plan.





On August
11, 2008 and December 11, 2008, the Company granted an employee 2,858 and
5,715 shares (after adjusting for the 7-to-1 Share Conversion) of common stock,
respectively.  The shares granted vested in full on their respective
grant dates and are subject to the restricted stock unit grant agreement under
the 2008 Plan.





On August
11, 2008 and December 11, 2008, the Company granted Ming Zhao 2,858 and 5,715
shares (after adjusting for the 7-to-1 Share Conversion) of common stock,
respectively.  The shares granted vested on the dates that are the
one-year anniversary of their respective grant dates and are subject to the
restricted stock unit grant agreement under the 2008 Plan.





On
November 6, 2009, the Company granted officers and employees 155,000 shares of
common stock.  40% of the shares granted will vest on the date that is
the one-year anniversary of the grant date, 30% of the shares granted will vest
on the date that is the two-year anniversary of the grant date,
and  30% of the shares granted will vest on the date that is the
three-year anniversary of the grant date.  The shares are subject to
the restricted stock unit grant agreement under the 2008 Plan.  The
stock compensation expense relating to this grant was $120,000 for the year
ended December 31, 2009.





64




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





22.
Stock Compensation (continued)





The stock
compensation expenses for the year ended December 31, 2009, 2008 and 2007 were
as follows:





Years
      ended December 31,2009
            
            
            2008
            
            
            2007$’000
            
            
            
            $’000
            
            
            
            $’000Stock
      compensation expense
            
            $
            234
            
            
            $
            74
            
            
            $
            46




23.
Concentrations and Credit Risk





The Group
operates principally in the PRC and grants credit to its customers in this
geographic region.  Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Group’s operations.





At
December 31, 2009 and 2008, the Group has a credit risk exposure of uninsured
cash in banks of approximately $19,918,000 and $39,108,000,
respectively.  The Group does not require collateral or other
securities to support financial instruments that are subject to credit
risk.





The net
sales to customers representing at least 10% of net total sales are as
follows:





Years
      ended December 31,2009
            
            2008
            
            2007Customers$’000
            
            %
            
            
            $’000
            
            %
            
            
            $’000
            
            %Customer
      A
            
            $
            -
            
            -
            
            $
            -
            
            -
            
            $
            21,626
            
            13





The
following customers had balances greater than 10% of the total accounts
receivable as of December 31, 2009 and 2008, respectively:





Customers
            
            December
      31,
              2009
            
            
            December
      31,
              2008$’000
            
            
            %
            
            
            
            $’000
            
            
            %Customer
      B
            
            $
            2,542
            
            
            
            10
            
            
            $
            -
            
            
            
            -





24.
Retirement Benefits





The
full-time employees of Shanxi Coal are entitled to staff welfare benefits
including medical care, casualty, housing benefits, education benefits,
unemployment insurance and pension benefits through a Chinese
government-mandated multi-employer defined contribution plan.  Before
2007, Shanxi Coal was required to accrue the employer-portion for these benefits
based on 14% of the employees’ salaries.  Starting from 2007, the
requirement was not mandatory and Shanxi Coal stopped providing for the staff
welfare benefits.  As of December 31, 2009 and 2008, the total amount
included in accrued expenses for the provision was $688,000 and $1,759,000,
respectively. The Group is required to make contributions to the plans out of
the amounts accrued for all staff welfare benefits except for education
benefits. The contributions have not yet been made to the government social
welfare organization for the years ended December 31, 2009, 2008 and 2007. The
PRC government is responsible for the staff welfare benefits including medical
care, casualty, housing benefits, unemployment insurance and pension benefits to
be paid to these employees. The Group is responsible for the education benefits
to be paid and it has been accrued for in the consolidated financial
statements.




65




PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




24.
Retirement Benefits (continued)





ASC
930-715 “Extractive Activities-Mining-Retirement Benefits Compensation” provides
guidance regarding accounting for estimated payments in connection with the Coal
industry Retiree Health Benefit Act of 1992, which requires enterprises that
have ongoing operations in the coal industry to account for their obligations
under the Act as either participation in a multi-employer plan or as a
liability. The Group is only required to comply with the aforementioned separate
contribution plan according to local statutory requirements regarding retiree
health benefits; accordingly, the Consensus does not have impact on the Group’s
consolidated financial statements presented.




25. Black Lung
Benefits





In the
United States of America, companies are responsible under the Federal Coal Mine
Health and Safety Act of 1969, as amended, and various states’ statutes for the
payment of medical and disability benefits to employees and their dependents
resulting from occurrences of coal worker’s pneumoconiosis disease (black
lung).  In the PRC, besides a uniform contribution plan described in
Note 24, there is no such special Act or regulatory requirement to cover
occurrences of coal worker’s black lung. The Group provides no provision for its
workers’ black lung benefits inasmuch as the aforesaid Act does not apply to the
Group.




26.
Fair Value Measurement





ASC 820
“Fair Value Measurements and Disclosures” introduces a framework for measuring
fair value and expands required disclosure about fair value measurements of
assets and liabilities.  ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. ASC 820 also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.  There are three levels
of inputs that may be used to measure fair value:





Level 1 - Quoted prices in
active markets for identical assets or liabilities.





Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.





Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.





The Group
utilizes the income approach to measure fair value for its financial assets and
liabilities. The income approach includes option pricing models, such as
Black-Scholes (See Note 11).





66





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




26.
Fair Value Measurement (continued)




Assets
and liabilities measured at fair value on a recurring basis are summarized
below:





Fair
      Value Measurement as of December 31, 2009Description
            
            Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3$’000
            
            
            
            $’000
            
            
            
            $’000
            
            
            
            $’000Derivative
      warrants
            
            $
            7,620
            
            
            
            -
            
            
            $
            7,620
            
            
            
            -Total
            
            $
            7,620
            
            
            $
            -
            
            
            $
            7,620
            
            
            $
            -





Unrealized
gains or losses on derivatives are recorded in consolidated statement of
operations as “Derivative unrealized fair value gain/ (loss)”.




27.
Subsequent Events




On
February 18, 2010, the Company completed the offering and sale of 2,855,652
shares (the “Primary Shares”) of the Company’s Common Stock, par value $0.001
per share pursuant to an Underwriting Agreement (the “Underwriting Agreement”)
with Brean Murray, Carret & Co., LLC and Newbridge Securities Corporation
(collectively, the “Underwriters”) dated February 11, 2010.  The
Primary Shares were sold to the public at a price of $4.75 per
share.  The Company has granted the Underwriters a 30-day option to
purchase an aggregate of 428,348 additional shares of Common Stock (the
“Overallotment Shares”).  On February 16, 2010, the Underwriters
exercised the option in full.  The offering of the Overallotment
Shares closed simultaneously with the closing of the offering of the Primary
Shares.  The net proceeds to the Company were approximately $14.5
million after deducting underwriting commissions and estimated expenses payable
by the Company associated with the offering.





67


PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  28.
Condensed Financial Information of Registrant
 
 The
condensed financial information of Registrant includes the balance sheets as at
December 31, 2009 and 2008, and the statements of operations and cash flows for
the years ended December 31, 2009, 2008 and 2007.
 
 Balance
Sheet-Parent Company Only
 (In
thousands of United States dollars)
  Note(s)
                
                
                December
      31, 2009
                
                
                December
      31, 2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                
                
                
                $
                1,576
                
                
                $
                196Total
      current assets
                
                
                
                
                
                1,585
                
                
                
                196INVESTMENTS
      IN SUBSIDIARIES
                
                
                
                
                
                78,184
                
                
                
                66,366TOTAL
      ASSETS
                
                
                
                
                $
                79,760
                
                
                $
                66,562LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESOther
      payable
                
                
                
                
                
                155
                
                
                
                257Accrued
      expenses
                
                
                
                
                
                388
                
                
                
                232Derivative
      warrants
                
                
                11
                
                
                
                7,620
                
                
                
                -Total
      current liabilities
                
                
                
                
                
                
                8,163
                
                
                
                489LONG-TERM
      LIABILITIESDerivative
      warrants
                
                
                11
                
                
                
                -
                
                
                
                4,086STOCKHOLDERS’
      EQUITYPreferred
      stock, authorized 5,000,000 shares, par
                  value
      $0.01, issued and outstanding None
                
                
                
                
                
                
                -
                
                
                
                -Common
      stock, authorized 150,000,000 shares, par
                  value
      $0.001, issued and outstanding 15,828,863 shares
                  (2008:
      15,333,680)
                
                
                
                
                
                
                15
                
                
                
                15Paid-in
      capital
                
                
                
                
                
                
                104,729
                
                
                
                88,782Accumulated
      deficit
                
                
                
                
                
                
                (33,147
                )
                
                
                (26,810
                )Total
      stockholders’ equity
                
                
                
                
                
                
                71,597
                
                
                
                61,987TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                
                
                
                
                $
                79,760
                
                
                $
                66,562
  68
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 28.
Condensed Financial Information of Registrant (continued)
 
 Statement
of Operations-Parent Company Only
 (In
thousands of United States dollars)
 
 Note(s)
              
              
              Years
      ended December 31,2009
              
              
              2008
              
              
              2007Revenue:Share
      of earnings from investment in subsidiaries
              
              
              
              
              $
              11,818
              
              
              $
              18,744
              
              
              $
              15,689Total
      revenue
              
              
              
              
              
              11,818
              
              
              
              18,744
              
              
              
              15,689General
      and administrative expenses
              
              
              
              
              
              1,360
              
              
              
              1,130
              
              
              
              1,147Income
      from operations
              
              
              
              
              
              10,458
              
              
              
              17,614
              
              
              
              14,542Interest
      expense
              
              
              14
              
              
              
              -
              
              
              
              (169
              )
              
              
              (903
              )Debt
      financing costs
              
              
              15
              
              
              
              -
              
              
              
              (778
              )
              
              
              (2,422
              )Derivative
      unrealized fair value (loss)/gain
              
              
              11(c),
      16
              
              
              
              (5,036
              )
              
              
              394
              
              
              
              (343
              )Other
      income
              
              
              
              
              
              
              59
              
              
              
              -
              
              
              
              -Net
      income
              
              
              
              
              
              $
              5,481
              
              
              $
              17,061
              
              
              $
              10,874
 
 No cash
dividends were received from the subsidiaries for the years ended December 31,
2009, 2008 and 2007.
  69
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 28.
Condensed Financial Information of Registrant (continued)
 
 Statement
of Cash Flows-Parent Company Only
 (In
thousands of United States dollars)
 
 Years
      ended December 31,2009
              
              
              2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              5,481
              
              
              $
              17,061
              
              
              $
              10,874Adjustments
      to reconcile net income to net cash provided by
                operating
      activitiesShare
      of earnings from investment in subsidiaries
              
              
              (11,818
              )
              
              
              (18,744
              )
              
              
              (15,689
              )Amortization
      of debt issue costs
              
              
              -
              
              
              
              -
              
              
              
              6Amortization
      of discount on convertible notes and warrants
              
              
              -
              
              
              
              399
              
              
              
              895Derivative
      unrealized fair value loss/(gain)
              
              
              5,036
              
              
              
              (394
              )
              
              
              343Discount
      on converted shares and exercised warrants
              
              
              -
              
              
              
              -
              
              
              
              663Stock
      compensation expense
              
              
              234
              
              
              
              74
              
              
              
              46Issue
      of common stock for penalty
              
              
              -
              
              
              
              379
              
              
              
              -Changes
      in operating assets and liabilities:Advance
      from/(to) subsidiary
              
              
              564
              
              
              
              3,219
              
              
              
              (771
              )(Decrease)/increase
      in other payable
              
              
              (102
              )
              
              
              812
              
              
              
              471(Decrease)/increase
      in accrued expenses
              
              
              107
              
              
              
              11
              
              
              
              (91
              )Increase
      in penalty payable
              
              
              -
              
              
              
              -
              
              
              
              1,521Decrease
      in restricted cash
              
              
              -
              
              
              
              233
              
              
              
              -Net
      cash (used in)/provided by operating activities
              
              
              (498
              )
              
              
              3,050
              
              
              
              (1,732
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      for the purchase of equity interest in Shanxi Coal
              
              
              -
              
              
              
              (893
              )
              
              
              (1,799
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              (893
              )
              
              
              (1,799
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      of convertible notes
              
              
              -
              
              
              
              (2,015
              )
              
              
              -Exercise
      of warrants
              
              
              1,878
              
              
              
              -
              
              
              
              3,600Net
      cash provided by/(used in) financing activities
              
              
              1,878
              
              
              
              (2,015
              )
              
              
              3,600Net
      increase in cash and cash equivalents
              
              
              1,380
              
              
              
              142
              
              
              
              69Cash
      and cash equivalents /(bank overdraft) at beginning of
                year
              
              
              196
              
              
              
              54
              
              
              
              (15
              )Cash
      and cash equivalents at end of year
              
              $
              1,576
              
              
              $
              196
              
              
              $
              54Supplementary
      cash flow information:Cash
      paid during the year for:Interest
              
              $
              -
              
              
              $
              169
              
              
              $
              240Income
      taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -
  70
  Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
 
 There was no change in and no
disagreement with accountants on any accounting and financial disclosure matters
during fiscal year 2009.
  Item 9A(T). Controls and Procedures
  (a)           Evaluation
of 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 are controls and other procedures that are
designed to provide reasonable assurance that the information that we are
required to disclose in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
 
 In
connection with the preparation of this annual report on Form 10-K for the
fiscal year ended December 31, 2009, an evaluation was performed by our
management, with the participation of our CEO and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this annual report.
 
 (b)           Management’s Annual Report on
Internal Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rule 13a-15(f) and 15d-15(f)under the Exchange Act. 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 U.S. 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 the assets of the
      Company;
  ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles and, that receipts and expenditures of the
      Company are being made only in accordance with authorization of management
      and 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 or procedures may deteriorate.
  Our
management, including the Chief Executive Officer and Chief Financial Officer,
assessed as of December 31, 2009 the effectiveness of the Company’s
internal control over financial reporting. In making this assessment, management
used the criteria set forth in the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on the results of this evaluation, management has concluded that
the Company’s internal control over financial reporting as of December 31,
2009 was effective.
  Attestation Report of Independent
Registered Public Accounting Firm
 
 The
effectiveness of Puda’s internal control over financial reporting as of
December 31, 2009 has been audited by Moore Stephens, an independent
registered public accounting firm. The related report to the shareholders and
the Board of Directors of Puda appears on the next page of this
Report.
  71
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 Puda
Coal, Inc.
  We have
audited the internal control over financial reporting of Puda Coal Inc. and its
subsidiaries (the “Company”) as of December 31, 2009, based on criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’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 Report of Management on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on 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 of internal control over financial reporting 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 the 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 the 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, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated balance sheet as of
December 31, 2009 and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for the year then
ended,  and our report dated March 31, 2010 expressed an unqualified
opinion thereon.
 
 Moore
Stephens
 
 Certified
Public Accountants
 Hong
Kong
 
 March 31,
2010
  72
 
 (b)           Changes
in Internal Control over Financial Reporting
 
 During
the period covered by this annual report on Form 10-K, with the assistance of
our internal control compliance consultant, Deloitte Touche Tohmatsu CPA Ltd, we
improved the internal control function throughout our company and  our
culture regarding control consciousness. We have (i) set policies to make sure
that account reconciliations and analyses for significant financial statement
accounts are reviewed for completeness and accuracy by the Chief Financial
Officer, (ii) redesigned control procedures with standard documentation for
review and authorization in the purchase, sales and payroll transactions
cycles, (iii) implemented a process that ensures the timely review and
approval of complex accounting estimates by qualified accounting personnel and
subject matter experts, where appropriate, and (iv) established better
monitoring controls at the corporate accounting, factory operation and
anti-fraud levels. We believe that the actions we have taken have improved our
internal control over financial reporting, as well as our disclosure controls
and procedures such that, as of December 31, 2009,  no material
weakness exists in our disclosure controls and procedure or internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act)
 
 Except as
otherwise discussed herein, there have been no changes in our internal control
over financial reporting identified in connection with the evaluation required
by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that
occurred during the fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 
 Item 9B. Other
information
 
 None.
  73
 
 PART
III
  Item
10. Directors, Executive Officers and Corporate Governance
 
 
 The
following table shows the names and ages of our directors and executive officers
and the positions they hold at Puda.
  NAME
              
              AGE
              
              POSITIONMing
      Zhao
              
              37
              
              ChairmanLiping
      Zhu
              
              55
              
              Chief
      Executive OfficerQiong
      Wu
              
              35
              
              Chief
      Financial OfficerPengxiang
      Lang
              
              39
              
              Chief
      Operating OfficerLawrence
      S. Wizel
              
              67
              
              DirectorC.
      Mark Tang
              
              45
              
              DirectorJianfei
      Ni
              
              63
              
              Director
  Management
Biographies
  Ming Zhao has been the
co-founder, Chairman and CEO of Shanxi Coal since 1995.  He
ceased to be its CEO on June 25, 2008. Mr. Zhao was appointed Chief
Executive Officer, President and Chairman of the board of directors of Puda on
July 15, 2005 and currently serves as Chairman. He is the brother of Yao Zhao,
our 9.79% shareholder and a manager of our coal washing plants.  Mr.
Zhao’s extensive experience in the coal production industry, as well as his
in-depth knowledge of the Company, including its business, strategy,
marketplace, competition, operations and employees, as a founder of the Company
and through his former position as the CEO, enables him to make critical
contribution as a member of our board.
  Liping Zhubecame director,
President and CEO of the Company, effective on June 25, 2008. Before Mr. Zhu
joined the Company, he was Deputy General Manager at Shanxi Loudong-Junan Coal
& Gas Company since 1997, which is engaged in the coal mining and washing
business in Shanxi Province, China, responsible for public and government
relationships and financing of the company. The company that Mr. Zhu was
employed by is not a parent, subsidiary or otherwise an affiliate of the
Company. Mr. Zhu is not a director of any other public company in the United
States.  Mr. Zhu’s extensive experience in the coal mining and washing
business, as well as his in-depth knowledge of the Company, including its
business, strategy, marketplace, competition, operation and employees, through
his current position as President and CEO of the Company, make him highly
qualified to serve as a member of the board.
  Qiong (Laby) Wu became CFO of
the Company effective on July 23, 2008. Before Ms. Wu joined the Company, she
was CFO and Vice President of Financing and Investor Relations at Sinoenergy
Corporation (Nasdaq CM: SNEN) since 2006, which is a manufacturer of compressed
natural gas (“CNG”) vehicle and gas station equipment and a designer, developer
and operator of retail CNG filling stations in the People's Republic of China.
Ms. Wu was employed at Ernst & Young Hua Ming Accounting Firm as a Senior
Auditor from 2004 to 2006. From 2000 to 2004, Ms. Wu was a Manager and Tax
Consultant at HLB-Beijing Yongtuo CPAs, responsible for financial audits and
internal control design.  None of the companies that Ms. Wu was
employed by is a parent, subsidiary or otherwise an affiliate of the
Company.
  Pengxiang Lang became the
Company’s Chief Operating Officer on March 12, 2009.  Prior to his
involvement with the Company, Mr. Lang served as vice president in charge of
operation of Shanxi Coal from 2002 to March, 2009.  From 2000 to 2002, he
was general manager of Rudi Science Industry & Trade Co., Ltd.  Prior
to that, he served as the representative officer of Shanxi Coking Coal Group’s
Tianjian Representative Office and vice general manager of Shanxi Coking Coal
Group’s Taiyuan subsidiary from 1994 to 1999.  Mr. Lang obtained his Master
of Business Administration from Tianjin Commercial College.
  74
  Lawrence S.Wizel was appointed to the
board of directors as an independent director on August 3, 2007. Mr. Wizel is a
member and Chairman of our audit committee. He is also a member of the
compensation committee and nominating and corporate governance committee. Mr.
Wizel began his career in 1965 at Deloitte and was a partner in the firm from
1980 until May 2006 when he retired. At Deloitte, Mr. Wizel was a leader in the
New York Office Technology Group and was responsible for serving a diverse
client base of publicly held and private companies with a variety of
capabilities including SEC filings for initial public offerings, mergers and
acquisition transactions and periodic reporting. During the last four years at
Deloitte, Mr. Wizel served as a Deputy Professional Practice Director in the
Deloitte New York office.  Additionally, Mr. Wizel has extensive
experience regarding multinational and multi-locational companies, specifically
in China. Mr. Wizel holds a BS from Michigan State University and is a Certified
Public Accountant. Mr. Wizel is a director of American Oriental Biotech Co. Ltd.
(NYSE: ABO) and 3SBIO, Inc. (NASDAQ: SSRX).  Mr. Wizel’s substantial
knowledge and experience in the accounting, auditing and financial matters and
in internal control over financial reporting makes him highly qualified to serve
as a member of the board and the compensation committee and as Chairman of our
audit committee.
  C. Mark Tang was appointed to
the board of directors as an independent director on October 9, 2007. Dr. Tang
is a member and Chairman of our nominating and corporate governance committee.
He is also a member of the audit committee and compensation committee. Since
2009, Dr. Tang has been director and Chairman of GCA Therapeutics, Ltd. Dr. Tang
was a director of Tongli Pharmaceuticals (USA) Inc. (OTCBB: TGLP) since 2008.
Dr. Tang has been the founder and CEO of World Tech Ventures, LLC, an
international merchant banking and venture capital firm specialized in advising
and investing in life sciences biotechnology since 2002. From 2004 to 2006, Dr.
Tang was a director of Biotech Commercialization and Instructor at Rutgers
University Business School.  From 1997 to 2000, Dr. Tang was a
director and Co-founder of Aegisoft Corp.  Dr. Tang holds a Ph. D
degree in Biochemistry and Molecular Biology from University of California at
Riverside and an MBA in Finance from Leonard N. Stern School of Business at New
York University. Dr. Tang’s extensive experience with Chinese companies and
their marketplace and access to capital markets and his familiarity with a broad
range of board functions make him highly qualified to serve as a member of the
board and the audit committee and as Chairman of the nominating and corporate
governance committee.
  Jianfei Ni was appointed to
the board of directors as an independent director on June 29,
2007.  Mr. Ni retired as Vice President and Chief Engineer from the
Taiyuan Institute of Coal Design & Research, in Taiyuan, Shanxi, China,
where he worked from 1978 to 2005.  Since 2006, Mr. Ni has been
a consultant at Shanxi Weide Coal Mine Design & Consulting
Company.  From 2005 to 2006, Mr. Ni was Chief Engineer at
Shanxi Yuantong Coal Mine Engineering Design and Consulting
Company.  With over thirty years of experience in the coal industry
and extensive knowledge as a coal expert, Mr. Ni is highly qualified to serve as
a member of the board of directors.
  Other
Significant Employees
 
 Yao Zhao, the manager of coal
washing plants of Shanxi Coal and former Chief Operating Officer of Puda, was
one the two co-founders of Shanxi Coal. He was appointed to be Chief Operating
Officer of Shanxi Coal and manager of its coal washing plants in 1999, and Chief
Operating Officer of Puda on July 15, 2005.  He resigned from the
Chief Operating Officer position in November 2006.  Yao Zhao also
serves as an executive officer, and currently is a 75% owner of Shanxi Liulin
Jucai Coal Industry Co., Limited, a coal mine which supplies raw coal to Shanxi
Coal.  Yao Zhao is the brother of Ming Zhao, our Chief Executive
Officer from July 2005 to June 2008.
  Board
Independence
  The board
of directors determined that Mr. Lawrence S. Wizel, Dr. Mark C. Tang and Mr.
Jianfei Ni are “independent” under Section 803 of the NYSE Amex Company
Guide.
 
 On
September 15, 2009, the Board of Directors amended and restated the Company’s
Audit Committee Charter to be in compliance with the requirements of the NYSE
Amex in connection with its application for listing on the
Exchange.  The Board determined that all the three members of the
Audit Committee, Mr. Jianfei Ni, Dr. C. Mark Tang and Mr. Lawrence S. Wizel, are
independent as that term is defined in Section 10A(m) of the Exchange Act of
1934, as amended, and meet the independence requirements of the NYSE
Amex.  To the full extent permitted by applicable law, the Audit
Committee will exercise the powers and duties as set forth in the Amended and
Restated Audit Committee Charter.
 
 None of
our officers, directors or significant employees is involved in any legal
proceedings.
  75
  Audit
Committee
  Since the
establishment of our audit committee on August 28, 2007, all related party
transactions should be subject to our audit committee’s review and approval on
an ongoing basis. Our audit committee is comprised of Mr. Lawrence S. Wizel, Dr.
Mark C. Tang and Mr. Jianfei Ni, each of whom is “independent,” as that term is
defined in Section 10A(m) of the Securities Exchange Act and the Rules and
Regulations of the Securities and Exchange Commission, and meets the
independence and financial literacy requirements of the NYSE Amex
LLC.  Our Board of Directors has determined that Mr. Lawrence S. Wizel
is the audit committee “financial expert” pursuant to Section 407(d)(5) of the
Exchange Act. There are no written policies and procedures regarding review of
related party transactions in our audit committee charter. The independent
directors who are members of the audit committee follow state fiduciary laws in
their review of the related party transactions and will approve such
transactions if they are in our best interests.
  Board
Diversity
  We have
no formal policy regarding board diversity.  Our priority in selection
of board members is identification of members who will further the interests of
our stockholders through their management experience, knowledge of our business,
understanding of the competitive landscape, familiarity with our targeted
markets and experience with the regulatory framework to which we are
subject.
 
 Board
Leadership Structure and Risk Oversight
  Mr. Zhao
has served as Chairman of our board of directors since our inception and had
also served as our CEO since our inception until June 25, 2008. Our board
leadership structure is commonly utilized by public companies with all or
substantially all of their operations in China, and we believe that this
leadership structure has been effective for us.  Having our former CEO
and our co-founder serve as Chairman of the board shows our employees, customers
and other constituencies that we are under strong leadership, with strong
continuity in our business, strategy and the management of our operations. We
also believe that this eliminates the potential for duplication of efforts and
inconsistent actions.
  Mr. Wizel
has served as the Chairman of our Audit Committee since August 3,
2007.  We believe Mr. Wizel’s financial literacy, expertise and
experience as a senior auditing partner at Deloitte are extremely helpful to us
as a NYSE Amex listed company and in our effectors to continue to comply with
requirements regarding internal control over financial reporting.  We
recognize that different board leadership structures may be appropriate for
companies with different histories or varying equity ownership structures and
percentages. However, we believe our current leadership structure remains the
optimal board leadership structure for us.
  Our audit
committee is responsible for overseeing our risk management function. While the
audit committee has primary responsibility for overseeing risk management, our
entire board of directors is actively involved in overseeing our risk
management. For example, the board engages in periodic discussions with such
company officers as the board deems necessary, including the chief executive
officer, chief operating officer, chief financial officer and general counsel.
We believe that the leadership structure of our board supports effective risk
management oversight.
 
 Code
of Ethics
  On
September 15, 2009, the Board of the Company adopted a Code of Business Conduct
and Ethics which is applicable to all directors, officers and employees of the
Company, including the CEO and CFO. The Code is available on the company’s
website at http://www.pudacoalinc.com under the Investor Relations
section.  Any amendments to, or waivers of, the Code which applies to
any of our executive officers or directors will be disclosed in our website
promptly following the date of such amendment or waiver.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Exchange Act requires the Company’s executive officers and
directors, and persons who own more than 10% of the Company’s outstanding shares
of Common Stock (the “Reporting Persons”), to file reports of ownership and
reports of changes in ownership with the Securities and Exchange
Commission.  Such officers, directors and 10% beneficial owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
 
 The
Reporting Persons of an issuer that is registering equity securities for the
first time under Section 12 of the Exchange Act must file a Form 3 no later than
the effective date of the registration statement.  Due to a lack and
delay of Edgar filing codes at the time the Company’s registration statement
under Form 8-A was declared effective, the October 1, 2009 Forms 3 were filed
late on behalf of Messers. Jianfei Ni, Tang C. Mark, Langxiang Peng, Lawrence
Wizel, Qiong Wu, Ming Zhao, Yao Zhao and Liping Zhu. To the Company’s knowledge,
the Company believes that all of the Section 16 filing requirements were other
satisfied for 2009.
  76
  Item
11. Executive Compensation
 
 Compensation
Discussion and Analysis
 
 Objectives
 
 The
primary objectives of our compensation programs are to attract, motivate and
retain talented and dedicated executive officers. Additionally, our compensation
programs are designed to reward good work in connection with the achievement of
corporate performance goals (as described below).
 
 Prior to
the establishment of our compensation committee in October 2007, our executive
compensation decisions were made by our board of directors with the consultation
of our executive officers. On October 25, 2007, we established a compensation
committee consisting of three members, Messers. Jianfei Ni (Chairman), C. Mark
Tang and Lawrence S. Wizel. All three members are “independent directors”
as that term defined by the NYSE Amex rules and “non-employee directors” under
Rule 16b-3(b)(3)(i) promulgated under the Securities Exchange Act of 1934. Our
board of directors adopted a compensation committee charter, which is filed as
Exhibit 3.01 to the Form 8-K filed on October 25, 2005. To the full extent
permitted by applicable law, the compensation committee exercises the powers and
duties as set forth in the compensation committee charter. The compensation
committee determines the compensation for our directors, CEO and other executive
officers, employees, consultants and advisors, reports annually to our
stockholders on executive compensation matters, administers our equity-based and
other compensation plans, if any, and takes or cause to be taken such other
actions and address such other matters as the board of directors may from time
to time authorize the compensation committee to undertake or assume
responsibility for.
 
 We judge
whether our compensation programs have met their goals by whether they have
attracted and retained talented and dedicated executives and whether the
response from executives is that their overall compensation causes them to feel
dedicated to our corporate goals and motivated to perform at highest
level.
 
 Compensation
Policies in Determination of Compensation
 
 Consultants
and Benchmarks
 
 We did
not retain any compensation consultant to design or review our compensation
policies and procedures in 2009. We conduct an annual review of the aggregate
level of our executive compensation, as well as the mix of elements used to
compensate our executive officers by taking into account our own corporate goals
and performance and local practice in China as well as the general pay
level of Chinese companies listed in the U.S.; however, we did not use any
specific benchmark companies in connection with the determination of our 2009
compensation.
 
 Compensation
Mix
 
 Our
executive compensation is allocated in the form of cash and equity-based
compensation. We have established Puda Coal, Inc. 2008 Equity Incentive Plan on
December 29, 2008 (the “Plan”), and we have granted stock awards to certain
directors and officers pursuant to the Plan.
  Employment
and Change of Control Agreements
 
 We have entered into employment
agreements with our CEO on June 25, 2008, CFO on July 23, 2008 and COO on March
6, 2009. The employment agreements do not have change of control provisions and
we do not have separate change of control agreements with our
employees.
  77
  Accounting
and Tax Treatment
 
 Given our current levels of
compensation, the accounting and tax consideration have not significantly
impacted our forms of compensation.
  We do not
believe there is any substantial risk arising from our compensation policies and
practices for our employees that may have a material adverse effect on us, due
to the nature of our business and compensation structure.
 
 Elements
of Compensation
 
 Our
executive compensation consists of the following elements:
 
 Base
salary
 
 Our
Compensation Committee, which was established in July 2007, reviewed and set the
base salary level for each executive officers for year 2009 by taking into
account our own operating goals and performance and local practice in China, we
also  refer to the general pay level of executive officers of those
companies listed in the U.S.
 
 Base salary is a significant portion of
our overall executive compensation, which is consistent with the compensation
practices of many Chinese companies.  Our current CEO and CFO joined
the Company in 2008,  their base salaries were determined based on the
negotiation between them and the Company, taking into consideration the market
practice in China.
 
 Bonus
 
 We may
compensate executives with an annual discretionary cash bonus because we want to
reward good work in connection with the achievement of certain corporate
performance targets. We do not award bonuses based on individual performance
measures.
 
 Discretion
has been exercised in awarding cash bonuses. In deciding to compensate
individual executives with an annual bonus and in setting annual bonus amounts,
the board of directors considered whether and to what extent the executive
contributed to our business and operations.  We did not grant any
bonus to our named executive officers in 2009 because of the general economic
downturn, which has significantly affected our operating performance and cash
flows.
 
 Stock
Awards and Options Awards
 
 On
December 29, 2008, the shareholders of the Company approved a Puda Coal, Inc.
2008 Equity Incentive Plan and amended on July 30, 2009 to reflect the 7-to-1
Share Conversion of the Company (the “2008 Plan”).  The purpose of the
2008 Plan is to promote the success of the Company and to increase shareholder
value by providing an additional means through the grant of equity incentive
awards to attract, motivate, retain and reward employees and
directors.  Any employee or director of the Company is eligible to
participate in the 2008 Plan and may be granted stock awards and/or options
(collectively, “Awards”) by the administrator of the 2008 Plan, which is the
Board of Directors, the Compensation Committee or their
delegates.  The 2008 Plan became effective upon its approval by the
shareholders of the Company and will continue in effect for a term of ten years
unless terminated by the administrator of the 2008 Plan earlier.  The
aggregate number of shares of common stock that may be issued pursuant to the
Awards under the 2008 Plan is 714,286 shares (after adjusting for the 7-to-1
Share Conversion).  The aggregate number of shares subject to the
Awards under the 2008 Plan during any calendar year to any one awardee will not
exceed 71,429 shares (after adjusting for the 7-to-1 Share
Conversion).  The fair market value of the common stock should be
determined by the administrator of the 2008 Plan in good faith using a
reasonable valuation method in a reasonable manner in accordance with Section
409A of the Internal Revenue Code of 1986, as amended.  Whenever
possible, the determination of fair market value should be based upon the
average of the highest and lowest quoted sales prices for such common stock as
of such date as reported in sources as determined by the
administrator.
 
 On November 6, 2009, the Compensation
Committee approved the grant of restricted stock units to certain employees of
the Company and its subsidiary, Shanxi Coal, including without limitation, Mr.
Liping Zhu, Chief Executive Officer and President, and Ms. Qiong Wu, Chief
Financial Officer, under the 2008 Plan.
  78
  Under the
Compensation Committee approval, the Company granted Mr. Zhu and Ms. Wu 15,000
and 30,000 shares of common stock of the Company, respectively.  The
shares granted to each of Mr. Zhu and Ms. Wu will vest 40% upon the date that is
one-year anniversary of the grant date (November 6, 2009), 30% upon the date
that is two-year anniversary of the grant date, and 30% upon the date that is
three-year anniversary of the grant date.
 
 Retirement
and/or Deferred Compensation
 
 We do not provide any other retirement
or deferred compensation to any of our named executives other than, in
accordance with Chinese law, 14% of an employee’s monthly base salary
to such employee’s welfare and benefit package. The amounts we contributed to
our named executive officers are included in the “Other Annual Compensation”
column in the Summary Compensation Table.
  79
  Summary
Compensation Table
 
 The following table sets forth
information concerning all compensation paid to our named executive officers
during the last three completed fiscal years as a registrant. No other executive
officer received a total compensation that exceeded $100,000 during 2007, 2008
or 2009.  Except the amount of $54,298 paid by the Company to Ms. Wu
in 2009, the amounts of compensation reported in the summary compensation table
are the amounts of the compensation the named executive officers received from
Shanxi Coal, the Company’s subsidiary.
  Name
      and Principal Position
                  
                  Year
                  
                  Salary
      ($) (1)
                  
                  
                  Stock
      Awards ($)
                  
                  
                  Other Annual
                    Compensation (1)(2)
      ($)
                  
                  
                  Total
      (1)($)Liping
      Zhu
                  
                  2009
                  
                  
                  32,992
                  
                  
                  
                  107,400
                  (5)
                  
                  
                  -
                  
                  
                  
                  140,392(President
      and Chief Executive Officer)
                  
                  2008
                  
                  
                  38,571
                  (3)
                  
                  
                  -
                  
                  
                  
                  1,145
                  
                  
                  
                  39,716Qiong
      Wu
                  
                  2009
                  
                  
                  90,922
                  
                  
                  
                  214,800
                  (5)
                  
                  
                  -
                  
                  
                  
                  305,722(Chief
      Financial Officer)
                  
                  2008
                  
                  
                  50,000
                  (4)
                  
                  
                  -
                  
                  
                  
                  1,410
                  
                  
                  
                  11,485
  
 (1)
              All
      compensations were paid in Reminbi but are reported in U.S. dollars. The
      currency conversion ratio we used to report the compensation in the table
      is 6.8259, which is theaverage conversion
      ratio for fiscal year 2009, consistent with the conversion ratio we used
      in our consolidated financial statements for the fiscal year ended
      December 31, 2009.
  (2)
              In
      accordance with Chinese regulations, we had accrued 14% of the base
      salary of each employee (including named executive officers) to such
      employees’ welfare in 2008. In 2009, according to the revised
      regulation, we did not accrue the 14% staff
  welfare.
  (3)
              Represents
      the salary Mr. Liping Zhu earned from June 25, 2008, the day he became our
      CEO, to the end of 2008 pursuant to the employment agreement between the
      Company and Mr. Zhu.  The actual payment by the end of December
      31, 2008 is $8,182.
  (4)
              Represents
      the salary Ms. Qiong Wu earned from July 23, 2008, the day she became our
      CFO, to the end of 2008 pursuant to the employment agreement between the
      company and Ms. Wu.  The actual payment by the end of December
      31, 2008 is $10,075.
  (5)
              Represents
      aggregate grant date fair value of stock awards computed in accordance
      with FASB ASC Topic 718.
  Grants
of plan-based awards
 
 Name
              
              Grant
      Date
              
              All
      Other Stock Awards: Number of Shares of Stocks or Units
(#)
              
              
              Grant
      Date Fair Value of Stock and Option Awards ($)(1)Liping
      Zhu
              
              11/06/2009
              
              
              15,000
              (2)
              
              
              107,400Qiong
      Wu
              
              11/06/2009
              
              
              30,000
              (2)
              
              
              214,800
 
 
 (1)
              The grant date fair value of each
      equity award computed in accordance with FASB ASC Topic 718. (2)The shares
      were granted to each of Mr. Zhu and Ms. Wu at November 6, 2009, (the
      “grant date”). The shares will vest 40% upon the date that is one-year
      anniversary of the grant date, 30% upon the date that is two-year
      anniversary of the grant date, and 30% upon the date that is three-year
      anniversary of the grant
date.
  80
  Outstanding
Equity Awards at Fiscal Year-End
  Stock
      AwardsName
              
              Number
      of Shares or Units of Stock That Have Not Vested(#)
              
              
              Market
      Value of Shares or Units of Stock That Have Not Vested($)
              
              
              Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested(#)
              
              
              Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested($)(3)Liping
      Zhu
              
              
              -
              
              
              
              -
              
              
              
              15,000
              (1)
              
              
              107,400
              (2)Laby
      Wu
              
              
              -
              
              
              
              -
              
              
              
              30,000
              (1)
              
              
              214,800
              (2)
  
 (1)
                The sharesweregranted to each of Mr. Zhu and
      Ms. Wuat November
      6, 2009, (the“grant date”). The shareswill vest40% upon the date that is
      one-year anniversary of the grant date, 30% upon the date that is two-year
      anniversary of the grant date, and 30% upon the date that is three-year
      anniversary of the grant
date.
  (2)
              Market
      price of unvested shares owned as of December 31,
  2009.
  (3)
              The
      aggregate fair value of equity awards was computed in accordance with FASB
      ASC Topic 718 at grant dates.
  81
  Pension
Benefits and Non-Qualified Deferred Compensation
  In accordance with Chinese law, we
contributed 14% of the monthly base salary of each employee (including named
executive officers) to such employee’s welfare and benefit in
2009.  We did not provide any other retirement or deferred
compensation to any of our named executive officers in fiscal year
2009.
  None of our named executive officers
had any post termination or change of control benefits.
  Compensation
of Directors
  Our non-employee directors are
compensated in accordance with their director contracts with the company, which
includes stock, and cash compensation in the case of Mr. Wizel and Dr.
Tang.  Non-employee directors are also reimbursed for reasonable
expenses incurred in attending board and committee meetings.
 
 The
Company does not have termination or change of control agreements with
directors, nor are there any prerequisites or life insurance premium payments to
the directors.
 
 Director
Compensation Table
  The
amounts of compensation reported in the director compensation table for fiscal
year 2009 are the amounts of the compensation the directors received from Puda
Coal. Our directors did not receive any additional compensation from Shanxi
Coal.
  Name
              
              Fees
      Earned or
                Paid
      inCash($)
              
              
              StockAwards
      ($)(1)
              
              
              Total
      ($)Ming
      Zhao
              
              
              26,994
              (2)
              
              
              —
              
              
              
              26,994Lawrence
      Wizel
              
              
              40,000
              (3)
              
              
              25,000
              (4)
              
              
              65,000C
      Mark Tang
              
              
              25,000
              (5)
              
              
              15,000
              (6)
              
              
              40,000Jianfei
      Ni
              
              
              -
              
              
              
              25,000
              (7)
              
              
              25,000
 (1)
              Represents
      aggregate grant date fair value computed in accordance with FASB ASC Topic
      718.
  (2)
              Represents
      the dollar amount of annual cash fee to Mr. Zhao earned from January 1,
      2009 to December 31, 2009.
  (3)
              50%
      of the $40,000 annual cash fee to Mr. Wizel was earned on March 11, 2009;
      the remaining 50% was earned on August 11,
2009.
  (4)
              $12,500
      of the stock awards to Mr. Wizel was vested on March 11, 2009 and $12,500
      of the stock awards to Mr. Wizel was vested on August 11,
      2009.
  (5)
              50%
      of the $25,000 annual cash fee to Mr. Tang was earned on April 9, 2009;
      50% of the $25,000 was earned on October 9,
  2009.
  (6)
              $7,500
      of the stock awards to Mr. Tang was vested on April 9, 2009 and $7,500 of
      the stock awards to Mr. Tang was vested on October 9,
  2009.
  (7)
              $12,500
      of the stock awards to Mr. Ni was vested on March 11, 2009 and $12,500 of
      the stock awards to Mr. Ni was vested on August 11,
  2009.
  82
  COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
  The
current members of the compensation committee are Mr. Jianfei Ni
(Chairman), Mr. Lawrence S. Wizel and Dr. C. Mark Tang. None of the
compensation committee members is an officer or employee of us or our
subsidiaries, and none has ever been our officer. No member of our compensation
committee or our executive officer has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
  COMPENSATION
COMMITTEE REPORT
  The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of the Exchange Act with our
management.  Based on such discussions referred to in the prior
sentence of this section, the compensation committee recommended to our board of
directors that the Compensation Discussion and Analysis be included in our
annual report on Form 10-K.
  83
  Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  The
following table sets forth certain information regarding our common stock
beneficially owned on March 15, 2010, for (i) each shareholder we know to be the
beneficial owner of 5% or more of our outstanding common stock, (ii) each of our
executive officers and directors, and (iii) all executive officers and directors
as a group. In general, a person is deemed to be a “beneficial owner” of a
security if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60 days.
To the best of our knowledge, subject to community and martial property laws,
all persons named have sole voting and investment power with respect to such
shares, except as otherwise noted. At March 17, 2010, we had 19,449,832 shares
of our common stock outstanding.
  Name of Beneficial Owner(1)
                  
                  Amount of Beneficial
    Ownership
                  
                  
                  Percent of Beneficial Ownership
      %(2)Ming
      Zhao, Former President and CEO; Chairman of the Board
                  
                  
                  7,594,290
                  (3)
                  
                  
                  36.08Yao
      Zhao
                  
                  
                  1,896,430
                  
                  
                  
                  9.01Liping
      Zhu, President and CEO
                  
                  
                  0
                  
                  
                  
                  0Laby
      Wu, CFO
                  
                  
                  0
                  
                  
                  
                  0Lawrence
      S. Wizel, director
                  
                  
                  14,963
                  (3)
                  
                  
                  0.07C.
      Mark Tang, director
                  
                  
                  14,561
                  (3)
                  
                  
                  0.07Jianfei
      Ni, director
                  
                  
                  13,177
                  (3)
                  
                  
                  0.06All
      executive officers and directors as a group
                  
                  
                  9,533,421
                  
                  
                  
                  45.30
 
 
 (1)
              Address
      is c/o Shanxi Puda Coal Group Co., Ltd. 426 Xuefu Street, Taiyuan, Shanxi
      Province, China.
  (2)
              Assumes
      that all of the notes are converted and all of the warrants are
      exercised.
  (3)
              As
      of December 31, 2009, none of the additional shares and warrants granted
      to the director or officer in 2009 (other than the ones listed in the
      table above) were issued or
outstanding.
  Item 13. Certain Relationships and Related Transactions, and
Director Independence
  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  Transactions
with Related Persons
  Dividend Payments. In 2005,
Shanxi Coal declared dividends equals to $1,715,470, payable to Ming Zhao (80%)
and Yao Zhao (20%), of which $543,470 was paid in 2005 and $1,172,000 was paid
in October 17, 2008. In September 2008, Shanxi Coal declared dividends of
$1,170,754 to its shareholders. Of which, $1,053,678 is payable to
Putai, who is 90% equity owners of Shanxi Coal, and $93,661 is payable to
Mr. Ming Zhao who is 8% owner and $23,415 is payable to Mr. Yao Zhao who is 2%
owner of Shanxi Coal .  As of the date of this report, the declared
dividend is not paid.
 
 We
currently obtain raw coal supply from a diversified pool of local Liulin County
coal mines, including Jucai Coal, a coal mine that is owned 75% by Yao Zhao.
Jucai Coal supplies raw coal to both Shanxi Coal and other unrelated parties. In
2008 we purchased 218,32910 MT of raw coal from Jucai Coal, which represents 8%
of our total raw coal purchase in 2008 in terms of tonnage. The dollar value of
the sales to us by Jucai in 2008 was $16,083,000, and as a 75% owner of
Jucai Coal, Yao Zhao, our Chairman’s brother, had personal interest in the
transaction of approximately $12,062,000.
  84
  Headquarters Lease. In 2001,
Shanxi Coal entered into agreements with Resources Group, an entity owned 80% by
Ming Zhao and 10% by Yao Zhao, to lease an office and certain equipment. In
2009, the rent expense paid to Resource Group was $158,000, and as an 80% owner
and 10% owner of Resources Group, Ming Zhao and Yao Zhao had interest of
$126,400 and $15,800 in the lease, respectively.
  Warehouse Facility. Resources
Group also has a large storage facility in Liulin County near Shanxi Coal’s
Shanxi Liuling Dongqiang Plant which holds cleaned coal processed our cleaning
facilities. The storage facility has a railway dock and spur with access to
local rail. It is permitted to use this facility rent-free.
  Advance for Land Use Rights.
Yao Zhao advanced funds to us for payments due for land use rights for the land
used for old Jucai Liulan Plant of $197,000 in 2000. The amount payable to Yao
Zhao, adjusted for changes in exchange rate was $239,393 as of December 31,
2009. The land use rights were for use of the land upon which the old Shanxi
Liulin Jucai Plant was constructed.
  Acquisition ofShanxiCoal. On September 13, 2007,
Putai exercised the Option to acquire 90% of the total registered capital of
Shanxi Coal at an acquisition price of RMB20,250,000 (approximately $2,692,000),
pursuant to the Exclusive Option Agreement as described above.  Upon
the Option exercise, Putai entered into a Share Transfer Agreement with the
owners of Shanxi Coal, Ming Zhao and Yao Zhao, respectively.  Pursuant
to the Share Transfer Agreements, Putai agrees to acquire 72% of the total
registered capital of Shanxi Coal from Ming Zhao at a purchase price of
RMB16,200,000 (approximately $2,154,000) and 18% of the
total  registered capital of Shanxi Coal from Yao Zhao at a purchase
price of RMB4,050,000 (approximately $538,000).  The acquisition price
of $2,692,000 was fully paid as of December 31, 2008.  After the
acquisition, Putai became a 90% owner of Shanxi Coal, and the Exclusive Option
Agreement, Exclusive Consulting Agreement, Operating Agreement, Technology
License Agreement and Authorization, each entered into on June 24, 2005, among
Putai, Shanxi Coal, Ming Zhao and Yao Zhao, were terminated.  The
acquisition of Shanxi Coal was recommended by our audit committee and was
approved by all independent members of our board of directors.  The
Zhao brothers did not participate or vote on the decision to acquire Shanxi
Coal.
  Conflict of Interest. Ming Zhao and Yao Zhao
may have, or may develop in the future, conflicts of interest with us. As the
10% direct equity owners of Shanxi Coal, they might personally profit if Shanxi
Coal’s benefits of operation are not directed to us. In addition, the loan used
to finance our recent facility expansions are held by Resources Group, a company
which is owned by the Zhaos. It could be in their economic interest to cause us
to default on the payment of the loan with Resources Group since Resources Group
could acquire the assets which are subject to the lien as a result of
enforcement of the lien after a default. With their combined ownership of us
48.93% (45.09% after the warrant exercise), they can control the actions which
we take. Ming Zhao is our Chairman of the board of directors and had been our
CEO until June 2008. In addition, they also control the mines from which we get
most of our coal. By limiting or eliminating our coal supply, they could
materially adversely impact our production and revenue, which in turn could
cause us to default on our loan to Resources Group.
  The
acquisition of Shanxi Coal was recommended by our audit committee and was
approved by all independent members of our board of directors.  The
Zhao brothers did not participate or vote on the decision to acquire Shanxi
Coal.
  As of
December 31, 2009 and 2008, the Group had the following amounts due from/to
related parties:
 
 December 31,
                2009
              
              
              December
      31,
                2008$’000
              
              
              $’000Advance
      to Shanxi Liulin Jucai Coal Industry Co., Limited
                (“Jucai
      Coal”), a related company with a common owner
              
              $
              1,020
              
              
              $
              879Other
      payable to Shanxi Puda Resources Group Limited
                (“Resources
      Group”), a related company with common owners
              
              $
              795
              
              
              $
              796Other
      payable to Yao Zhao, manager and shareholder of Puda
              
              
              236
              
              
              
              234$
              1,031
              
              
              $
              1,030Loan
      payable to Resources Group-current
      portion
              
              $
              1,300
              
              
              $
              1,300-long-term
      portion
              
              
              6,500
              
              
              
              7,800$
              7,800
              
              
              $
              9,100
 
 The
balances, except for the loan payable to Resources Group, are unsecured,
interest-free and there are no fixed terms for repayment.
 
 The
balance payable to Resources Group of $795,000 includes $901,000 of professional
and regulatory charges related to the public listing paid by Resources Group on
behalf of the Company, netted against other receivables of $106,000 due from
Resources Group.
 
 The
amount payable to Yao Zhao represents land-use rights paid by him on behalf of
Shanxi Coal.
 
 In 2001,
Shanxi Coal entered into agreements with Resources Group to lease office
premises.  In the years ended December 31, 2009, 2008 and 2007, rental
expenses paid to Resources Group were $158,000, $7,000 and $6,000,
respectively.
 
 In the
years ended December 31, 2009, 2008 and 2007, Shanxi Coal purchased raw coal
from Jucai Coal in the amounts of $15,055,000, $16,083,000 and $18,320,000,
respectively.
 
 On
November 17, 2005, Shanxi Coal entered into a coal supply agreement with Jucai
Coal, pursuant to which Shanxi Coal has priority to Jucai Coal’s high grade
metallurgical coking coal supply over Jucai Coal’s other
customers.  Under the terms of the agreement, Shanxi Coal receives a
discount of RMB 30(approximately $4) to RMB 50(approximately $7) per metric ton
of coal from the price Jucai Coal charges to its other customers.
 
 On
November 17, 2005, Shanxi Coal entered into two conveyance agreements with
Resources Group.  The two agreements transfer two new coal washing
plants, related land-use rights and coal washing equipment in Liulin County and
Zhongyang County, Shanxi Province.  The Liulin County plant has an
annual clean coal washing capacity of 1.1 million metric tons while the
Zhongyang County plant has an annual clean coal washing capacity of 1.2 million
metric tons.  The Liulin County plant started formal production in
December 2005.  The Liulin County plant, land-use rights and related
equipment were purchased for a cost of $5,800,000.  The Zhongyang
County plant started formal production at the end of March 2006.  The
Zhongyang County plant, land-use rights and related equipment were purchased for
a cost of $7,200,000.  Each conveyance agreement provides that the
purchase price paid by Shanxi Coal to Resources Group, which totals $13,000,000,
should be amortized over ten years from December 31, 2005 and bears interest at
a rate of 6% per annum payable quarterly.  In the year ended December
31, 2009, Shanxi Coal paid principal of $1,300,000 (2008: $1,300,000, 2007:
$1,300,000) and interest of $518,000 (2008: $594,000, 2007: $674,000) to
Resources Group.  Shanxi Coal pledged the land use rights, plant and
equipment of the plants to Resources Group until such time when the purchase
price and interest thereupon is fully paid by Shanxi Coal to Resources
Group. If Shanxi Coal fails to pay the principal or interest of the
purchase price of the plants financed by Resources Group in full when due, the
properties acquired by Shanxi Coal, which have been pledged to Resources Group
as collateral, are revertible to Resources Group.
 
 Since the
establishment of our audit committee on August 28, 2007, all related party
transactions are subject to our audit committee’s review and approval on an
ongoing basis. Our audit committee is comprised of three directors, each of whom
are “independent,” as that term is defined in Section 10A(m) of the Exchange Act
of 1934, and the Rules and Regulations of the Securities and Exchange
Commission, and shall otherwise meet the applicable independence and financial
literacy requirements of the NYSE Amex. There are no written policies and
procedures regarding review of related party transactions in our audit committee
charter. The independent directors who are members of the audit committee follow
state fiduciary laws in their review of the related party transactions and will
approve such transactions if they believe them to be in our best
interests.
 
 Director
Independence
 
 Our board of directors consists of Ming
Zhao, Lawrence S. Wizel, C. Mark Tang and Jianfei Ni as
directors.  Ming Zhao is also 39.14% shareholder of us and therefore
is not “independent” under the NYSE Amex rules. Lawrence S. Wizel, C. Mark Tang
and Jianfei Ni are “independent” under the NYSE Amex rules.
  85
  Item
14. Principal Accountant Fees and Services
 
 The fees
billed to us by our independent auditors, Moore Stephens, for services for the
fiscal year ended December 31, 2009, were as follows:
 
 Audit Fees. This category
consists of fees for the audit of consolidated financial statements and review
of consolidated financial statements included in our annual report on Form 10-K
and quarterly reports on Form 10-Q, and services that are normally provided by
the independent auditor in connection with statutory and regulatory filings or
engagements for the fiscal periods indicated above. For the years ended
December 31, 2009 and December 31, 2008, the audit fee charged by Moore was
approximately $123,000, and $108,000, respectively.
 
 Audit-Related Fees. This
category consists of assurance and related services by the independent auditor
that are reasonably related to the performance of the audit and review of
consolidated financial statements and not reported under audit fees. It also
includes fees incurred in connection with the issuance of consents related to
SEC registration statements, and our current report on Form 8-K and Form 8-K/A.
For the years ended December 31, 2009 and December 31, 2008, Moore Stephens
billed us for audit related fees in the amount of approximately $0 and $54,000,
respectively.
 
 Tax Fees. This category
consists of professional services rendered by the independent auditor for tax
compliance and tax planning. The services under this category include tax
preparation and technical advice. For the fiscal years ended December 31, 2009
and December 31, 2008, Moore Stephens billed us for tax fees in the amount of
approximately $0 and $0.
 
 All Other Fees. This category
consists of fees not covered by Audit Fees, Audit Related Fees, and Tax Fees.
For the fiscal years ended December 31, 2009 and December 31, 2008, Moore
Stephens charged us for the internal control over the financial reporting in the
amount of approximately $70,000 and $0 respectively.
 
 86
  PART
IV
 Item 15. Exhibits, Financial
Statement Schedules
  The
following exhibits are filed herewith or incorporated by reference into this
report on Form 10-K:
 
 ExhibitNo.
              
              Exhibits3.1
              
              Articles
      of Incorporation (incorporated by reference to Current Report of the
      Company on Form 8-K file September 21, 2005)3.2
              
              Bylaws
      of Puda Coal, Inc., as amended on June 29, 2007 (incorporated by reference
      to Exhibit 3.1 to Current Report of the Company filed on Form 8-K filed
      July 6, 2007).3.3
              
              Amended and Restated Audit
      Committee Charter (incorporated by reference to Exhibit 3.1 to
      Current Report of the Company filed on Form 8-K filed September 15,
      2009).3.4
              
              Compensation
      Committee Charter (incorporated by reference to Exhibit 10.1 to Current
      Report of the Company filed on Form 8-K filed October 29,
      2007).3.5
              
              Nominating
      Committee Charter (incorporated by reference to Exhibit 10.1 to Current
      Report of the Company filed on Form 8-K filed October 29,
      2007.3.6
              
              Puda
      Coal, Inc. 2008 Equity Incentive Plan and form agreements under the Plan
      (incorporated by reference to Exhibits 10.4-10.7 to Current Report of the
      Company filed on Form 8-K filed December 31, 2008).3.7
              
              Amendment No. 1 to Puda Coal,
      Inc. 2008 Equity Incentive Plan dated July 30, 2009. (incorporated
      by reference to Exhibits 3.1-3.2 to Current Report of the Company filed on
      Form 8-K filed November 12, 2009)10.1
              
              Form
      of Subscription Agreement dated November 18, 2005 entered into by Puda
      Coal, Inc. and the Investors (incorporated by reference to Exhibit 99.1 to
      Current Report of the Company filed on Form 8-K on November 23,
      2005).10.2
              
              Form
      of Note dated November 18, 2005 (incorporated by reference to Exhibit 99.2
       to Current Report of the Company filed on Form 8-K on November 23,
      2005).10.3
              
              Form
      of Warrant  dated November 18, 2005 (incorporated by reference to
      Exhibit 99.3 to Current Report of the Company filed on Form 8-K on
      November 23, 2005).
  87
  10.4
              
              Zhang
      Yang Plant Conveyance Agreement dated November 17, 2005 between Shanxi
      Puda Coal Group Co., Ltd. and Shanxi Puda Resources Group Limited
      (incorporated by reference to Exhibit 99.5 to Current Report of the
      Company filed on Form 8-K on November 23, 2005).10.5
              
              Coking
      Coal Supply Agreement dated November 17, 2005 between Shanxi Puda Coal
      Group Co., Ltd. and Jucai Coal Industry Co. (incorporated by reference to
      Exhibit 99.4 to Current Report of the Company filed on Form 8-K on
      November 23, 2005).10.6
              
              Liu
      Lin Plant Conveyance Agreement dated November 17, 2005 between Shanxi Puda
      Coal Group Co., Ltd. and Shanxi Puda Resources Group Limited
       (incorporated by reference to Exhibit 99.6 to Current Report of the
      Company filed on Form 8-K on November 23, 2005).10.7
              
              Clean
      Coal Supply Contract - Taiyuan Steel & Iron (Group) Raw Material Trade
      Co., Ltd. (incorporated by reference to Exhibit 10.16 to SB-2/A filed
      March 10, 2006).10.8
              
              Clean
      Coal Supply Contract - Handan Steel & Iron Joint-Stock Co., Ltd.
      (incorporated by reference to Exhibit 10.17 to SB-2/A filed March 10,
      2006).10.9
              
              Clean
      Coal Supply Contract - Tangshan Steel & Iron Group Co., Ltd.
      (incorporated by reference to Exhibit 10.18 to SB-2/A filed March 10,
      2006).10.10
              
              Clean
      Coal Supply Contract - Capital Steel & Iron Group Mineral Co.
      (incorporated by reference to Exhibit 10.19 to SB-2/A filed March 10,
      2006).10.11
              
              Clean
      Coal Supply Letter of Intent - Shanxi Coal Import & Export Group
      Luliang Branch (incorporated by reference to Exhibit 10.20 to SB-2/A filed
      March 10, 2006).10.12
              
              Clean
      Coal Supply Letter of Intent - Sinochem Corporation (incorporated by
      reference to Exhibit 10.21 to SB-2/A filed March 10,
  2006).10.13
              
              Clean
      Coal Supply Contract - Shanxi Changzhi Steel Group Raw Material Co. Ltd.
      (incorporated by reference to Exhibit 10.22 to SB-2/A filed March 10,
      2006).10.14
              
              Clean
      Coal Supply Contract - Baotou Steel Group Resources Supplying Company
      (incorporated by reference to Exhibit 10.23 to SB-2/A filed March 10,
      2006).10.15
              
              Clean
      Coal Supply Contract - Shandong Haihua Group (incorporated by reference to
      Exhibit 10.24 to SB-2/A , filed March 10, 2006).10.16
              
              Note
      & Indebtedness Subordination Agreement dated November 17, 2005 among
      Puda Coal, Inc., Shanxi Puda Coal Group Co., Ltd., Shanxi Puda Resources
      Group Limited, and Taiyuan Putai Business Consulting Co., Ltd. (now known
      as Shanxi Putai Resources Limited) (incorporated by reference to Exhibit
      99.7 to Current Report of the Company filed on Form 8-K on November 23,
      2005).10.17
              
              Agreement
      between Shanxi Puda Resources Group, Ltd. and Shanxi Puda Resources Co.,
      Ltd. dated April 25, 2005 (incorporated by reference to Exhibit 10.26 to
      SB-2/A , File # 333-130380 filed on March 10, 2006).10.18
              
              Summary
      of Clean Coal Supply Arrangement - Liulin Coal Cleaning Plant
      (incorporated by reference to Exhibit 10.27 to SB-2 filed on May 31,
      2006).10.19
              
              Asset
      Exchange Agreement, dated June 6, 2007, between the Shanxi Coal and
      Lingshi Coal & Chemical (incorporated by reference to Exhibit 10.1 to
      Current Report of the Company filed on Form 8-K filed June 12,
      2007).10.20
              
              Director’s
      Contract, dated June 29, 2007, between the Company and Jianfei Ni
      (incorporated by reference to Exhibit 10.1 to Current Report of the
      Company filed on Form 8-K filed July 6,
2007).
  88
  10.21
                  
                  Director’s
      Contract, dated August 3, 2007, between the Company and Lawrence S. Wizel
      (incorporated by reference to Exhibit 10.1 to Current Report of the
      Company filed on Form 8-K filed August 9, 2007).10.22
                  
                  Agreement,
      dated September 6, 2007, between the Shanxi Coal and Xin Kai Yuan
      Hotel and Restaurant Co. Limited (incorporated by reference to Exhibit
      10.1 to Current Report of the Company filed on Form 8-K filed September
      12, 2007).10.23
                  
                  Share
      Transfer Agreement, between Putai and Ming Zhao, dated September 13, 2007
      (incorporated by reference to Exhibit 10.1 to Current Report of the
      Company filed on Form 8-K on September 19, 2007).10.24
                  
                  Share
      Transfer Agreement, between Putai and Yao Zhao, dated September 13, 2007
      (incorporated by reference to Exhibit 10.2 to Current Report of the
      Company filed on Form 8-K filed September 19, 2007).10.25
                  
                  Agreement,
      among Putai, Shanxi Coal, Ming Zhao and Yao Zhao, dated September 13, 2007
      (incorporated by reference to Exhibit 10.3 to Current Report of the
      Company filed on Form 8-K filed September 19, 2007).10.26
                  
                  Director’s
      Contract, dated October 9, 2007, between the Company and C. Mark Tang
      (incorporated by reference to Exhibit 10.1 to Current Report of the
      Company filed on Form 8-K filed October 9, 2007).10.27
                  
                  Amendment
      No. 1 to Director’s Contract, dated December 29, 2008, between the
      Company and Lawrence S. Wizel (incorporated by reference to Exhibit 10.1
      to Current Report of the Company filed on Form 8-K filed December 31,
      2008).10.28
                  
                  Amendment
      No. 1 to Director’s Contract, dated December 29, 2008 between the
      Company and Jianfei Ni (incorporated by reference to Exhibit 10.2 to
      Current Report of the Company filed on Form 8-K filed December 31,
      2008).10.29
                  
                  Amendment
      No. 1 to Director’s Contract, dated December 29, 2008, between the
      Company and C. Mark Tang (incorporated by reference to Exhibit 10.3 to
      Current Report of the Company filed on Form 8-K filed December 31,
      2008).10.30
                  
                  Puda
      Coal, Inc. 2008 Equity Incentive Plan and form agreements under the plan
      (incorporated by reference to Exhibits 10.4-10.7 to Current Report of the
      Company filed on Form 8-K filed December 31, 2008).10.31
                  
                  Agreement
      of Shares Transfer by and among Shanxi Puda Coal Group Co., Ltd., Li
      Jingquan, Feng Ming and Chen Guang dated May 14, 2009 (incorporated by
      reference to Exhibits 10.1-10.2 to Current Report of the Company filed on
      Form 8-K filed May 15, 2009)10.32
                  
                  Plan
      of Conversion, Delaware Certificate of Conversion, Florida Certificate of
      Conversion, Certificate of Incorporation of Puda Coal, Inc.-a Delaware
      corporation, By-laws of Puda Coal, Inc.- a Delaware corporation(incorporated
      by reference to Exhibits 3.1-3.5 to Current Report of the Company filed on
      Form 8-K filed JuJuly8, 2009  15, 2009)10.35
                  
                  Mining Right and Mining Assets
      Transfer Agreement between Pinglu County Da Wa Coal Industry Co., Ltd. and
      Shanxi Puda Coal Group Co., Ltd.(incorporated by reference to
      Exhibits 10.1toCurrent Report of the Company
      filed on Form 8-K filedDecember 17, 2009).10.36
                  
                  Mining
      Right and Mining Assets Transfer Agreement between Pinglu County Guanyao
      Coal Industry Co., Ltd. and Shanxi Puda Coal Group Co., Ltd. (incorporated
      by reference to Exhibits 10.2 to Current Report of the Company filed on
      Form 8-K filed December 17, 2009).23.1
                  
                  Auditors'
      Consent dated March 31, 201031.1
      *
                  
                  Certification
      of Mr. Liping Zhu pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended.31.2
      *
                  
                  Certification
      of Ms. Qiong Wu pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended.32.1
      *
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer of Puda Coal,
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.
  
 *
              Filed
      herewith
  89
  Signatures
 
 In
accordance with the requirements of Section 13 or 15(d) of Securities Exchange
Act of 1934, the registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized.
  PUDA
      COAL, INC.Dated:
      March 31, 2010
                By:
                /s/
      Liping ZhuLiping
      Zhu, Chief Executive Officer and President
  In
accordance with the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant in the capacities and on the date indicated.
  Signature/Title(i)
      Principal Executive Officer:/s/
      Liping ZhuLiping
      Zhu
              
              Chief
      Executive Officer (Principal Executive Offier)
              
              Dated:
      March 31, 2010(ii)
      Principal Financial and Accounting Officer:/s/
      Qiong WuQiong
      Wu
              
              Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
              
              Dated:
      March  31, 2010(iii)
      Directors:/s/
      Ming ZhaoMing
      Zhao
              
              Chairman
      of the Board
              
              Dated:
      March 31, 2010/s/
      Jianfei NiJianfei
      Ni
              
              Director
              
              Dated:
      March 31, 2010/s/
      C. Mark TangC.
      Mark Tang
              
              Director
              
              Dated:
      March 31, 2010/s/
      Lawrence WizelLawrence
      Wizel
              
              Director
              
              Dated:
      March 31, 2010
 
 90