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,
2008





o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
      the transition period from __________ to __________Commission
      file number 333-85306.




PUDA
COAL, INC.





(Name of
small business issuer in its charter)




Florida
                
                65-1129912(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification No.)426
      Xuefu Street, Taiyuan, Shanxi Province,
                  The
      People’s Republic of China030006(Address
      of principal executive offices)
                
                (Zip
      Code)




Issuer’s Telephone Number: 011 86
351 228 1302




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.oYesxNo





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 filing requirements for the past 90
days. YesxNo





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  oNon-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, 2008, 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
$20,876,971.  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 6, 2009, was 107,335,759
shares.


2


TABLE
OF CONTENTS




PagePART
      IItem
      1. Business
                        5Item
      1A. Risk Factors
                        12Item
      2. Properties
                        21Item
      3. Legal Proceedings
                        22Item
      4. Submission of Matters to a Vote of Security Holders
                        22PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder
      Matters  and Issuer Purchases of Equity
    Securities
                        23Item
      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
                        32Item
      8. Financial Statements and Supplementary Data
                        34Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                        72Item
      9A(T). Controls and Procedures
                        72Item
      9B. Other Information
                        74PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
                        74Item
      11. Executive Compensation
                        76Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                        83Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                        83Item
      14. Principal Accountant Fees and Services
                        86PART
      IVItem
      15. Exhibits, Financial Statement Schedules
                        86Signatures
                        89Certifications


3





Forward-Looking
Statements





This
Annual Report on Form 10-K of Puda Coal, Inc. (“Puda” or the “Company”) contains
certain forward-looking statements. 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, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Form 10-K 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,” or
similar expressions are intended to identify forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of a number of risks and uncertainties, including but not
limited to: (a) limited amount of resources devoted to expanding our business
plan; (b) our failure to implement our business plan within the time period we
originally planned to accomplish; (c) our ability to eliminate or otherwise
mitigate any material weakness in internal control over financial reporting or
significant deficiencies that have been and may be further identified; and (d)
other risks that are discussed in this Form 10-K and incorporated herein by
reference or included in our previous filings with the SEC.





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 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




·
            Tianjin




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 are not a coal mining operation and do not own any
coal mines as of the date of this report.  We currently purchase raw
coal from a diversified pool of local coal mines in Shanxi
Province.


4


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 executive offices 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
transport.




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 year 2008, we produced about 2.3 million MT cleaned coal, which is 66%
of the 3.5 million MT annual production capacity.





To
diversify our source of revenue and increase our gross margin, we set forth the
business strategy to enter into coal mining business, which can be operated
separately from, or synergistically with our coal washing business. We plan
to take advantage of the policy initiatives of the Chinese government and have
begun working on finding suitable coal mines to acquire. As of the date of this
report, we have not entered into any definitive coal mine acquisition
agreements.




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”), a public
reporting company traded on the OTC Bulletin Board, was incorporated in Florida
on August 9, 2001 under Florida Law.





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. 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, 2008, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in
the Group companies are as follows:





l
            Puda
      Coal, Inc.: Mr. Ming Zhao (approximately 49%); Mr. Yao Zhao (approximately
      12%) held directly.





l
            Puda
      Investment Holding Limited: Mr. Ming Zhao (approximately 49%); Mr. Yao
      Zhao (approximately 12%) held indirectly through
  Puda.





l
            Shanxi
      Putai Resources Limited: Mr. Ming Zhao (approximately 49%); Mr. Yao Zhao
      (approximately 12%) held indirectly through Puda and
  BVI.





l
            Shanxi
      Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao (2%) held
      directly, Mr. Ming Zhao (approximately 44%); Mr. Yao Zhao (approximately
      11%) held indirectly through Puda, BVI and
  Putai.





Corporate
Structure





Our
company has an offshore holding structure commonly used by foreign investors
with operations in China. We are a Florida 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.





After the
above reorganization and as of December 31, 2008, the organizational structure
of the Group is as follows:











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.


6





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 2008, the raw coal production was 2.62 billion MT, a 12.5%
increase over 2007, when the raw coal production was 2.32 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




·
            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 500 million MT and 489
million MT raw steel in 2008 and 2007 respectively, representing 38% and
36% of the world’s total steel production in 2008 and 2007. 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.




By
acquiring 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.


7


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 Liulin County, 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 raw coking coal by 19 coal mines, of which 14 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.





One of
our supplier 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 12.37% (10.68% after the
Conversion) stockholder of Puda. In addition to us, Jucai Coal also supplies
high grade coal to other unrelated parties. Jucai Coal sold
us 343,758MT and 218,329MT in 2007 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,
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 RMB30 to RMB50 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.


8


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 2008, we had 19 suppliers, with no one supplier who supplied
more than 10% of our total raw coal purchase for year 2008.  In 2007,
we had 16 raw coal suppliers, of which Jucai Coal supplied 10.9% of total raw
coal we purchased.





Prices
for raw coking coal are generally negotiated by the parties. Jucai Coal
typically sells its high quality coal to third parties at the higher end of the
guided price range. However, sales of its high quality coal to us are priced at
the lower end of the guided price range and we currently receive a discount
equal to RMB30 to RMB50 per MT from the price charged by Jucai Coal to its other
customers. This favorable raw coal pricing, coupled with the high coal quality
from Jucai Coal, allows us to be price competitive to obtain new
business.





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 $6,270,458, $8,065,596 and $12,152,000 of raw
      coal from this mine in 2006, 2007 and 2008,
  respectively.





·
            Liulin Dadongzhuang Coal
      Mine - Shanxi Coal purchased about $5,995,774, $7,880,949 and
      $12,839,000 of raw coal from this mine in 2006, 2007and 2008,
      respectively.




Operations




We have
three coal washing plants, of which two are located in Liulin County and one is
located in Lingshi County. In 2008, we produced about 2.3 million MT, which is
66% 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 15.


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 achieve higher margin and continue to enhancing
shareholder value, we plan to make 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.  We
plan to take advantage of the policy initiatives of the Chinese government and
we are actively evaluating coal mine acquisition candidates. As of the date of
this report, we have not entered into any definitive material coal mine
acquisition agreements.





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
2007, we sold 2,012,701 MT of cleaned coking coal to 18 different
customers. In 2008, we sold 2,342,059 MT of cleaned coking coal to 20
different customers. This represents an increase of 16% from 2007, due primarily
to increased demand from existing and new customers, and increased production
capacity.





In each
of 2008 and 2007, we had 20 and 18 customers, respectively. In 2007, one
customer Baotou Steel Group counted for more than 10% of our annual
sales (13.1%). In 2008, no customer counted for more than 10% of our annual
sales.





With
railway access to Shanxi Province, Inner Mongolia Antonomous Region, Hebei
Province, Beijing and Tianjin, we can readily service the growing appetite 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




·
            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, 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.





As a
response to the global economic crisis, on November 11, 2008 the Chinese
government announced a RMB 4 trillion yuan economic stimulus plan,
pursuant to which the government will invest RMB 4 trillion yuan by the end
of 2010 to stimulate Chinese economy. Under the stimulus plan, 280
billion yuan will be invested in low income housing and related projects ,
approximately 370 billion yuan will be invested in rural livelihood and rural
infrastructure projects and railways, and 1.8 trillion yuan will be invested in
highways, airports, urban and rural power grids.  China Steel
Association released a research report, which states that the 4 trillion
yuan investment in different industries will stimulate the revitalization
of the top ten industries including steel industry and drive domestic steel
consumption to 430 million tons in 2009.  Without the economic
stimulus, it was expected that in 2009 China's steel consumption would drop to
around 390 million tons. This means that the country's policy to revive the
economy is expected to cause a total of 40,000,000 tons of steel consumption
increase.


10




Employees




We had
approximately 328 employees as of December 31, 2008 as compared to 245 employees
as of December 31, 2007.  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
              
              5Supply;
      Marketing and Sales
              
              Purchase
      raw coal and maintain relationship with suppliers; Sell cleaned coal,
      maintain relationship with customers, and acquire new
      customers
              
              22Transportation
              
              Short-range
      truck drivers (within plant)
              
              21Production
              
              Produce
      cleaned coal
              
              226Quality
      Control
              
              Quality
      check on input (raw coal) and output (cleaned coal)
              
              21Reception
      and Security
              
              Administrative
      matters on reception and security
              
              25Total
              
              
              
              328





Distribution




We sell
our clean coking coal through a direct sales force of approximately
16 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 2008, 2007 and 2006, we did not incur any expenditure on research
and development activities.




Governmental
Approvals




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


11


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.




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 plan
to grow through external growth opportunities, 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
recent tightening of the global credit markets, and the lack of investors
confidence in the equity markets. 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.





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 unprecedented volatility, stress,
illiquidity and disruption around the world. Many of our customers and suppliers
may encounter much uncertainty and risks due to the weakening 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.


12





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 highest level in October 2008, and
then significantly decreased afterwards. 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.




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 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. 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.


13


We
may not be able to manage our expanding operations effectively, which could harm
our business.





We have
expanded rapidly by acquiring coal washing facilities in Liulin County,
Zhongyang County and Lingshi County, which have become operational and have a
total annual coal washing capacity of approximately 3.5 million
MT.  We anticipate continuous expansion in our business, both through
further acquisitions and internal growth.  The new facility
acquisitions and the overall internal growth require significant management
resources that our smaller-size competitors do not need to devote to their
operations.  In order to manage the expected growth of our operations
and personnel, we will be required to improve and implement operational and
financial systems, procedures and controls, and expand, train and mange our
growing employee base.  Further, our management will be required to
maintain and expand our relationship with more suppliers and
customers.  Our current and planned personnel, systems, procedures and
controls may not be adequate to support our further operations.  If we
were not successful in establishing, maintaining and managing our personnel,
systems, procedures and controls, our business will be materially and adversely
affected.




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.




We
have not timely renew our property insurance, we may incur significant loss if
there is any unexpected damage to our property.





In  2007,
Shanxi Coal maintained property insurances coverage in the amount of $32,474,213
(RMB246,200,000) through The People’s Insurance Company of China.  The
insurances expired on September 26, 2008 and October 6, 2008 respectively. As of
the date of this report, we had not renewed the property
insurances.  As the risks of our business operations are currently not
covered by insurance, any loss or damage to our properties or other assets, or
personal injuries arising from our business operations may have a material
adverse effect on our financial condition and operations.  We are in
the process of renewing our insurance policies as soon as we can to bring the
insurance coverage to the level that the management believes will be reasonable
and appropriate.





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.




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.


14


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.





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.




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 New Shanxi Liulin Jucai Plant and the New
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 (currently 49.47% and
12.37%of our
outstanding common stock), they can 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.”




Because
we are expanding, we may have to make sales to customers with inadequate or
unknown creditworthiness. We may not be able to collect receivables which are
incurred by these customers.




Our
ability to receive payment for cleaned coal depends on the continued
creditworthiness of our customers. In order to pay our expansion costs, we may
have to make sales to customers who are less creditworthy than our historical
customers. Our customer base may change if our sales increase because of our
added cleaning capacity. If we are not able to collect our receivables, our
profitability will be negatively affected.





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.


15


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.




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.


16


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.





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.


17





Our
ownership structure is subject to regulatory controls which could cause our
subsidiaries to be subject to penalties or which may restrict our ability to
repatriate and distribute profits.




The State
Administration of Foreign Exchange (“SAFE”) in China issued public Circular No.
75 on October 21, 2005 concerning foreign exchange regulations on financings and
returns on investments made by PRC residents through off-shore investment
vehicles. The circular went into effect November 1, 2005 and replaces Circular
No. 11 issued January 24, 2005 and Circular No. 29 issued April 8, 2005
concerning foreign investment regulations on mergers and acquisitions in China.
Circular No. 75 eliminates the requirement under the prior two circulars for the
China Ministry of Commerce (“MOFCOM”) to approve offshore investments made by
PRC individual residents. This change effectively enables PRC individual
residents to set up, control or otherwise invest into China through an offshore
vehicle for the purposes of attracting overseas financing and facilitating an
offshore public listing or offshore merger and acquisition exit, so long as such
individuals comply with the SAFE registration procedures contained in Circular
No. 75.




Although
Circular No. 75 has removed the requirement for MOFCOM approval, and Puda’s
Chinese shareholders have complied with Circular No. 75 requirements, the
burdens that may arise under the SAFE registration process in the future may
still restrict our ability to control and manage Shanxi Coal and could adversely
affect our business and prospects.





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, 2008, the last trading day in 2008, Renminbi
appreciated to approximately 6.8225 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 Dollars 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.




Risks
Associated with Our Common Stock




Our
stock is thinly traded and stockholders may not be able to liquidate their
investment at all, or may only be able to liquidate the investment at a price
less than the company’s value.




Our
common stock is very thinly traded, and the price if traded may not reflect the
value of our company. Consequently, investors may not be able to liquidate their
investment at all, or if they are able to liquidate it may only be at a price
that does not reflect the value of the business. Even if a more active market
should develop, the price may be highly volatile. Because the price for our
stock is low, many brokerage firms may not be willing to effect transactions in
the securities. Even if an investor finds a broker willing to effect a
transaction in our stock, the combination of brokerage commissions, transfer
fees, taxes, if any, and any other selling costs may exceed the selling price.
Further, many lending institutions will not permit the use of common stock like
ours as collateral for any loans.


18





We do not
qualify or meet the requirements for the listing and/or quotation of our common
stock on the NASDAQ Capital Market and the American Stock Exchange. If we
determine that we would like to pursue such listing and attempt to meet the
listing standards, in order to achieve the minimum required price per share,
we would have to effect a reverse stock split which could reduce the
overall value of your investment.





Because
we are subject to the Penny Stock Rules sale of our stock by investors may be
difficult.




We are
subject to the SEC’s “penny stock” rules. Penny stocks generally are equity
securities with a price of less than $5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by
the SEC which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson, and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer’s confirmation.




In
addition, the penny stock rules require that prior to a transaction, the broker
and/or dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity for our common
stock. As long as our common stock is subject to the penny stock rules, the
holders of such common stock may find it more difficult to sell their
securities.





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, 2008, the closing sale prices of our ordinary shares on the
Over-the-Counter Bulletin Board ranged from $0.17 to $0.37 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 majority 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
December 31, 2008, Ming Zhao and Yao Zhao own in total approximately 61.84% of
the Company’s outstanding shares,  and upon the conversion of all of
the outstanding convertible notes and the exercise of all of the outstanding
warrants the underlying stock of which is being registered in this offering
(“Conversion”), they will own in total approximately 53.39% 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, Florida 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.


19




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 (61.84%, and 53.39% after the Conversion), 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.





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 $1,756,470, 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
and 2008 by Puda Coal, the OTC listed company. Puda Coal does 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 26.




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 management 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.


20


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 December 15, 2009.  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.





We
have failed to maintain an effective system of internal control over financial
reporting and we may not be able to accurately report our financial results. As
a result, current and potential shareholders could lose confidence in our
financial reporting, which would harm our business and the trading price of our
stock.




As
reported in Item 9A(T) “Control and Procedures” of this report, our management
has determined that as of December 31, 2008, we did not maintain effective
internal controls over financial reporting based on criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Frameworkas a result of
identified material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. For a
detailed description of these material weaknesses and our remediation efforts
and plans, see Item 9A(T) – “Controls and Procedures.” If the result of our
remediation of the identified material weaknesses is not successful, or if
additional material weaknesses are identified in our internal control over
financial reporting, our management will be unable to report favorably as to the
effectiveness of our internal control over financial reporting and/or our
disclosure controls and procedures, and we could be required to further
implement expensive and time-consuming remedial measures and potentially lose
investor confidence in the accuracy and completeness of our financial reports
which could have an adverse effect on our stock price and potentially subject us
to litigation.





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.




The two
new 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 New Shanxi Liulin County Plant, which
is located in Liulin County, Shanxi province, started production in December of
2005. The New Shanxi Liulin County Plant, land-use rights and related equipment
were purchased for a cost of $5.8 million. The New Zhongyang County Plant, which
is located in Zhongyang County, Shanxi province, started production in April of
2006. The New 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
New Shanxi Liulin Jucai Plant and the New 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 2007 and 2008 were
$1,300,000.




Our new 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 tons 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).


21


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 an office as
headquarters office of Shanxi Coal, which is in Taiyuan, Shanxi, and certain
equipment (“the office lease agreement”). The rent is 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 RMB90,000 per year 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  2007,
Shanxi Coal maintained property insurances coverage in the amount of $32,474,213
(RMB246,200,000) through The People’s Insurance Company of China.  The
insurances have expired on September 26, 2008 and October 6, 2008 respectively.
As of the date of this report, we have not renewed the property
insurance.   We are in the process of renewing our insurance
policies as soon as we can to bring the insurance coverage to the level that our
management believes will be reasonable and appropriate.





Item
3. Legal Proceedings




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




Item
4. Submission of Matters to a Vote of Security Holders





None.


22


PART
II




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




Market
Information




Our
common stock is quoted under the symbol, “PUDC.OB” on the OTC Bulletin
Board,  Trading in the common stock in the over-the-counter market has
been limited and sporadic and the quotations set forth below are not necessarily
indicative of actual market conditions.  Further, all prices reflect
inter-dealer prices without retail mark-up, mark-down, or commission and may not
necessarily reflect actual transactions. The high and low sales prices for the
periods presented have been adjusted to reflect stock splits:





High*
                                                          
                                                          Low*2007March
      31, 2007
                                                          
                                                          
                                                          1.340
                                                          
                                                          0.770June
      30, 2007
                                                          
                                                          
                                                          2.59
                                                          
                                                          0.83September
      30, 2007
                                                          
                                                          
                                                          2.36
                                                          
                                                          1.24December
      31, 2007
                                                          
                                                          
                                                          2.11
                                                          
                                                          0.782008March
      31, 2008
                                                          
                                                          
                                                          0.29
                                                          
                                                          0.27June
      30, 2008
                                                          
                                                          
                                                          0.54
                                                          
                                                          0.49September
      30, 2008
                                                          
                                                          
                                                          0.29
                                                          
                                                          0.25December
      31, 2008
                                                          
                                                          
                                                          0.21
                                                          
                                                          0.18





*
            Source:
      Yahoo! Finance








Holders




As of
December 31, 2008 there were 107,335,759shares outstanding and
approximately158holders 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 $1,756,470,
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.”


23





Securities
Authorized for Issuance under Equity Compensation Plans




The
following table sets forth, as of December 31, 2008, 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
                      
                      
                      10,000
                      
                      
                      $
                      2.5
                      
                      
                      
                      4,772,976
                      (1)Equity
      compensation plans not approved by security holders:
                      
                      None
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A





(1)
            This
      number represents the number 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 the 10,000
  warrants.




Sales
of Unregistered Securities





In July
2008, we issued and delivered 2,058,062 shares of common stock of Puda Coal to
the investors in the November 2005 private placement as penalty shares due on
November 13, 2006 through March 6, 2008 for our failure to make the resale
registration statement effective according to the time frame agreed upon with
the investors in the Subscription Agreement.  The penalty shares were
issued only to accredited investors in the United States and to persons who are
not “U.S. persons” as defined in Regulation S under the Securities Act. The
penalty shares were issued in reliance on the exemptions from registration
afforded under Rule 506 of Regulation D and Regulation S under the Securities
Act. We did not engage in any public advertising or general solicitation in
connection with the issuance of the penalty shares.





Purchases
of Equity Securities by Issuer





We
did not purchase any of our equity securities in 2008.





Item
6. Selected Financial Data





SELECTED
FINANCIAL DATA





The
following selected financial data for the five years ended December 31, 2008 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 31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004OPERATIONS
      DATA
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000Revenues
                      
                      $
                      242,338
                      
                      
                      $
                      165,267
                      
                      
                      $
                      137,771
                      
                      
                      $
                      51,710
                      
                      
                      $
                      19,735Net
      income
                      
                      
                      17,061
                      
                      
                      
                      10,874
                      
                      
                      
                      1,354
                      
                      
                      
                      965
                      
                      
                      
                      3,693Option
      holder preference dividend
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,717)
                      
                      
                      
                      (2,717)
                      
                      
                      
                      —Income/(loss)
      applicable to commonShares
                      
                      $
                      17,061
                      
                      
                      $
                      10,874
                      
                      
                      $
                      (1,363)
                      
                      
                      $
                      (1,752)
                      
                      
                      $
                      3,693Income/(loss)
      per common share -basic
      and diluted
                      
                      $
                      0.16
                      
                      
                      $
                      0.11
                      
                      
                      $
                      (0.02)
                      
                      
                      $
                      (0.03)
                      
                      
                      $
                      0.05Cash
      dividends declared per commonShare
                      
                      $
                      0.00
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      0.02
                      
                      
                      $
                      0.03BALANCE
      SHEET DATATotal
      assets
                      
                      $
                      98,632
                      
                      
                      $
                      81,264
                      
                      
                      $
                      62,984
                      
                      
                      $
                      46,701
                      
                      
                      $
                      11,344Convertible
      notes and warrants
                      
                      $
                      4,086
                      
                      
                      $
                      7,421
                      
                      
                      $
                      13,894
                      
                      
                      $
                      18,925
                      
                      
                      $
                      —Other
      Long-term debt
                      
                      $
                      7,800
                      
                      
                      $
                      9,100
                      
                      
                      $
                      10,400
                      
                      
                      $
                      11,700
                      
                      
                      $
                      —Shareholders'
      equity
                      
                      $
                      72,277
                      
                      
                      $
                      48,581
                      
                      
                      $
                      23,037
                      
                      
                      $
                      6,082
                      
                      
                      $
                      7,149


24


QUARTERLY
FINANCIAL DATA




Unaudited
quarterly results of operations for the years ended December 31, 2008 and 2007
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 2008 and 2007.




First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  FourthQuarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  YearYEAR
      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 commonshares
                  
                  $
                  4,295
                  
                  
                  
                  2,863
                  
                  
                  
                  6,539
                  
                  
                  $
                  3,364
                  
                  
                  $
                  17,061Income
      per common share -basic and
      diluted
                  
                  $
                  0.04
                  
                  
                  
                  0.03
                  
                  
                  
                  0.06
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.16YEAR
      ENDED December 31, 2007Revenues
                  
                  $
                  37,415
                  
                  
                  
                  38,097
                  
                  
                  
                  40,536
                  
                  
                  $
                  49,219
                  
                  
                  $
                  165,267Gross
      profit
                  
                  $
                  7,505
                  
                  
                  
                  6,628
                  
                  
                  
                  6,655
                  
                  
                  $
                  7,827
                  
                  
                  $
                  28,615Net
      income/(loss)
                  
                  $
                  3,847
                  
                  
                  
                  (670)
                  
                  
                  
                  3,365
                  
                  
                  $
                  4,332
                  
                  
                  $
                  10,874Option
      holder preference dividend
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Income/(loss)
      applicable to commonshares
                  
                  $
                  3,847
                  
                  
                  
                  (670)
                  
                  
                  
                  3,365
                  
                  
                  $
                  4,332
                  
                  
                  $
                  10,874Income/(loss)
      per common share -basic  and
      diluted
                  
                  $
                  0.04
                  
                  
                  
                  (0.00)
                  
                  
                  
                  0.03
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.11




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, 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 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. The
selling price of cleaned coal increased approximately $14 or 16%, from
approximately $89 (after adjusting for RMB appreciation against USD over this
period) per ton for the year ended December 31, 2007 to approximately $103 per
ton for the year ended December 31, 2008.  The increase in the tonnage
sales and average selling price of cleaned coal were the primary reasons for the
increase in our net revenue. The increase in tonnage sale and selling price were
primarily due to increased orders of cleaned coal from existing and new
customers for the year ended December 31, 2008.


25





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 an increase in the tonnage sales
of cleaned coal.  The average purchase price of raw coal increased $14
or 26%, from approximately $54 (after adjusting for RMB appreciation
against USD over this period) per ton for the year ended December 31, 2007
to approximately $68 per ton for the year ended December 31,
2008.





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 issued to the placement
agent.





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.


26


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.





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Net
Revenue. Net revenue was $165,267,000 for the year ended December 31, 2007,
compared to $137,771,000 for the year ended December 31, 2006, an increase of
$27,496,000, or 20%. The tonnage sales of cleaned coal increased approximately
255,000 MT, or 15%, from approximately 1,758,000 MT for the year ended December
31, 2006 to approximately 2,013,000 MT for the year ended December 31, 2007. The
increase in the tonnage sales of cleaned coal was the primary reason for the
increase in our net revenue. The increase in tonnage sales accounted for
approximately 15% of the total 20% increase in net revenue and the remaining 5%
was attributable to currency exchange rate differences. The increase in tonnage
sales was primarily due to increased purchases of cleaned coal from existing and
new customers for the year ended December 31, 2007 as a result of the increase
in the general demand for high-grade coking coal in China, which was largely
driven by the economic growth that China continued to experience for the year
ended December 31, 2007. Steel is a key component of rail systems, bridges,
ports, airports, construction projects and car production spearheading China's
economic growth and the increased demand for steel directly causes the increased
demand for the cleaned high-grade metallurgical coking coal, which we sell. The
average selling price was approximately $82 and $82 (after adjusting for RMB
appreciation against USD over this period) per ton for the years ended December
31, 2007 and 2006, respectively.





In
response to this increase in general demand, we have significantly expanded our
capacity to 3.5 million MT per year through the purchase of three new coal
washing facilities in November 2005 and June 2007. The Liulin County plant
(annual clean coal washing capacity of 1.1 million MT) became operational in
December 2005, the Zhongyang County plant (annual clean coal washing capacity of
1.2 million MT) became operational by the end of March 2006 and the Lingshi
County Chongjie plant (annual clean coal washing capacity of 1.2 million MT)
became operational in August 2007. In June 2007, we exchanged all assets of our
400,000 MT Liulin Dongqiang coal washing plant for all assets of the Lingshi
County Chongjie plant.





Cost of
Revenue. Cost of revenue was $136,652,000 for the year ended December 31, 2007,
compared to $109,381,000 for the year ended December 31, 2006, an increase of
$27,271,000, or 25%. This was primarily due to an increase in the average
purchase price of raw coal from approximately $48 (after adjusting for RMB
appreciation against USD over this period) per ton for the year ended December
31, 2006 to approximately $50 per ton for the year ended December 31,
2007.





Gross
Profit. Gross profit was $28,615,000 for the year ended December 31, 2007,
compared to $28,390,000 for the year ended December 31, 2006, an increase of
$225,000, or 1%, due to an increase in sales volume. Gross profit margins for
the years ended December 31, 2007 and 2006 were 17% and 21%, respectively. Such
decrease in gross profit margins was primarily due to an increase in average
purchase price of raw coal during the fiscal year ended December 31, 2007 that
exceeded the increase in the average selling price of raw coal in this
year..





Selling
Expenses. Selling expenses were $2,975,000 for the year ended December 31, 2007,
compared to $3,231,000 for the year ended December 31, 2006. This represents a
decrease of $256,000, or 8%, primarily due to decrease in shipping charges
because of decreased tonnage sales to customers outside Shanxi Province for the
year ended December 31, 2007.





General
and Administrative Expenses. General and administrative expenses were $2,215,000
for the year ended December 31, 2007, compared to $2,387,000 for the year ended
December 31, 2006. This represents a decrease of $172,000, or 7%, primarily due
to a decrease in legal and professional fees and investor relation
expenses.





Income
from Operations. Operating profit was $23,425,000 for the year ended December
31, 2007, compared to $22,772,000 for the year ended December 31, 2006. The
increase of $653,000, or 3%, was primarily the result of a decrease in operating
expenses of $428,000 and an increase in gross profit of
$225,000.


27


Interest
Expense. Interest expense was $1,577,000 for the year ended December 31, 2007,
compared to $4,441,000 for the year ended December 31, 2006. This represents a
decrease of $2,864,000, or 64%, and such decrease was primarily due to a
decrease of $2,235,000 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 $553,000 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 $2,422,000 for the year ended
December 31, 2007, compared to $10,669,000 for the year ended December 31, 2006.
This represents a decrease of $8,247,000, or 77%, primarily due to a decrease in
amortization of discount on convertible notes and warrants of $7,732,000, a
decrease in amortization of debt issue costs of $832,000, which was offset by an
increase in penalty payment of $317,000 for not having the registration
statement effective by March 17, 2006.





Derivative
Unrealized Fair Value Loss. Derivative unrealized fair value loss of $343,000
for the year ended December 31, 2007 and derivative unrealized fair value gain
of $1,237,000 for the year ended December 31, 2006 represented a change in fair
value of the warrants issued to the placement agent.





Income
Before Income Taxes. Income before income taxes was $19,166,000 for the year
ended December 31, 2007, compared to $8,958,000 for the year ended December 31,
2006. The increase of $10,208,000, or 114%, was primarily the result of a
decrease in debt financing costs of $8,247,000, a decrease in interest expenses
of $2,864,000, an increase in operating profit of $653,000, which was offset by
an increase in derivative unrealized fair value loss of $1,580,000 for the year
ended December 31, 2007.





Income
Taxes. Income taxes were $8,292,000 for the year ended December 31, 2007,
compared to $7,604,000 for the year ended December 31, 2006, an increase of
$688,000, or 9%, due to an increase in the operating profit of Shanxi Coal from
$23,402,000 for the year ended December 31, 2006 to $23,980,000 for the year
ended December 31, 2007. Income tax is imposed by the China Tax Bureau on income
of Shanxi Coal, as calculated under Chinese GAAP and tax rules The income tax
rate was 33% for the years ended December 31, 2007 and 2006 and was reduced to
25% effective on January 1, 2008.





Net
Income. Net income was $10,874,000 for the year ended December 31, 2007,
compared to $1,354,000 for the year ended December 31, 2006, an increase of
$9,520,000, or 703%, mainly due to a decrease in debt financing costs of
$8,247,000, a decrease in interest expenses of $2,864,000,and  an
increase in operating profit of $653,000, which was offset by an increase in
derivative unrealized fair value loss of $1,580,000, and an increase in income
taxes of $688,000 for the year ended December 31, 2007.





Inflation
had no significant impact on our results of operations for the years ended
December 31, 2007 and 2006.





Business Outlook





Due to
high prices for raw materials used in steel making and the global economic
crisis, China’s steel industry is currently experiencing slower production,
which the Company believes will impact on our tonnage sales in the next two
quarters or during a longer period of time.





In the
longer term, the management believes the outlook for its coal washing operations
remains attractive, as the Company has maintained a stable increased customer
base and supply tunnels. We believe that the outlook for China’s steel making
industry also remains promising due to China’s 4 trillion yuan economic stimulus
package, which encourages infrastructure development projects such as the
construction of railway and motor vehicle manufacturing as well as real estate
projects, which will drive the demand for steel.  This provides
significant opportunities for suppliers of cleaned coking coal like Puda
Coal.





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 weakening 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” of this
report.





The
Company is currently operating at approximately 66% utilization of its
production capacity and has the capacity to meet any reasonable increases in
future demand.  In addition, the Company intends to execute its
strategy of entering the coal mining business to increase
profitability.  However, if the Company is unable to obtain or manage
new 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, 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” of this
report.


28





Liquidity
and Capital Resources





Net cash
provided by operating activities was $26,280,000 for the year ended December 31,
2008, compared to net cash used in operating activities of $4,013,000 for the
year ended December 31, 2007, an increase of $30,293,000. This was primarily due
to a decrease in working capital needs resulting from decreased inventory
and an increase in net income.





Net cash
used in investing activities was $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 used in investing activities of $7,910,000
for the year ended December 31, 2007 was related to the payment of $1,799,000 to
Ming Zhao and Yao Zhao for the purchase of equity interest in Shanxi Coal, the
cash paid to acquire a new coal washing facility of $5,977,000 in June 2007, and
the cash paid to acquire fixed assets of $134,000 in October 2007.





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.  Net cash provided by financing
activities of $2,300,000 for the year ended December 31, 2007 was related to
cash received from the exercise of warrants of $3,600,000, which was offset
by the repayment of long-term debt of $1,300,000.





On
November 17, 2005, Shanxi Coal entered into two conveyance agreements
with Resources Group (a related person controlled by our controlling
shareholders), pursuant to which Shanxi Coal acquired 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 with an annual
clean coal washing capacity of 1.1 million MT started full 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 with an annual clean coal washing capacity of 1.2 million MT started full
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, is amortized over 10 years
from December 31, 2005 and bears interest at a rate of 6% per annum payable
quarterly.  On June 6, 2007, Shanxi Coal entered into an Asset
Exchange Agreement with Lingshi Jinliao Coal & Chemical Co.
Ltd.   Pursuant to the Asset Exchange Agreement, Shanxi Coal
agreed to exchange all assets of its 400,000 MT Liulin Dongqiang coal washing
plant, with a book value of RMB11.5 million ($1,511,000), plus RMB45.5 million
($5,977,000) in cash, for all assets of Lingshi County Chongjie coal washing
plant, with a book value of RMB57 million ($7,488,000).   The
Lingshi County Chongjie plant with an annual clean coal washing capacity of 1.2
million MT started formal production in August 2007.





On
September 6, 2007, Shanxi Coal entered into an agreement with Xin Kai Yuan Hotel
and Restaurant Co. Limited, pursuant to which, Shanxi Coal agreed to purchase
the coal mining right with respect to a coal mine located in Duanjia Village,
Jingle County, Shanxi Province of China.  As consideration, Shanxi
Coal agreed to pay an aggregate purchase price of RMB460 million (approximately
$60.7 million) in cash.  Under the agreement, Shanxi Coal agreed to
pay a first installment in the amount of RMB200 million ($26.5 million) within
10 business days after the receipt of the mining permit by the seller and a
second installment in the amount of RMB150 million ($19.9 million) within ten
business days after the receipt of the mining commencement report by the
seller.  Shanxi Coal agreed to pay the remaining purchase price,
RMB110 million ($14.6 million) within three months after the receipt of the
mining commencement permit.  If the seller does not obtain the mining
permit for the benefit of Shanxi Coal within two months of the agreement date,
Shanxi Coal has the right to unilaterally terminate the agreement.  As
the seller failed to obtain the mining permit, our management has decided to
terminate the agreement. As of the date of this report, the termination is in
progress.





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 $9,100,000 as of December 31, 2008, for
the acquisition of the new Liulin County plant and the new Zhongyang County
plant.





Warrants
were also issued in that private placement to acquire up to 15,900,000
shares of our common stock which are exercisable at price of $.60
per share, or an aggregate of $9,540,000. We believe that the likelihood
that 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.


29


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 $39,108,000 as of December 31, 2008.  We believe that our
cash will be adequate to satisfy our anticipated cash requirements
for fiscal 2009, 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 our 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.




Recently,
the general economic, global capital and credit market conditions in the United
States and other parts of the world have deteriorated significantly and have
adversely affected access to capital and increased the cost of capital. However,
we continue to believe that our available cash and cash flow from operations and
other currently available financing, will be adequate to meet our operating
needs, and generally satisfy our investing needs in the following 6 to 9
months  We currently do not rely on short-term borrowing to fund our
operations and, as a result, we do not believe that existing global capital and
credit market conditions will have a significant impact on our near-term
liquidity. We are closely monitoring our liquidity as well as the condition of
these markets. If these conditions continue or become worse, our future cost of
debt and equity capital and our future access to capital markets could be
adversely affected. We cannot guarantee that we will be able to obtain any
additional financing in the future or extend any existing financing arrangements
on favorable terms, or at all.





CRITICAL
ACCOUNTING ESTIMATES





The
discussion and analysis of Puda’s financial condition and results of operations
is based upon Puda’s financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these 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 difference
estimates.





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.




Fair
value measures






Puda
adopted Statement of Financial Accounting Standards (SFAS) No.157, “Fair Value
Measurements” (SFAS 157) effective January 1, 2008.  . 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.


30




Share-based
compensation




Share-based
compensation expenses are recognized in accordance with SFAS No. 123(R) 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 collectibility is reasonably
assured.  We assess collectibility 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, 2008, 2007
and 2006.  On December 31, 2008, 2007 and 2006, the exchange rates per
US$1.00 were RMB 6.82, RMB 7.30 and RMB 7.81, 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.





NEW
ACCOUNTING STANDARDS





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
No. 141R”), which replaces SFAS No 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized for purchase
accounting. It also changes the recognition of assets acquired and liabilities
assumed arising from contingencies, requires the capitalization of in-process
research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for
financial statements issued for fiscal years beginning January 1, 2009 and will
apply prospectively to business combinations completed on or after that date.
The adoption of SFAS 141R is expected to have no material impact on the Group’s
consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51(“SFAS No.
160”), which changes the accounting and reporting for minority interests.
Minority interests will be recharacterized as noncontrolling interests and will
be reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. SFAS No. 160 is effective for
financial statements for fiscal years beginning January 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. The adoption of SFAS 160 is expected to have no
material impact on the Group’s consolidated financial
statements.


31




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133 (“SFAS No. 161”), which requires additional disclosures
about the objectives of using derivative instruments; the method by which the
derivative instruments and related hedged items are accounted for under FASB
Statement No.133 and its related interpretations; and the effect of derivative
instruments and related hedged items on financial position, financial
performance, and cash flows. SFAS No. 161 also requires disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early adoption
encouraged. The adoption of SFAS No. 161 on January 1, 2009 is expected to have
no material impact on the Group’s consolidated financial
statements.




Off
Balance Sheet Arrangements





None.





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, 2008.





(In
thousand dollars)




Obligations
                                    
                                    Total Ending
                                      Balance
                                    
                                    
                                    Less Than
                                      One Year
                                    
                                    
                                    1-3 Years
                                    
                                    
                                    3-5 Years
                                    
                                    
                                    More than 5
                                      YearsLong Term
      Debt Obligations
                                    
                                    $
                                    9,100
                                    
                                    
                                    $
                                    1,300
                                    
                                    
                                    
                                    2,600
                                    
                                    
                                    
                                    2,600
                                    
                                    
                                    
                                    2,600Capital
      Lease Obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Operating
      Lease Obligations
                                    
                                    $
                                    65
                                    
                                    
                                    $
                                    13
                                    
                                    
                                    
                                    26
                                    
                                    
                                    
                                    26
                                    
                                    
                                    
                                    -Purchase
      Obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Repayment
      Obligations under Line of Credit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
                                    
                                    $
                                    9,165
                                    
                                    
                                    $
                                    1,313
                                    
                                    
                                    
                                    2,626
                                    
                                    
                                    
                                    2,626
                                    
                                    
                                    
                                    2,600





On September 6, 2007, Shanxi Coal
entered into an agreement with Xin Kai Yuan Hotel and Restaurant Co. Limited
(“Xin Kai Yuan agreement”), pursuant to which, Shanxi Coal will purchase the
coal mining right with respect to a coal mine located in Duanjia Village, Jingle
County, Shanxi Province of China.  As consideration, Shanxi Coal will
pay an aggregate purchase price of RMB460 million (approximately $60.7 million)
in cash.  Under the agreement, Shanxi Coal will pay a first
installment in the amount of RMB200 million ($26.5 million) within 10 business
days after the receipt of the mining permit by the seller and a second
installment in the amount of RMB150 million ($19.9 million) within ten business
days after the receipt of the mining commencement report by the
seller.  Shanxi Coal will pay the remaining purchase price, RMB110
million ($14.6 million) within one year after the receipt of the mining
commencement permit.  Shanxi Coal plans to finance the purchase
through a debt facility which it is currently negotiating.  If the
seller does not obtain the mining permit for the benefit of Shanxi Coal within
two months of the agreement date, Shanxi Coal may terminate the
agreement.  As of the date of purchase, the coal mine was not
operating and Shanxi Coal will construct the coal mine after the commencement
permit has been obtained.  Shanxi Coal has to get external financing
to facilitate the acquisition.  As of April 3, 2008, Xin Kai Yuan
Hotel & Restaurant Co. Limited had not obtained a mining permit. Shanxi Coal
has decided to terminate the agreement and is now in the process of terminating
this agreement.





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.


32


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, 2008 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, 2008. 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, 2008 under the heading “Risk Factors.” During the
year 2008, the foreign currency translation adjustment to our comprehensive
income was $3.498 million, primarily as a result of the RMB appreciating against
the U.S. dollar. An average appreciation (depreciation) of the RMB against the
U.S. dollar of 6% could increase (decrease) our net income by $1.0 million for
the year 2008. As of December 31, 2008, our accumulated other comprehensive
income was $7.497 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 steadily from approximately RMB377 per ton
in 2007 to approximately RMB 475 per ton in 2008. 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 2008. We
generally have not employed forward contracts or other financial instruments to
hedge commodity price risk.




Credit
Risk




We are exposed to credit risk from our
cash at bank and contract receivables. At December 31, 2008, we had a credit
risk exposure of cash at bank of approximately $39,108,000. 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 collectibility
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.


33


Item
8. Financial Statements and Supplementary Data





PUDA
COAL, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


December
31, 2008, 2007 and 2006


Together
With Report Of


Independent
Registered Public Accounting Firm


34




PUDA
COAL, INC.




INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                2Consolidated
      Balance Sheets
                3-4Consolidated
      Statements of Operations
                5-6Consolidated
      Statements of Changes in Stockholders’ Equity
                7-8Consolidated
      Statements of Cash Flows
                9-10Notes
      to Consolidated Financial Statements
                11-37


35


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 as of December 31, 2008 and 2007, 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, 2008. 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.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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, 2008 and 2007 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.





Moore
Stephens





Certified
Public Accountants


Hong
Kong





March 6,
2009


36





PUDA
COAL, INC.


CONSOLIDATED
BALANCE SHEETS


December
31, 2008 and 2007


(In
thousands of United States dollars)





Note(s)
                    
                    
                    December 31,
                      2008
                    
                    
                    December 31,
                      2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    
                    22
                    
                    
                    $
                    39,108
                    
                    
                    $
                    16,381Restricted
      cash
                    
                    
                    3,
      22
                    
                    
                    
                    -
                    
                    
                    
                    233Accounts
      receivable, net
                    
                    
                    4
                    
                    
                    
                    14,645
                    
                    
                    
                    8,137Other
      receivables-
      Related parties
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    4-Third
      parties
                    
                    
                    
                    
                    
                    
                    7
                    
                    
                    
                    6Advances
      to suppliers-
      Related parties
                    
                    
                    5
                    
                    
                    
                    879
                    
                    
                    
                    685-
      Third parties
                    
                    
                    
                    
                    
                    
                    5,635
                    
                    
                    
                    1,363Inventories
                    
                    
                    6
                    
                    
                    
                    21,589
                    
                    
                    
                    35,953Total
      current assets
                    
                    
                    
                    
                    
                    
                    81,863
                    
                    
                    
                    62,762PROPERTY,
      PLANT AND EQUIPMENT, NET
                    
                    
                    7
                    
                    
                    
                    13,370
                    
                    
                    
                    15,018INTANGIBLE
      ASSETS, NET
                    
                    
                    8
                    
                    
                    
                    3,399
                    
                    
                    
                    3,484TOTAL
      ASSETS
                    
                    
                    
                    
                    
                    $
                    98,632
                    
                    
                    $
                    81,264LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESCurrent
      portion of long-term debt-
      Related party
                    
                    
                    5,9
                    
                    
                    $
                    1,300
                    
                    
                    $
                    1,300Accounts
      payable-
      Related parties
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    182-
      Third parties
                    
                    
                    
                    
                    
                    
                    4,272
                    
                    
                    
                    2,140Other
      payables-
      Related parties
                    
                    
                    5
                    
                    
                    
                    1,030
                    
                    
                    
                    1,851-
      Third parties
                    
                    
                    
                    
                    
                    
                    2,714
                    
                    
                    
                    2,916Accrued
      expenses
                    
                    
                    
                    
                    
                    
                    1,991
                    
                    
                    
                    1,350Income
      taxes payable
                    
                    
                    
                    
                    
                    
                    1,319
                    
                    
                    
                    2,223VAT
      payable
                    
                    
                    
                    
                    
                    
                    1,726
                    
                    
                    
                    1,379Distribution
      payable
                    
                    
                    5
                    
                    
                    
                    117
                    
                    
                    
                    1,096Convertible
      notes
                    
                    
                    10
                    
                    
                    
                    -
                    
                    
                    
                    1,841Derivative
      conversion feature
                    
                    
                    10
                    
                    
                    
                    -
                    
                    
                    
                    1,100Penalty
      payable
                    
                    
                    10
                    
                    
                    
                    -
                    
                    
                    
                    1,725Total
      current liabilities
                    
                    
                    
                    
                    
                    
                    14,469
                    
                    
                    
                    19,103LONG-TERM
      LIABILITIESLong-term
      debt-
      Related party
                    
                    
                    5,
      9
                    
                    
                    
                    7,800
                    
                    
                    
                    9,100Derivative
      warrants
                    
                    
                    10,
      25
                    
                    
                    
                    4,086
                    
                    
                    
                    4,480Total
      long-term liabilities
                    
                    
                    
                    
                    
                    
                    11,886
                    
                    
                    
                    13,580


37


PUDA
COAL, INC.


CONSOLIDATED
BALANCE SHEETS (Continued)


December
31, 2008 and 2007


(In
thousands of United States dollars)





Note(s)
                
                
                December
      31,
                  2008
                
                
                December
      31,
                  2007COMMITMENTS
      AND CONTINGENCIES
                
                
                11STOCKHOLDERS’
      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
                  107,335,759  (2007:
      105,252,176)
                
                
                
                
                
                
                107
                
                
                
                105Paid-in
      capital
                
                
                
                
                
                
                31,555
                
                
                
                28,304Statutory
      surplus reserve fund
                
                
                
                
                
                
                1,366
                
                
                
                1,366Retained
      earnings
                
                
                
                
                
                
                31,752
                
                
                
                14,807Accumulated
      other comprehensive income
                
                
                
                
                
                
                7,497
                
                
                
                3,999Total
      stockholders’ equity
                
                
                
                
                
                
                72,277
                
                
                
                48,581TOTAL
      LIABILITIES AND STOCKHOLDERS’
                  EQUITY
                
                
                
                
                
                $
                98,632
                
                
                $
                81,264





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


38


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the years ended December 31, 2008, 2007 and 2006


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





Years
      ended December 31,Note(s)
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006NET
      REVENUE
                      
                      
                      
                      
                      $
                      242,338
                      
                      
                      $
                      165,267
                      
                      
                      $
                      137,771COST
      OF REVENUE
                      
                      
                      
                      
                      
                      212,002
                      
                      
                      
                      136,652
                      
                      
                      
                      109,381GROSS
      PROFIT
                      
                      
                      
                      
                      
                      30,336
                      
                      
                      
                      28,615
                      
                      
                      
                      28,390OPERATING
      EXPENSESSelling
      expenses
                      
                      
                      
                      
                      
                      3,191
                      
                      
                      
                      2,975
                      
                      
                      
                      3,231General
      and administrative expenses
                      
                      
                      
                      
                      
                      2,207
                      
                      
                      
                      2,215
                      
                      
                      
                      2,387TOTAL
      OPERATING EXPENSES
                      
                      
                      
                      
                      
                      5,398
                      
                      
                      
                      5,190
                      
                      
                      
                      5,618INCOME
      FROM OPERATIONS
                      
                      
                      
                      
                      
                      24,938
                      
                      
                      
                      23,425
                      
                      
                      
                      22,772INTEREST
      INCOME
                      
                      
                      
                      
                      
                      406
                      
                      
                      
                      83
                      
                      
                      
                      59INTEREST
      EXPENSE
                      
                      
                      13
                      
                      
                      
                      (763
                      )
                      
                      
                      (1,577
                      )
                      
                      
                      (4,441
                      )DEBT
      FINANCING COSTS
                      
                      
                      14
                      
                      
                      
                      (778
                      )
                      
                      
                      (2,422
                      )
                      
                      
                      (10,669
                      )DERIVATIVE
      UNREALIZED FAIR VALUE
                        GAIN/(LOSS)
                      
                      
                      10(c),
      15
                      
                      
                      
                      394
                      
                      
                      
                      (343
                      )
                      
                      
                      1,237OTHER
      EXPENSE
                      
                      
                      16
                      
                      
                      
                      (719
                      )
                      
                      
                      -
                      
                      
                      
                      -INCOME
      BEFORE INCOME TAXES
                      
                      
                      
                      
                      
                      
                      23,478
                      
                      
                      
                      19,166
                      
                      
                      
                      8,958INCOME
      TAXES
                      
                      
                      17
                      
                      
                      
                      (6,417
                      )
                      
                      
                      (8,292
                      )
                      
                      
                      (7,604
                      )NET
      INCOME
                      
                      
                      
                      
                      
                      
                      17,061
                      
                      
                      
                      10,874
                      
                      
                      
                      1,354OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
                      
                      
                      
                      
                      
                      
                      3,498
                      
                      
                      
                      2,860
                      
                      
                      
                      985COMPREHENSIVE
      INCOME
                      
                      
                      
                      
                      
                      $
                      20,559
                      
                      
                      $
                      13,734
                      
                      
                      $
                      2,339NET
      INCOME
                      
                      
                      
                      
                      
                      
                      17,061
                      
                      
                      
                      10,874
                      
                      
                      
                      1,354LESS:
      DIVIDENDSOption
      holder preference dividend
                      
                      
                      1,
      2(n)
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,717
                      )Common
      dividend
                      
                      
                      
                      
                      
                      
                      (116
                      )
                      
                      
                      -
                      
                      
                      
                      -UNDISTRIBUTED
      EARNINGS
                      
                      
                      
                      
                      
                      $
                      16,945
                      
                      
                      $
                      10,874
                      
                      
                      $
                      (1,363
                      )





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


39


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS (Continued)


For
the years ended December 31, 2008, 2007 and 2006


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





Years
      ended December 31,Note(s)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006BASIC
      EARNINGS/(LOSS) PER SHARE-
      Option holder preference
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  0.04-
      Other common holders
                  
                  
                  
                  0.16
                  
                  
                  
                  0.11
                  
                  
                  
                  (0.02
                  )$
                  0.16
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.02DILUTED
      EARNINGS/(LOSS) PER SHARE-
      Option holder preference
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  0.04-
      Other common holders
                  
                  
                  
                  0.16
                  
                  
                  
                  0.11
                  
                  
                  
                  (0.02
                  )$
                  0.16
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.02WEIGHTED
      AVERAGE NUMBER OF SHARES
                    OUTSTANDING-BASIC
                  18
                  
                  
                  106,288,598
                  
                  
                  
                  98,404,914
                  
                  
                  
                  80,167,110-DILUTED
                  18
                  
                  
                  106,602,646
                  
                  
                  
                  100,591,136
                  
                  
                  
                  80,329,032





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


40


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For
the years ended December 31, 2008, 2007 and 2006


(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
              
              
              Par
      ValueBalance,
      January 1, 2006
              
              
              75,450,000
              
              
              $
              75
              
              
              $
              1,908
              
              
              $
              1,366
              
              
              $
              2,579
              
              
              $
              154
              
              
              $
              6,082Notes
      converted to common stock, at $0.50 per share (Note 10(c)
              
              
              13,500,000
              
              
              
              14
              
              
              
              6,736
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,750Exercise
      of warrants, at $0.60 per share (Note 10(a)
              
              
              3,100,000
              
              
              
              3
              
              
              
              1,857
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,860Cashless
      exercise of placement agent warrants (Note 10(b)
              
              
              242,180
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Derivative
      conversion feature transferred to equity upon conversion (Note
      10(c)
              
              
              -
              
              
              
              -
              
              
              
              3,314
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,314Derivative
      note warrants transferred to equity upon exercise (Note
    10(c)
              
              
              -
              
              
              
              -
              
              
              
              789
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              789Derivative
      placement agent warrants transferred to equity upon exercise (Note
      10(c)
              
              
              -
              
              
              
              -
              
              
              
              882
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              882Issue
      of common stock for services
              
              
              10,000
              
              
              
              -
              
              
              
              21
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21Issue
      of common stock for fractional shares and round lot
holders
              
              
              487
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issue  of
      penalty shares (Note 10(a)
              
              
              578,634
              
              
              
              1
              
              
              
              999
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,354
              
              
              
              -
              
              
              
              1,354Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              985
              
              
              
              985Balance,
      December 31, 2006
              
              
              92,881,301
              
              
              $
              93
              
              
              $
              16,506
              
              
              $
              1,366
              
              
              $
              3,933
              
              
              $
              1,139
              
              
              $
              23,037Notes
      converted to common stock, at $0.50 per share (Note 10(c)
              
              
              5,320,000
              
              
              
              5
              
              
              
              2,655
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,660Exercise
      of warrants, at $0.60 per share (Note 10(a)
              
              
              6,000,000
              
              
              
              6
              
              
              
              3,594
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,600Cashless
      exercise of placement agent warrants (Note 10(b)
              
              
              1,050,875
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1Derivative
      conversion feature transferred to equity upon conversion (Note
      10(c)
              
              
              -
              
              
              
              -
              
              
              
              1,306
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,306Derivative
      note warrants transferred to equity upon exercise (Note
    10(c)
              
              
              -
              
              
              
              -
              
              
              
              1,527
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,527Derivative
      placement agent warrants transferred to equity upon exercise (Note
      10(c)
              
              
              -
              
              
              
              -
              
              
              
              2,716
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,716Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,874
              
              
              
              -
              
              
              
              10,874Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,860
              
              
              
              2,860Balance,
      December 31, 2007
              
              
              105,252,176
              
              
              $
              105
              
              
              $
              28,304
              
              
              $
              1,366
              
              
              $
              14,807
              
              
              $
              3,999
              
              
              $
              48,581


41





PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)


For
the years ended December 31, 2008, 2007 and 2006


(In
thousands of United States dollars)





COMMON
      STOCK
              
              
              PAID-IN
                CAPITAL
              
              
              STATUTORY
                SURPLUS
                RESERVE
                FUND
              
              
              RETAINED
                EARNINGS
              
              
              ACCUMULATED
                OTHER
                COMPREHENSIVE
                INCOME
              
              
              TOTAL
                STOCKHOLDERS’
                EQUITYDerivative
      conversion feature transferred to equity upon maturity (Note
      10(c)
              
              
              -
              
              
              
              -
              
              
              
              1,100
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,100Issue  of
      penalty shares (Note 10(a)
              
              
              2,058,062
              
              
              
              2
              
              
              
              2,102
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,104Issue
      of directors shares (Note
                21)
              
              
              25,521
              
              
              
              -
              
              
              
              49
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              49Dividend
      distribution
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (116
              )
              
              
              -
              
              
              
              (116
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              17,061
              
              
              
              -
              
              
              
              17,061Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,498
              
              
              
              3,498Balance,
      December 31, 2008
              
              
              107,335,759
              
              
              $
              107
              
              
              $
              31,555
              
              
              $
              1,366
              
              
              $
              31,752
              
              
              $
              7,497
              
              
              $
              72,277





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


42


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the years ended December 31, 2008, 2007 and 2006


(In
thousands of United States dollars)





Years
      ended December 31,Notes
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    
                    $
                    17,061
                    
                    
                    $
                    10,874
                    
                    
                    $
                    1,354Adjustments
      to reconcile net income to net cash provided byoperating
      activitiesAmortization
      of land-use rights
                    
                    
                    
                    85
                    
                    
                    
                    78
                    
                    
                    
                    78Depreciation
                    
                    
                    
                    1,650
                    
                    
                    
                    1,252
                    
                    
                    
                    953Provision
      for doubtful debts
                    
                    
                    
                    17
                    
                    
                    
                    1
                    
                    
                    
                    10Amortization
      of debt issue costs
                    
                    
                    
                    -
                    
                    
                    
                    6
                    
                    
                    
                    838Amortization
      of discount on convertible notes and warrants
                    
                    
                    
                    399
                    
                    
                    
                    895
                    
                    
                    
                    8,627Derivative
      unrealized fair value (gain)/loss
                    
                    
                    
                    (394
                    )
                    
                    
                    343
                    
                    
                    
                    (1,237
                    )Discount
      on converted shares and exercised warrants
                    
                    
                    
                    -
                    
                    
                    
                    663
                    
                    
                    
                    2,898Stock
      compensation expense
                    
                    
                    
                    74
                    
                    
                    
                    46
                    
                    
                    
                    -Issue
      of common stock for services
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    21Issue
      of common stock for penalty
                    
                    
                    
                    379
                    
                    
                    
                    -
                    
                    
                    
                    1,000Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                    
                    
                    
                    (5,844
                    )
                    
                    
                    (444
                    )
                    
                    
                    (2,972
                    )Decrease
      in other receivables
                    
                    
                    
                    4
                    
                    
                    
                    41
                    
                    
                    
                    4(Increase)/decrease
      in advances to suppliers
                    
                    
                    
                    (4,243
                    )
                    
                    
                    (799
                    )
                    
                    
                    1,819Decrease/(increase)
      in inventories
                    
                    
                    
                    16,600
                    
                    
                    
                    (18,518
                    )
                    
                    
                    (8,104
                    )Increase/(decrease)
      in accounts payable
                    
                    
                    
                    1,754
                    
                    
                    
                    (596
                    )
                    
                    
                    1,426Increase
      in accrued expenses
                    
                    
                    
                    526
                    
                    
                    
                    289
                    
                    
                    
                    588(Decrease)/increase
      in other payables
                    
                    
                    
                    (991
                    )
                    
                    
                    660
                    
                    
                    
                    1,432(Decrease)/increase
      in income tax payable
                    
                    
                    
                    (1,042
                    )
                    
                    
                    (415
                    )
                    
                    
                    1,088Increase
      in VAT payable
                    
                    
                    
                    245
                    
                    
                    
                    90
                    
                    
                    
                    887Increase
      in penalty payable
                    
                    
                    
                    -
                    
                    
                    
                    1,521
                    
                    
                    
                    204Decrease
      in restricted cash
                    
                    
                    
                    233
                    
                    
                    
                    -
                    
                    
                    
                    382Net
      cash provided by/(used in) operating activities
                    
                    
                    
                    26,513
                    
                    
                    
                    (4,013
                    )
                    
                    
                    11,296CASH
      FLOWS FROM INVESTING ACTIVITIES: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
                    
                    
                    
                    (895
                    )
                    
                    
                    (7,910
                    )
                    
                    
                    -CASH
      FLOWS FROM FINANCING ACTIVITIES:Exercise
      of warrants
                    
                    
                    
                    -
                    
                    
                    
                    3,600
                    
                    
                    
                    1,860Repayment
      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 (used in)/provided by financing activities
                    
                    
                    
                    (4,487
                    )
                    
                    
                    2,300
                    
                    
                    
                    560Effect
      of exchange rate changes on cash
                    
                    
                    
                    1,596
                    
                    
                    
                    1,061
                    
                    
                    
                    1,020


43


PUDA
COAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


For
the years ended December 31, 2008, 2007 and 2006


(In
thousands of United States dollars)





Years
      ended December 31,Notes
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Net
      increase/(decrease) in cash and cash equivalents
                  
                  
                  
                  22,727
                  
                  
                  
                  (8,562
                  )
                  
                  
                  12,876Cash
      and cash equivalents at beginning of year
                  
                  
                  
                  16,381
                  
                  
                  
                  24,943
                  
                  
                  
                  12,067Cash
      and cash equivalents at end of year
                  
                  
                  $
                  39,108
                  
                  
                  $
                  16,381
                  
                  
                  $
                  24,943Supplementary
      cash flow information:
                  19





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


44


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 Florida Law and headquartered in Shanxi Province,
China.  The Company was incorporated on August 9, 2001.
 
 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 1 for 10 reverse stock split of Puda’s
outstanding common stock (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 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 did
not have any operating activities from August 19, 2004 (inception) to December
31, 2008.
 
 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.
 
 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 were
Mr. Ming Zhao (80%) and Mr. Yao Zhao (20%).   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.
 
 45
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 1.
The Company (continued)
 
 On June
24, 2005, Putai and Shanxi Coal entered into an Exclusive Consulting Agreement,
an Operating Agreement, and a Technology License Agreement (collectively, these
agreements are referred to herein as the “Operating
Agreements”).  Under the Operating Agreements, Putai agreed to advise,
consult, manage and operate Shanxi Coal’s business, to provide certain financial
accommodations to Shanxi Coal, and to license certain technology to Shanxi Coal
for use in its business, in exchange for Shanxi Coal’s payment of all of its
operating cash flow to Putai.   Under the Exclusive Option
Agreement dated June 24, 2005, each of the holders of the registered capital of
Shanxi Coal granted Putai the exclusive right and option (the “Option”) to
acquire all of their registered capital of Shanxi Coal at Putai’s sole and
absolute discretion for a purchase price equal to the actual capital
contributions paid in by the holders of the registered capital of Shanxi Coal
for their respective purchase of the shares at the time of original issuance of
the registered capital by Shanxi Coal.  The amount of the registered
capital of Shanxi Coal as of the date of the Exclusive Option Agreement totaled
RMB22,500,000 ($2,717,000).    The exercise of the Option is
analogous to creating a second class of common stock, which is referred to as
“Option holder preference” on the consolidated statements of operations for the
year ended December 31, 2006.   Putai was further authorized to
exercise the voting rights of the holders of the registered capital of Shanxi
Coal and to act as the representative for such holders in all matters respecting
Shanxi Coal’s registered capital. Although Puda owned none of the outstanding
equity interests in Shanxi Coal, the Operating Agreements provided Puda control
over Shanxi Coal, and the risks and rewards associated with equity
ownership.
 
 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.
 
 As of
December 31, 2008, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in
the Group companies are as follows:
 
 l
              Puda
      Coal, Inc.: Mr. Ming Zhao (approximately 49%); Mr. Yao Zhao (approximately
      12%) held directly.
 
 l
              Puda
      Investment Holding Limited: Mr. Ming Zhao (approximately 49%); Mr. Yao
      Zhao (approximately 12%) held indirectly through
  Puda.
 
 l
              Shanxi
      Putai Resources Limited: Mr. Ming Zhao (approximately 49%); Mr. Yao Zhao
      (approximately 12%) held indirectly through Puda and
  BVI.
 
 l
              Shanxi
      Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao (2%) held
      directly, Mr. Ming Zhao (approximately 44%); Mr. Yao Zhao (approximately
      11%) held indirectly through Puda, BVI and
  Putai.
 
 46
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 1.
The Company (continued)
 
 After the
above reorganization and as of December 31, 2008, the organizational structure
of the Group is as follows:
 
 
 
 2.
Summary of Significant Accounting Policies
 
 (a)
Basis of Presentation and Consolidation
 
 The
consolidated balance sheets as of December 31, 2008 and 2007 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, 2008, 2007 and 2006 include Puda,
BVI, Putai and Shanxi Coal for the full year.  Intercompany items have
been eliminated.
 
 The
merger of a private operating company into a non-operating public shell
corporation with nominal net assets typically results in the owners and
management of the private company having actual or effective operating control
of the combined company after the transaction, with shareholders of the former
public shell continuing only as passive investors.  These transactions
are considered to be capital transactions in substance, rather than business
combinations.  That is, the transaction is equivalent to the issuance
of stock by the private company for the net monetary assets of the shell
corporation, accompanied by a recapitalization.  The accounting is
identical to that resulting from a reverse acquisition, except that no goodwill
or other intangible should be recorded. For accounting purposes, Shanxi Coal is
deemed to be the acquirer.
 
 (b)
Use of Estimates
 
 In
preparing 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 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.
 
 (c)
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, 2008
and 2007, the Group did not have any cash equivalents.
  47
 
 PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 2.
Summary of Significant Accounting Policies (continued)
 
 (d)
Allowance for Doubtful Accounts
 
 The Group
recognizes an allowance for doubtful accounts to ensure accounts receivable are
not overstated due to uncollectibility. 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.
 
 (e)
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.
 
 (f)
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 Company 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 facility
                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.
 
 (g)
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.
 
 (h)
Impairment of Assets
 
 In
accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", 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 (see
Notes 7 and 8).
  48
 
 PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 2.
Summary of Significant Accounting Policies (continued)
 
 (i)
Derivative Financial Instruments
 
 Derivative
financial instruments are accounted for under SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities” as amended (SFAS No.
133).  Under SFAS No. 133, 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.
 
 (j)
Income Taxes
 
 The Group
accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes".  Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  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 SFAS No. 109, 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 United States generally accepted accounting principles (“US
GAAP”), and no material differences were found, thus, there were no deferred tax
assets or liabilities as of December 31, 2008 and 2007.
 
 Under
current PRC tax laws, no tax is imposed in respect to distributions paid to
owners except for individual income tax.
 
 (k)
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) collectibility is reasonably
assured.
 
 Net
revenue represents the invoiced value of products, less returns and discounts
and net of VAT.
 
 (l)
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, 2008, 2007 and 2006.
 
 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.
  49
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 2.
Summary of Significant Accounting Policies (continued)
 
 (m)
Fair Value of Financial Instruments
 
 SFAS No.
107, “Disclosures about Fair Values of Financial Instruments”, requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet.  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, 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 be approximate fair value based on the current rates at which the
Group could borrow funds with similar remaining maturities.
 
 (n)
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.  Prior to the exercise of the
Option by Putai (see Note 1), a method akin to the
two-class method was presented to reflect the presumed exercise of the Option to
buy-out Shanxi Coal for the year ended December 31, 2006.
 
 (o)
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.
 
 p)
Share-Based Compensation Expense
 
 SFAS No.
123(R), Share-Based Payment, 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. SFAS No. 123(R) 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 Company’s consolidated
statements of operations.
 
 (q)
New Accounting Pronouncements
 
 SFAS
No. 141R
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141.
The statement retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way assets and
liabilities are recognized for purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for financial statements
issued for fiscal years beginning January 1, 2009 and will apply prospectively
to business combinations completed on or after that date.  The
adoption of SFAS No. 141R will have an impact on the Group’s consolidated
financial statements for any future acquisitions.
  50
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 2.
Summary of Significant Accounting Policies (continued)
 
 (q)
New Accounting Pronouncements (continued)
  SFAS
No. 160
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes
the accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for financial statements
for fiscal years beginning January 1, 2009 and will apply prospectively, except
for the presentation and disclosure requirements, which will apply
retrospectively.  The adoption of SFAS No. 160 is expected to have no
material impact on the Group’s consolidated financial statements.
  SFAS
No. 161
  In March 2008, the FASB
issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133”, which requires
additional disclosures about the objectives of using derivative instruments; the
method by which the derivative instruments and related hedged items are
accounted for under FASB Statement No.133 and its related interpretations; and
the effect of derivative instruments and related hedged items on financial
position, financial performance, and cash flows. SFAS No. 161 also requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged. The adoption of SFAS No. 161 on January 1,
2009 is expected to have no material impact on the Group’s consolidated
financial statements.
  (r)
Reclassifications
  Certain
reclassifications have been made to prior year balances in order to conform to
the current year’s presentation.
 
 3.
Restricted Cash
 
 Restricted
cash of $233,000 as of December 31, 2007 was reserved for interest payments on
convertible notes.    As the convertible notes expired and
the principal was redeemed and outstanding interest was paid by the end of
December 31, 2008, the reserve was no longer required at that date.
 
 4.
Allowance for Doubtful Receivables
 
 Details
of allowance for doubtful receivables deducted from accounts receivable are as
follows:-
 December 31,
                      2008
                    
                    
                    December 31,
                      2007$’000
                    
                    
                    $’000Balance,
      beginning of year
                    
                    $
                    48
                    
                    
                    $
                    44Additions
                    
                    
                    22
                    
                    
                    
                    4Balance,
      end of year
                    
                    $
                    70
                    
                    
                    $
                    48
 The Group
did not write off any bad debts in the years ended December 31, 2008, 2007 and
2006.
  51
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 5.
Related Party Transactions
 
 As of
December 31, 2008 and 2007, the Group had the following amounts due from/to
related parties:-
 
 December 31,
                    2008
                  
                  
                  December 31,
                    2007$’000
                  
                  
                  $’000Other
      receivable from Ming Zhao, director and major shareholder of
      Puda
                  
                  $
                  -
                  
                  
                  $
                  4Advance
      to Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”), a
      related company with a common owner
                  
                  $
                  879
                  
                  
                  $
                  685Accounts
      payable to Jucai Coal
                  
                  $
                  -
                  
                  
                  $
                  182Other
      payable to Shanxi Puda Resources Group Limited (“Resources Group”), a
      related company with common owners
                  
                  $
                  796
                  
                  
                  $
                  743Other
      payable to Yao Zhao, manager and shareholder of Puda
                  
                  
                  234
                  
                  
                  
                  215Other
      payable to Ming Zhao and Yao Zhao
                  
                  
                  -
                  
                  
                  
                  893$
                  1,030
                  
                  
                  $
                  1,851Distribution
      payable to Ming Zhao and Yao Zhao
                  
                  $
                  117
                  
                  
                  $
                  1,096Loan
      payable to Resources Group-current
      portion
                  
                  $
                  1,300
                  
                  
                  $
                  1,300-long-term
      portion
                  
                  
                  7,800
                  
                  
                  
                  9,100$
                  9,100
                  
                  
                  $
                  10,400
 
 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 $796,000 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 $105,000 due from
Resources Group.
 
 The
amount payable to Yao Zhao represents land-use rights paid by him on behalf of
Shanxi Coal.
 
 The Group
paid $893,000 in 2008 to Ming Zhao and Yao Zhao for the balance of the purchase
price for the exercise of the Option (see Note 1).
 
 In 2001,
Shanxi Coal entered into agreements with Resources Group to lease an office and
certain equipment.  In the years ended December 31, 2008, 2007 and
2006, rental expenses paid to Resources Group were $7,000, $6,000 and $6,000,
respectively (see Note 11).
 
 In the
years ended December 31, 2008, 2007 and 2006, Shanxi Coal purchased raw coal
from Jucai Coal in the amounts of $16,083,000, $18,320,000 and $17,329,000,
respectively.
  52
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 5.
Related Party Transactions (continued)
 
 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 $4 to $6 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, 2008, Shanxi Coal paid principal of $1,300,000 (2007: $1,300,000, 2006:
$1,300,000) and interest of $594,000 (2007: $674,000, 2006: $750,000) 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 9).
 
 6.
Inventories
 
 As of
December 31, 2008 and 2007, inventories consist of the following:
 
 December 31,
                        2008
                      
                      
                      December 31,
                        2007$’000
                      
                      
                      $’000Raw
      materials
                      
                      $
                      7,816
                      
                      
                      $
                      24,252Finished
      goods
                      
                      
                      13,773
                      
                      
                      
                      11,701Total
                      
                      $
                      21,589
                      
                      
                      $
                      35,953
 
 There was
no allowance for losses on inventories as of December 31, 2008 and
2007.
  53
  PUDA
COAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 7.
Property, Plant and Equipment, Net
 
 As of
December 31, 2008 and 2007, property, plant and equipment consists of
following:
 
 December 31,
                      2008
                    
                    
                    December 31,
                      2007$’000
                    
                    
                    $’000Cost:Buildings
      and facilities
                    
                    $
                    3,344
                    
                    
                    $
                    3,344Machinery
      equipment
                    
                    
                    13,611
                    
                    
                    
                    13,611Motor
      vehicles
                    
                    
                    104
                    
                    
                    
                    104Office
      equipment and others
                    
                    
                    32
                    
                    
                    
                    3017,091
                    
                    
                    
                    17,089Accumulated
      depreciation:Buildings
      and facilities
                    
                    
                    427
                    
                    
                    
                    255Machinery
      equipment
                    
                    
                    3,278
                    
                    
                    
                    1,814Motor
      vehicles
                    
                    
                    13
                    
                    
                    
                    2Office
      equipment and others
                    
                    
                    3
                    
                    
                    
                    -3,721
                    
                    
                    
                    2,071Carrying
      value:Buildings
      and facilities
                    
                    
                    2,917
                    
                    
                    
                    3,089Machinery
      equipment
                    
                    
                    10,333
                    
                    
                    
                    11,797Motor
      vehicles
                    
                    
                    91
                    
                    
                    
                    102Office
      equipment and others
                    
                    
                    29
                    
                    
                    
                    30$
                    13,370
                    
                    
                    $
                    15,018
 
 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 ofthe 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 5 and
9).
 
 Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$1,650,000, $1,252,000 and $953,000, respectively.  In the year ended
December 31, 2008, the amount included in cost of sales and general and
administrative expenses was approximately $1,618,000 (2007: $1,238,000, 2006:
$927,000) and $32,000 (2007: $14,000, 2006: $26,000), respectively.
 
 There was
no impairment in the value of property, plant and equipment for the years ended
December 31, 2008, 2007 and 2006.


54


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





8.
Intangible Assets





Land-use rightsDecember 31,
                    2008
                  
                  
                  December 31,
                    2007$’000
                  
                  
                  $’000Cost
                  
                  $
                  3,634
                  
                  
                  $
                  3,634Accumulated
      amortization
                  
                  
                  235
                  
                  
                  
                  150Carrying
      value
                  
                  $
                  3,399
                  
                  
                  $
                  3,484





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 5 and 9).





Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$85,000, $78,000, and 78,000 respectively.  The estimated aggregate
amortization expense for the five years ending December 31, 2009, 2010, 2011,
2012 and 2013 amounts to approximately $85,000, $85,000, $85,000, $85,000 and
$85,000, respectively.





There was
no impairment in the value of intangible assets for the years ended December 31,
2008, 2007 and 2006.





9.
Long-term Debt





December 31,
                    2008
                  
                  
                  December 31,
                    2007$’000
                  
                  
                  $’000Conveyance
      loan
                  
                  $
                  9,100
                  
                  
                  $
                  10,400Less:
      current portion
                  
                  
                  (1,300
                  )
                  
                  
                  (1,300
                  )Long-term
      portion
                  
                  $
                  7,800
                  
                  
                  $
                  9,100





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, 2008, Shanxi Coal paid
principal of $1,300,000 (2007: $1,300,000, 2006: $1,300,000) and interest of
$594,000 (2007: $674,000, 2006: $750,000) 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 5, 7 and 8).


55





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





9.
Long-term Debt (continued)





The
future principal payments under the conveyance loan as of December 31, 2008 are
as follows:





December 31,
                    2008Year
                  
                  $’0002009
                  
                  $
                  1,3002010
                  
                  
                  1,3002011
                  
                  
                  1,3002012
                  
                  
                  1,3002013
                  
                  
                  1,300Thereafter
                  
                  
                  2,600$
                  9,100





10.
Convertible Notes and Related 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, 2008, $10,260,000
was converted into 20,520,000 shares of common stock, $2,015,000 was redeemed
upon maturity, and the remaining $225,000 will be paid off upon the receipt of
the original notes from the investors.  The balance of $225,000 is
included in other payables in the consolidated balance sheet as of December 31,
2008.   The related warrants to purchase 25,000,000 shares of
common stock, exercisable at $.60 per share, have a term of five years from the
date of issuance.  As of December 31, 2008, 9,100,000 warrants were
exercised into 9,100,000 shares of common stock.


56


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.
Convertible Notes and Related Warrants (continued)





Investors
were given "full ratchet" anti-dilution protection under the notes and the
warrants, meaning that the conversion price under the notes and 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 conversion price of the notes or the exercise price of the warrants,
with carve-outs for (i) issuance of shares of common stock in connection with
the conversion of the notes or exercise of the warrants, (ii) the issuance of
shares of common stock for the payment of the penalties under the notes, or
(iii) the issuance of common stock to employees or directors pursuant to an
equity incentive plan approved by Puda's stockholders. The conversion price of
the notes and the exercise price of the warrants are 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 (i) the common stock into which the notes may be converted, and (ii)
the common stock underlying the warrants, on a registration statement to be
filed with the Securities and Exchange Commission (“SEC”). Such registration
statement was required to be filed within 30 days following the date of closing
of the offer and sale of the units, which occurred on November 18, 2005, and
declared effective within 120 days from that date, or Puda would be subject to
pay a penalty to investors of an amount equal to 1% of the purchase price of
each unit held by investors, payable in shares of common stock for every 30 day
period, or part thereof, after the relevant date. Puda was required to pay the
costs associated with the registration statement (see Note 14).  Puda
was also required to pay investors an amount equal to 1% of the purchase price
of each unit held by investors for every 30 day period that Puda becomes
deficient in its periodic reporting requirements with the SEC under the
Securities Exchange Act of 1934, as amended until all the securities have been
sold by the investors.  This late filing penalty was in addition to
any other penalties and was payable in shares of Puda’s common
stock.  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 and
(iii) the average daily trading volume of the common stock exceeds 50,000 shares
per day during the same period.





The
convertible notes and warrants require the Company to register the resale of the
shares of common stock upon conversion or exercise of these
securities.  The warrants are freestanding derivative financial
instruments.  The Company accounts for the fair value of these
outstanding warrants to purchase common stock and conversion feature of its
convertible notes in accordance with SFAS No. 133 “Accounting For Derivative
Instruments And Hedging Activities” and EITF Issue No. 00-19 “Accounting For
Derivative Financial Instruments Indexed To And Potentially Settled In A
Company’s Own Stock” which requires the Company to account for the conversion
feature and warrants as derivatives.  Pursuant to SFAS No. 133, the
Company bifurcated the fair value of the conversion feature from the convertible
notes, since the conversion features were determined not to be clearly and
closely related to the debt host.  In addition, since the effective
registration of the securities underlying the conversion feature and warrants is
an event outside of the control of the Company, pursuant to EITF Issue No.
00-19, the Company recorded the fair value of the conversion features and
warrants as liabilities.  The Company is required to carry these
derivatives on its 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 balance of the derivative conversion feature of
$1,100,000 was transferred to equity upon maturity at October 31,
2008.


57





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.
Convertible Notes and Related Warrants (continued)





Based on
a Black-Scholes pricing model as of the date the convertible notes and related
warrants were issued, the warrants, which are exercisable at $.60 per share, had
a value of $2.25 per share, or $56,250,000, and the conversion feature had a
value of $2.17 per share, or $54,250,000.  The parameters used in the
model include the stock market price on the issuance date of $2.46, exercise
price of warrants of $0.60, (conversion price of note of $0.50), contractual
term of five years (three years for conversion feature), risk-free interest rate
for treasury bills of 3.89% and historical volatility of 110% based on the
previous twelve months stock price.





As these
values were greater than the debt of $12,500,000, the total issue was
discounted.  The discount was allocated between the warrants and
conversion feature based on their relative fair values, resulting in the
warrants being valued at $6,363,000 and the conversion feature at
$6,137,000.  The conversion feature was recorded as a derivative
liability as the contract does not contain an explicit limit on the number of
shares to be delivered in a share settlement, and has been amortized over the
life of the debt of three years using the effective interest method, up to
October 31, 2008.   The amount amortized in the years ended
December 31, 2008, 2007 and 2006 were $366,000, $524,000 and $1,263,000,
respectively.  Upon conversion, the pro rata % of the amount actually
converted in relation to the total convertible is multiplied by the remaining
derivative liability, and transferred to equity.  The amount of
derivative conversion feature transferred to equity upon conversion in the years
ended December 31, 2008, 2007 and 2006 were $nil, $1,306,000 and $3,314,000,
respectively.  Upon maturity at October 31, 2008, the balance of
derivative conversion feature of $1,100,000 was transferred to
equity.  The portion of the discount related to the converted shares
of $nil, $648,000 and $2,689,000 in the years ended December 31, 2008, 2007 and
2006, respectively, was recorded in interest expense.  The amount
allocated to the warrants is 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, 2008, 2007 and 2006 was $33,000, $205,000 and
$3,908,000, 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,
2008, 2007 and 2006 was $nil, $1,527,000 and $789,000,
respectively.  The portion of the discount of $nil, $15,000 and
$80,000 related to the exercised warrants in the years ended December 31, 2008,
2007 and 2006, respectively, was recorded in interest expense.





Debt
issue costs of $1,583,000 has been amortized over the life of the debt of three
years using the effective interest method up to October 31, 2008 and the amounts
amortized in the years ended December 31, 2008, 2007 and 2006 were $nil and
$6,000 and $838,000, respectively.





Interest
expense on the convertible notes in the years ended December 31, 2008, 2007 and
2006 amounted to $169,000, $240,000 and $793,000, respectively.





The
registration statement regarding the convertible notes and related warrants was
declared effective by the SEC on March 31, 2008.  The relevant date of
March 17, 2006 for having the registration statement declared effective pursuant
to the subscription agreement for the convertible notes and warrants had
passed.  Therefore, Puda was required to pay the penalty to investors
for the delay in getting the registration statement effective. According to the
subscription agreement of the convertible notes and related warrants, the
penalty is equal to 1% of the purchase price of each unit held by investors,
payable in shares of common stock of the Company, for every 30-day period, or
part thereof, after the relevant date. The penalty payable to the investors was
$4,167 per day after the relevant date of March 17, 2006 and was in effect up to
March 31, 2008.  The penalty for the years ended December 31, 2008,
2007 and 2006 was $379,000, $1,521,000 and $1,204,000
respectively.  In November 2006, the Company issued 578,634 shares of
common stock in settlement of $1,000,000 of the penalty.   In
July 2008, the Company issued 2,058,062 shares of common stock in settlement of
$2,104,000 of the penalty (see Note 14).


58





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.
Convertible Notes and Related Warrants (continued)





In
December 2006, the FASB issued FASB Staff Position (“FSP”) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" (EITF
00-19-2).  EITF 00-19-2 addresses an issuer’s accounting for
registration payment arrangements.  For registration payment
arrangements and financial instruments subject to those arrangements that were
entered into prior to the issuance of the FSP, the guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2006,
and interim periods within those fiscal years. The Company has been and is in
compliance with the FSP in that the contingent obligation is recognized under
SFAS 5 and FASB Interpretation No. 14 and financial instruments subject to
registration payment arrangement are recognized and measured in accordance with
other applicable accounting principles.





(b) In
conjunction with the issuance of the notes, the placement agent was issued five
year warrants, exercisable from November 18, 2005, to purchase 2,500,000 shares
of common stock of the Company at an exercise price of $.60 per
share.  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 $0.60 not in cash, but by reducing the
number of common share issued to them.  These warrants were valued at
$2.25 per share and the total value amounted to $5,625,000. 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, 2008, 2007
and 2006 was $nil, $166,000 and $3,456,000 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, 2008, 2007 and
2006 was $nil, $2,716,000 and $882,000, respectively.  The portion of
the discount of $nil, $nil and $129,000 related to the exercised warrants in the
years ended December 31, 2008, 2007 and 2006, respectively, was recorded in
interest expense.  As of December 31, 2008, these warrants were valued
at $.05 per share according to a Black-Scholes pricing model and the unrealized
gain on the change in fair value of these warrants of $394,000 is included in
the consolidated statements of operations.  As of December 31, 2008,
1,742,040 placement agent warrants were exercised in a cashless method and
resulted in the issuance of 1,293,055 common shares.


59


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.
Convertible Notes and Related Warrants (continued)





(c) As of
December 31, 2008 and 2007, convertible notes and related warrants include the
following:





December 31,
                    2008
                  
                  
                  December 31,
                    2007$000
                  
                  
                  $000Convertible
      notes:Gross
      amount issued
                  
                  $
                  12,500
                  
                  
                  $
                  12,500Less:
      amount converted  in 2005
                  
                  
                  (850
                  )
                  
                  
                  (850
                  )Less:
      amount converted  in 2006
                  
                  
                  (6,750
                  )
                  
                  
                  (6,750
                  )Less:
      amount converted  in 2007
                  
                  
                  (2,660
                  )
                  
                  
                  (2,660
                  )Less:
      unamortized discount on conversion feature
                  
                  
                  -
                  
                  
                  
                  (366
                  )Less:
      unamortized discount on note warrants
                  
                  
                  -
                  
                  
                  
                  (33
                  )Less:
      amount redeemed upon maturity
                  
                  
                  (2,015
                  )
                  
                  
                  -Less:
      amount reclassified to other payable
                  
                  
                  (225
                  )
                  
                  
                  -$
                  -
                  
                  
                  $
                  1,841Derivative
      conversion feature:Amount
      allocated to conversion feature
                  
                  $
                  6,137
                  
                  
                  $
                  6,137Less:
      amount transferred to equity upon conversion in 2005
                  
                  
                  (417
                  )
                  
                  
                  (417
                  )Less:
      amount transferred to equity upon conversion in 2006
                  
                  
                  (3,314
                  )
                  
                  
                  (3,314
                  )Less:
      amount transferred to equity upon conversion in 2007
                  
                  
                  (1,306
                  )
                  
                  
                  (1,306
                  )Less:
      amount transferred to equity upon maturity in 2008
                  
                  
                  (1,100
                  )
                  
                  
                  -$
                  -
                  
                  
                  $
                  1,100Derivative
      warrants:Amount
      allocated to investor warrants
                  
                  $
                  6,363
                  
                  
                  $
                  6,363Placement
      agent warrants
                  
                  
                  5,625
                  
                  
                  
                  5,625Less:
      amount transferred to equity upon exercise of note warrants in
      2006
                  
                  
                  (789
                  )
                  
                  
                  (789
                  )Less:
      amount transferred to equity upon exercise of placement agent warrants in
      2006
                  
                  
                  (882
                  )
                  
                  
                  (882
                  )Less:
      amount transferred to equity upon exercise of note warrants in
      2007
                  
                  
                  (1,527
                  )
                  
                  
                  (1,527
                  )Less:
      amount transferred to equity upon exercise of placement agent 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
                  )
                  
                  
                  -$
                  4,086
                  
                  
                  $
                  4,480


60


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





11.
Commitments and Contingencies





As of
December 31, 2008, 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,
2008 are as follows:-





December 31,
                    2008Year
                  
                  $’0002009
                  
                  $
                  132010
                  
                  
                  132011
                  
                  
                  132012
                  
                  
                  132013
                  
                  
                  13$
                  65





The above
future lease payments represent amounts payable to Resources Group (see Note
5).





On
September 6, 2007, Shanxi Coal entered into an agreement with an unrelated
party, pursuant to which, Shanxi Coal will purchase  the coal mining
right with respect to a coal mine located in Duanjia Village, Jingle County,
Shanxi Province of China.  As consideration, Shanxi Coal will pay an
aggregate purchase price of RMB460 million (approximately $60.7 million) in
cash.  Under the agreement, Shanxi Coal will pay a first installment
in the amount of RMB200 million ($26.5 million) within 10 business days after
the receipt of the mining permit and a second installment in the amount of
RMB150 million ($19.9 million) within ten business days after the receipt of the
mining commencement report.  Shanxi Coal will pay the remaining
purchase price, RMB110 million ($14.6 million) within one year after the receipt
of the mining commencement permit.  Shanxi Coal plans to finance the
purchase through a debt facility which it is currently
negotiating.  If the seller does not obtain the mining permit for the
benefit of Shanxi Coal within two months of the agreement date, Shanxi Coal may
terminate the agreement.  As of the date of purchase, the coal mine is
not operating and Shanxi Coal will construct the coal mine after the
commencement permit has been obtained.  As the seller failed to obtain
the mining permit, Shanxi Coal has decided to terminate the agreement and is now
in the process of signing the termination agreement with the
seller.





As of
December 31, 2008 and 2007, the Group did not have any contingent
liabilities.





12.
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


61


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





13.
Interest Expense





Interest
expense for the year ended December 31, 2008 includes a $169,000 (2007:
$240,000, 2006: $793,000) interest
payment for the 8% convertible notes, a $594,000 (2007: $674,000, 2006:
$750,000) interest payment for the 6% loan from Resources Group for the purchase
of the Liulin and Zhongyang plants, and $nil (2007: $663,000, 2006:
$2,898,000) for the expensed portion of the discount on the conversion
feature and warrants related to converted shares and exercised
warrants.





14.
Debt Financing Costs





Debt
financing costs for the years ended December 31, 2008 include amortization of
debt issue costs of $nil (2007: $6,000, 2006: $838,000), amortization of
discount on convertible notes and warrants of $399,000 (2007: $895,000, 2006:
$8,627,000) and penalty for the delay in getting the registration statement
effective by March 17, 2006 of $379,000 (2007: $1,521,000, 2006: $1,204,000)
(see Note 10).





15.
Derivative Unrealized Fair Value Gain/Loss





Derivative
unrealized fair value gain of $394,000 in the year ended December 31, 2008
(2007: derivative unrealized fair value loss of $343,000, 2006: derivative
unrealized fair value gain of $1,237,000) represent the change in fair value of
the derivative warrants (see Note 10).





16.   Other
Expense





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





17.
Taxation





No
provision for taxation has been made for Puda, BVI and Putai for the years ended
December 31, 2008, 2007 and 2006, 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 31,2008
                  
                  
                  2007
                  
                  
                  2006$’000
                  
                  
                  $’000
                  
                  
                  $’000Current
      year provision
                  
                  $
                  6,417
                  
                  
                  $
                  8,292
                  
                  
                  $
                  7,604


62


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





17.
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 31,2008
                    
                    
                    2007
                    
                    
                    2006$’000
                    
                    
                    $’000
                    
                    
                    $’000Income
      before income taxes
                    
                    $
                    23,478
                    
                    
                    $
                    19,166
                    
                    
                    $
                    8,958Income
      tax on pretax income at statutory rate
                    
                    
                    7,982
                    
                    
                    
                    6,516
                    
                    
                    
                    3,046Tax
      effect of expenses that are not deductible in determining taxable
      profits
                    
                    
                    417
                    
                    
                    
                    1,560
                    
                    
                    
                    4,544Tax
      effect of income that is not taxable in determining taxable
      profits
                    
                    
                    (134
                    )
                    
                    
                    -
                    
                    
                    
                    (421
                    )Effect
      of different tax rates of subsidiary operating in other
      jurisdictions
                    
                    
                    (2,264
                    )
                    
                    
                    (240
                    )
                    
                    
                    (234
                    )Change
      in valuation allowance
                    
                    
                    416
                    
                    
                    
                    456
                    
                    
                    
                    669Income
      tax at effective rate
                    
                    $
                    6,417
                    
                    
                    $
                    8,292
                    
                    
                    $
                    7,604





As at
December 31, 2008 and 2007, the Group had accumulated net operating loss
carryforwards for United States federal income tax purposes of approximately of
$5,871,000 and $4,646,000, 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,
2008 and 2007.   The net operating loss carryforwards expire in
years 2021, 2022, 2023, 2024, 2025, 2026, 2027 and 2028 in the amounts of
$132,000, $394,000, $153,000, $371,000, $287,000, $1,968,000, $1,341,000 and
$1,225,000, respectively.





At
December 31, 2008 and 2007, deferred tax assets consist of:





December 31, 2008
                  
                  
                  December 31, 2007$’000
                  
                  
                  $’000Net
      operating loss carryforwards
                  
                  $
                  1,996
                  
                  
                  $
                  1,580Less:
      Valuation allowance
                  
                  
                  (1,996
                  )
                  
                  
                  (1,580
                  )Net
                  
                  $
                  -
                  
                  
                  $
                  -


63


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





18.Basic and Diluted Weighted Average
Number of Shares





Years
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Basic
      weighted average number of shares
                  
                  
                  106,288,598
                  
                  
                  
                  98,404,914
                  
                  
                  
                  80,167,110Options
      outstanding, after adjusting for 10 to 1 Reverse split
                  
                  
                  -
                  
                  
                  
                  2,678
                  
                  
                  
                  9,683Assumed
      conversion of notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Assumed
      exercise of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of penalty shares
                  
                  
                  -
                  
                  
                  
                  2,183,544
                  
                  
                  
                  152,239Issuance
      of directors/employees shares
                  
                  
                  314,048
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average number of shares
                  
                  
                  106,602,646
                  
                  
                  
                  100,591,136
                  
                  
                  
                  80,329,032





The
exercise of the warrants were not assumed for the year ended December 31, 2008
as they were out-of-the-money, but this item could potentially dilute earnings
per share in the future.  The convertible notes and warrants have no
dilutive effect on the basic income per share in the years ended December 31,
2007 and 2006, respectively.





19.
Supplementary cash flow information





Years
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006$’000
                  
                  
                  $’000
                  
                  
                  $’000Cash
      paid during the period for:Interest
                  
                  $
                  763
                  
                  
                  $
                  914
                  
                  
                  $
                  1,543Income
      taxes
                  
                  $
                  7,454
                  
                  
                  $
                  8,706
                  
                  
                  $
                  6,516Major
      non-cash transactions:Notes
      converted into common shares
                  
                  $
                  -
                  
                  
                  $
                  2,660
                  
                  
                  $
                  6,750Issue
      of common stock for services
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  21Issue
      of common stock for penalty
                  
                  $
                  2,104
                  
                  
                  $
                  -
                  
                  
                  $
                  1,000Dividend
      declared
                  
                  $
                  116
                  
                  
                  $
                  -
                  
                  
                  $
                  -


64





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





20.
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 commons stock
that may be issued pursuant to the Awards under the 2008 Plan is 5,000,000
shares.  The aggregate number of shares subject to the Awards under
the 2008 Plan during any calendar year to any one awardee will not exceed
500,000 shares.  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.





21.
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 10,000 shares of common stock of the Company per year. The
term of the warrants is 5 years and the exercise price is $2.50 per
share.  On December 29, 2008, Puda entered into an amendment to
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 (59,524 shares), 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.  The stock compensation cost was $12,000 and
$21,000 for the years ended December 31, 2008 and 2007,
respectively.





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 12,500 shares 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 (59,524
shares), 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.  The stock compensation cost was $25,000 and $12,000 for the
years ended December 31, 2008 and 2007, respectively.  As of December
31, 2008, 12,500 shares of common stock were issued.





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 13,021 shares of common stock of
the Company.   On December 29, 2008, the Company entered into an
amendment to 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 (75,000 shares),
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.  The stock
compensation cost was $21,000 and $13,000 for the years ended December 31, 2008
and 2007, respectively.  As of December 31, 2008, 13,021 shares of
common stock were issued.


65





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





21.
Stock Compensation (continued)





On August
11, 2008 and December 11, 2008, the Company granted an officer 20,000 and
40,000 shares 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.  The stock
compensation cost was $16,000 for the year ended December 31, 2008.





On August
11, 2008 and December 11, 2008, the Company granted Ming Zhou 20,000 and 40,000
shares of common stock, respectively.  The shares granted will vest 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.





22.
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, 2008 and 2007, the Group has a credit risk exposure of uninsured
cash in banks of approximately $39,108,000 and $16,614,000,
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 31,2008
                                          
                                          2007
                                          
                                          2006Customers$’000
                                          
                                          %
                                          
                                          $’000
                                          
                                          %
                                          
                                          $’000
                                          
                                          %Customer
      A
                                          
                                          $
                                          -
                                          
                                          -
                                          
                                          $
                                          21,626
                                          
                                          13
                                          
                                          $
                                          27,387
                                          
                                          20





The
following customers had balances greater than 10% of the total accounts
receivable as of December 31, 2008 and 2007, respectively:





Customers
                      
                      December 31,
                        2008
                      
                      
                      December 31,
                        2007$’000
                      
                      
                      %
                      
                      
                      $’000
                      
                      
                      %Customer
      A
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      961
                      
                      
                      
                      12Customer
      B
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      878
                      
                      
                      
                      11Customer
      C
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      865
                      
                      
                      
                      11Customer
      D
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      849
                      
                      
                      
                      10


66





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





23.
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.  The
Group is required to accrue the employer-portion for these benefits based on
certain percentages of the employees’ salaries. The total provision for such
employee benefits was $539,000, $395,000 and $332,000 for the years ended
December 31, 2008, 2007 and 2006, respectively and were recorded as accrued
expenses.  As of December 31, 2008 and 2007, the total amount included
in accrued expenses for the provision was $1,759,000 and $1,154,000,
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, 2008, 2007 and 2006. 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.





EITF
Consensus 92-13 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.





24. 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 23, 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.


67





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





25.
Fair Value Measurement





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS No.
157).  SFAS No. 157 introduces a framework for measuring fair value
and expands required disclosure about fair value measurements of assets and
liabilities.  SFAS No. 157 for financial assets and liabilities is
effective for fiscal years beginning after November 15, 2007. The Company has
adopted the standard for those assets and liabilities as of January 1, 2008 and
the impact of adoption was not significant.





SFAS No.
157 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. SFAS No. 157 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.
The standard describes 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
Company 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 10).





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





Fair Value Measurement as of December 31, 2008Description
                          
                          Total
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3$’000
                          
                          
                          $’000
                          
                          
                          $’000
                          
                          
                          $’000Derivative
      warrants
                          
                          
                          4,086
                          
                          
                          
                          -
                          
                          
                          
                          4, 086
                          
                          
                          
                          -Total
                          
                          $
                          4,086
                          
                          
                          $
                          -
                          
                          
                          $
                          4,086
                          
                          
                          $
                          -





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


68





PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





26.
Condensed Financial Information of Registrant





The
condensed financial information of Registrant includes the balance sheets as at
December 31, 2008 and 2007, and the statements of operations and cash flows for
the years ended December 31, 2008, 2007 and 2006.





Balance
Sheet-Parent Company Only


(In
thousands of United States dollars)


Note(s)
                                                                
                                                                
                                                                December 31,
                                                                  2008
                                                                
                                                                
                                                                December 31,
                                                                  2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                196
                                                                
                                                                
                                                                $
                                                                54Restricted
      cash
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                233Total
      current assets
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                196
                                                                
                                                                
                                                                
                                                                287INVESTMENTS
      IN SUBSIDIARIES
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                66,366
                                                                
                                                                
                                                                
                                                                47,622TOTAL
      ASSETS
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                66,562
                                                                
                                                                
                                                                $
                                                                47,909LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESOther
      payable
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                257
                                                                
                                                                
                                                                
                                                                1,886Accrued
      expenses
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                232
                                                                
                                                                
                                                                
                                                                196Convertible
      notes
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,841Derivative
      conversion feature
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,100Penalty
      payable
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,725Total
      current liabilities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                489
                                                                
                                                                
                                                                
                                                                6,748LONG-TERM
      LIABILITIESDerivative
      warrants
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                4,086
                                                                
                                                                
                                                                
                                                                4,480STOCKHOLDERS’
      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 107,335,759 shares (2007: 105,252,176)
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                107
                                                                
                                                                
                                                                
                                                                105Paid-in
      capital
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                88,690
                                                                
                                                                
                                                                
                                                                61,703Accumulated
      deficit
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (26,810
                                                                )
                                                                
                                                                
                                                                (25,127
                                                                )Total
      stockholders’ equity
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                61,987
                                                                
                                                                
                                                                
                                                                36,681TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                66,562
                                                                
                                                                
                                                                $
                                                                47,909


69


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





26.
Condensed Financial Information of Registrant (continued)





Statement
of Operations-Parent Company Only


(In
thousands of United States dollars)





Note(s)
                  
                  
                  Years ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Revenue:Share
      of earnings from investment in subsidiaries
                  
                  
                  
                  
                  $
                  18,744
                  
                  
                  $
                  15,689
                  
                  
                  $
                  15,648Total
      revenue
                  
                  
                  
                  
                  
                  18,744
                  
                  
                  
                  15,689
                  
                  
                  
                  15,648General
      and administrative expenses
                  
                  
                  
                  
                  
                  (1,130
                  )
                  
                  
                  (1,147
                  )
                  
                  
                  (1,171
                  )Income
      from operations
                  
                  
                  
                  
                  
                  17,614
                  
                  
                  
                  14,542
                  
                  
                  
                  14,477Interest
      expense
                  
                  
                  13
                  
                  
                  
                  (169
                  )
                  
                  
                  (903
                  )
                  
                  
                  (3,691
                  )Debt
      financing costs
                  
                  
                  14
                  
                  
                  
                  (778
                  )
                  
                  
                  (2,422
                  )
                  
                  
                  (10,669
                  )Derivative
      unrealized fair value gain/(loss)
                  
                  
                  10(c),
      15
                  
                  
                  
                  394
                  
                  
                  
                  (343
                  )
                  
                  
                  1,237Net
      income
                  
                  
                  
                  
                  
                  $
                  17,061
                  
                  
                  $
                  10,874
                  
                  
                  $
                  1,354





No cash
dividends were received from the subsidiaries for the years ended December 31,
2008, 2007 and 2006.


70


PUDA
COAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





26.
Condensed Financial Information of Registrant (continued)





Statement
of Cash Flows-Parent Company Only


(In
thousands of United States dollars)





Years ended December 31,2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                17,061
                
                
                $
                10,874
                
                
                $
                1,354Adjustments
      to reconcile net loss to  net cash used in operating
      activitiesShare
      of earnings from investment in subsidiaries
                
                
                (18,744
                )
                
                
                (15,689
                )
                
                
                (15,648
                )Amortization
      of debt issue costs
                
                
                -
                
                
                
                6
                
                
                
                838Amortization
      of discount on convertible notes and warrants
                
                
                399
                
                
                
                895
                
                
                
                8,627Derivative
      unrealized fair value (gain)/loss
                
                
                (394
                )
                
                
                343
                
                
                
                (1,237
                )Discount
      on converted shares and exercised warrants
                
                
                -
                
                
                
                663
                
                
                
                2,898Stock
      compensation expense
                
                
                74
                
                
                
                46Issue
      of common stock for penalty
                
                
                379
                
                
                
                -
                
                
                
                1,000Issue
      of common stock for service
                
                
                -
                
                
                
                -
                
                
                
                21Changes
      in operating assets and liabilities:Advance
      from/(to) subsidiary
                
                
                3,219
                
                
                
                (771
                )
                
                
                (1,079
                )Increase
      in other payable
                
                
                812
                
                
                
                471
                
                
                
                523Increase/(decrease)
      in accrued expenses
                
                
                11
                
                
                
                (91
                )
                
                
                242Increase
      in penalty payable
                
                
                -
                
                
                
                1,521
                
                
                
                204Decrease
      in restricted cash
                
                
                233
                
                
                
                -
                
                
                
                382Net
      cash provided by/(used in) operating activities
                
                
                3,050
                
                
                
                (1,732
                )
                
                
                (1,875
                )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
                
                
                -
                
                
                
                3,600
                
                
                
                1,860Net
      cash (used in)/provided by financing activities
                
                
                (2,015
                )
                
                
                3,600
                
                
                
                1,860Net
      increase/(decrease) in cash and cash equivalents
                
                
                142
                
                
                
                69
                
                
                
                (15
                )Cash
      and cash equivalents at beginning of year
                
                
                54
                
                
                
                (15
                )
                
                
                -Cash
      and cash equivalents/(bank overdraft) at end of year
                
                $
                196
                
                
                $
                54
                
                
                
                (15
                )Supplementary
      cash flow information:Cash
      paid during the period for:Interest
                
                $
                169
                
                
                $
                240
                
                
                $
                793Income
      taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -


71


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 2008.




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, as amended (the “Exchange Act”)) 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, our management, under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2008. In making this evaluation, our management considered the material
weaknesses in our internal control over financial reporting and the status of
their remediation as discussed below. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of December 31, 2008. However,
giving full consideration to the material weaknesses described below, we
performed adequate analyses and procedures, including among other things,
transaction reviews, account reconciliations and physical inventories, in order
to provide assurance that our Consolidated Financial Statements included in this
annual report were prepared in accordance with generally accepted accounting
principles (“GAAP”) and present fairly, in all material respects, our financial
position, results of operations and cash flows for the periods presented in
conformity with GAAP. As a result of these procedures, we concluded that the
Consolidated Financial Statements included in this annual report present fairly,
in all material respects, our financial position, results of operations and cash
flows for the periods presented in conformity with GAAP.




(b)
            Management’s
      Report on Internal Control over Financial
  Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for our Company, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over
financial reporting is a process designed under the supervision of our principal
executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2008 based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). As a result of the material weaknesses described below, our
management concluded that as of December 31, 2008 we did not maintain effective
internal control over financial reporting based on the criteria established in
Internal Control—Integrated Framework, issued by COSO.




A
“material weakness” is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. As of
December 31, 2008, the following material weaknesses in our internal control
over financial reporting existed:




1.
            Lack of documentation for review
      and authorization procedures in purchase, sales and payroll transaction
      cycles.


72





2.
            Lack of an internal control audit
      function throughout our company and  an inadequate culture
      regarding control
consciousness





3.
            Insufficient or lack of written
      policies and procedures relating to the periodic review of current
      policies and procedures and their
  implementation.





4.
            The
      lack of adequate training of employees, especially those newly hired,
      regarding our accounting policies and our antifraud
    programs.





5.
            No periodic review of the
      company’s insurance
policies.





Each of
the control deficiencies described in items 1 through 4 above could result in a
misstatement of the aforementioned accounts or disclosures that might result in
a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Management has determined
that each of the control deficiencies in items 1 through 4 above constitutes a
material weakness.




As a
result of the material weaknesses described above, our management concluded that
as of December 31, 2008, we did not maintain effective internal control over
financial reporting.




This
annual report does not include an attestation report of our company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to the attestation by the company’s
registered public accounting firm pursuant to the temporary rules of the
Securities and Exchange Commission that permit our company to provide
management’s report only in this annual report.




The
Company is taking the following specific remedial actions to address the
material weaknesses and deficiencies in our internal control over financial
reporting described above:




Reorganize
and restructure our production staff by the following steps:





1.
            Based
      on the nature of our production and operating environment, setting
      appropriate written policies and procedures, establishing clear roles,
      responsibilities, and accountability in all positions, and training staff
      in different positions;





2.
            Re-designing control procedures
      with standard documentation for review and authorization in the purchase,
      sales and  payroll transactions
  cycles;





3.
            Establishing internal audit
      functions, and implementing internal control supervision processes into
      transactions cycles.





The
Company is also taking action to improve period-end closing procedures
by:





1.
            Ensuring that account
      reconciliations and analyses for significant financial statement accounts
      are reviewed for completeness and accuracy by the Chief Financial
      Officer;





2.
            Implementing a process that
      ensures the timely review and approval of complex accounting estimates by
      qualified accounting personnel and subject matter experts, where
      appropriate;





3.
            Developing better monitoring
      controls at both the corporate accounting and factory operation
      level.





4.
            Documenting and implementing
      antifraud programs and controls as well as comprehensive risk assessment
      of procedures, programs and
controls.


73





5.
            Developing written policies and
      procedures.




In
addition, we are also addressing these issues by reviewing and revising our
internal accounting policies and procedures, seeking advice from professionals
to improve our internal controls, using a professional institute to conduct
our  physical inventory count and using outside accounting
advisors.  On July 23, 2008, we hired a qualified Chief Financial
Officer, who speaks English and Chinese and is familiar with both U.S. GAAP and
PRC GAAP as well as internal control compliance work.





We
believe that the foregoing actions, when implemented, will improve our internal
control over financial reporting, as well as our disclosure controls and
procedures. However, there is no certainty that all of the material weaknesses
described above will be eliminated in the near future. If any of the above
material weakness is not cured by that time, we will have to report that our
internal control over financial reporting and our disclosure controls and
procedures remain ineffective. Furthermore, certain of these remediation efforts
will require significant ongoing effort and investment. Our management, with the
oversight of our audit committee, will continue to identify and take steps to
remedy known material weaknesses as expeditiously as possible and enhance the
overall design and capability of our control environment. We intend to establish
our internal control audit function , accounting policies and controls and
financing reporting compliance capabilities by hiring senior staff who
understand internal control designing and implementation and enhancing training
in such matters.





(c)
            Change in
      Internal Control over Financial
Reporting




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.





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
              
              36
              
              Chairman,
      Chief Executive Officer before June 25, 2008Liping
      Zhu
              
              54
              
              Chief
      Executive OfficerQiong
      Wu
              
              34
              
              Chief
      Financial OfficerWenwei
      Tian
              
              38
              
              Chief
      Operating OfficerLawrence
      S. Wizel
              
              66
              
              DirectorC.
      Mark Tang
              
              44
              
              DirectorJianfei
      Ni
              
              62
              
              Director


74




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. He is the brother of Yao Zhao, our 13.13% shareholder and a
manager of our coal washing plants.




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.




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.




Wenwei Tian joined Puda in
February 2006 and was appointed to be Chief Operating Officer of Puda in
November 2006. Mr. Tian has also been the Chief Operating Officer and Operating
VP of Shanxi Coal since then.  Mr. Tian was a project manager at China
Digital Finance Times Company from July 2000 to August 2001 and a business
analyst at Odyssey Applied Technologies Company from April to August 2002. China
Digital Finance Times Company is an online securities trading company. Odyssey
Applied Technologies Company focuses on commercializing a patent that uses sour
gases generated from oil production to generate power.




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).




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
2002, 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. From 2004 to 2006, Dr. Tang was
also a director of Biotech Commercialization and Instructor at Rutgers
University Business School.  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.




Jianfei Ni was appointed to
the board of directors as an independent director on June 29, 2007. Mr. Ni
recently 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.


75


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.




The board
of directors has determined that Mr. Lawrence S. Wizel, Dr. Mark C. Tang and Mr.
Jianfei Ni are “independent” under NASDAQ marketplace Rule 4200(a)(15) although
we are not listed on NASDAQ. The board of directors further determined that
these three directors, who are also members of our audit committee, are
“independent” in accordance with Section 10A(m)(3) of the Exchange Act. Our
directors hold office until the next annual meeting of stockholders or the
election and qualification of their successors. Officers are elected annually by
the board of directors and serve at the discretion of the board of
directors




None of
our officers, directors or significant employees is involved in any legal
proceedings.




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 three directors, each of
whom is “independent,” as that term is defined in Section 10A(m) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Rules
and Regulations of the Securities and Exchange Commission, and meets the
independence and financial literacy requirements of the Nasdaq Stock Market. 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.




Code
of Ethics




We had
not yet adopted a Code of Ethics because our Board of Directors is currently
discussing the scope and implementation measures of the Code.  We
intend to adopt a Code of Ethics as soon as possible.




Section
16(a) Beneficial Ownership Reporting Compliance





Because
as of December 31, 2008 none of our stock was registered pursuant to Section 12
of the Exchange Act, our officers, directors and principal stockholders are not
required to comply with the reporting requirements of Section 16(a) of the
Exchange Act.




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).


76





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 (Chair), C. Mark
Tang and Lawrence S. Wizel. All three members are “independent directors” as
that term is defined in NASDAQ Marketplace Rule 4200(a)(15) 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.
Additionally, when determining whether to increase executive compensation, we
consider the level of compensation paid by our benchmark companies (as described
below) in order to attract and retain talented and dedicated
executives.





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 2008. 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 companies listed in OTC Bulletin Board; however, we did not use any
specific benchmark companies in connection with the determination of our 2008
compensation .





Compensation
Mix





Our
executive compensation is allocated in the form of cash and equity-based
compensation. We have established Pruda 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 and CFO on July 23, 2008. The
employment agreements do not have change of control provisions and we do not
have separate change of control agreements with our employees.





Accounting
and Tax Treatment





Given our current levels of
compensation, the accounting and tax consideration have not significantly
impacted our forms of compensation.





Elements of
Compensation





Our
executive compensation consists of the following elements:





Base
salary





Our
Compensation Committee , who was established in July 2007, reviewed and set the
base salary level for each executive officers for year 2008 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 OTC Bulletin.


77





Base salary is a significant portion of
our overall executive compensation, which is consistent with the compensation
practices of many Chinese companies.  Our new CEO and CFO just joined
the Company in 2008, therefore, 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 the accomplishment of corporate performance goals. We did not
grant any bonus to our named executive officers in 2008 because of the general
economic downturn and its uncertain impact on the Company in the
future.





Stock
Awards and Options Awards





On
December 29, 2008, the shareholders of the Company approved a Puda Coal, Inc.
2008 Equity Incentive Plan, or the 2008 Plan, by written consent in lieu of
meeting, at the recommendation of the Board.  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, 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 commons stock that may be
issued pursuant to the Awards under the 2008 Plan is 5,000,000
shares.  The aggregate number of shares subject to the Awards under
the 2008 Plan during any calendar year to any one awardee will not exceed
500,000 shares, except that in connection with the awardee’s initial service, he
may be granted Awards covering up to an additional 500,000
shares.  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. The
administrator of the 2008 Plan also has the authority to, in its discretion,
select employees or directors to whom Awards are to be granted, determine the
number of shares under the grant, determine the type of Awards, approve forms of
award agreements for use under the 2008 Plan, determine the terms and conditions
of any Award granted under the 2008 Plan so far as they are not inconsistent
with the terms of the 2008 Plan, interpret the terms of the 2008 Plan, adopt
rules and procedures relating to the operations and administration of the 2008
Plan, impose restrictions, conditions or limitations as to the timing and manner
of any resale by an awardee or subsequent transfers, and make other
determinations deemed necessary or advisable for administering the 2008 Plan and
any Award granted under the 2008 Plan.




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% ( in year 2008),  of an
employee’s monthly base salary to such employee’s welfare and benefit package
(before year 2008, it was 12% of based salary amount). The amounts we
contributed to our named executive officers are included in the “Other Annual
Compensation” column in the Summary Compensation Table.


78


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 2006, 2007
or 2008.  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. The Company’s
officers do not receive any additional compensation from Puda Coal, the public
parent company of Shanxi Coal.




Nameand
                                            Principal
                                            Position
                                          
                                          Year
                                          
                                          
                                          Salary ($)
                                            (1)
                                          
                                          
                                          Other
                                            Annual
                                            Compensation
                                            (1)(2) ($)
                                          
                                          
                                          Total (1)($)Ming
      Zhao (President and Chief Executive Officer before June 25,
      2008)(3)
                                          
                                          
                                          2008
                                            2007
                                            2006
                                          
                                          
                                          
                                          48,361
                                            102,883
                                            79,747
                                          (4)
                                          
                                          
                                          6,771
                                            12,346
                                            9,570
                                          
                                          
                                          
                                          55,132
                                            115,229
                                            89,317Liping
      Zhu (President and Chief Executive Officer since June 25,
      2008)(3)
                                          
                                          2008
                                          
                                          
                                          
                                          38,571
                                          (5)
                                          
                                          
                                          1,145
                                          
                                          
                                          
                                          9,327Xia
      Jin (Chief Financial Officer before July 23, 2008)(3)
                                          
                                          
                                          2008
                                            2007
                                            2006
                                          
                                          
                                          
                                          6,909
                                            15,568
                                            14,889
                                          (6)
                                          
                                          
                                          967
                                            1,868
                                            1,787
                                          
                                          
                                          
                                          7,876
                                            17,436
                                            16,676Qiong
      Wu (Chief Financial Officer since July 23, 2008)(3)
                                          
                                          2008
                                          
                                          
                                          
                                          50,000
                                          (7)
                                          
                                          
                                          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 6.9477, which is theaverage conversion
      ratio for fiscal year 2008, consistent with the conversion ratio we used
      in our financial statements for the fiscal year ended December 31,
      2008.




(2)
            In
      accordance with Chinese law, we contributed 14% of the base
      salary of each employee (including named executive officers) to such
      employees’ social pension insurance in 2008. These amounts are included in
      the “Other Annual Compensation” column of this Summary Compensation
      Table.




(3)
            Mr. Liping
      Zhu replaced Mr. Ming Zhao as our CEO on June 25, 2008.  Ms.
      Qiong Wu replaced Ms. Xia Jin as our CFO on July 23,
  2008.




(4)
            Represents
      the salary Mr. Ming Zhao received until June 25, 2008, the day he ceased
      to be our CEO.




(5)
            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.




(6)
            Represents
      the salary Ms. Xia Jin received until July 23, 2008, the day she ceased to
      be our CFO.




(7)
            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.


79





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)Ming
      Zhao
                    
                    8/11/2008
                      12/11/2008
                    
                    
                    
                    20,000
                      40,000
                    
                    
                    
                    8,400
                      8,000Liping
      Zhu
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Xia
      Jin
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Qiong
      Wu
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -





(1)           The
grant date fair value of each equity award computed in accordance with FAS
123R.





Outstanding
Equity Awards at Fiscal Year-End




Stock AwardsName
                      
                      Number of
                        Shares orUnits
                        ofStock 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
                        ($)Ming
      Zhao
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60,000
                      (1)
                      
                      
                      11,400
                      (2)Liping
      Zhu
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Xia
      Jin
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Laby
      Wu
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -





(1)
Include the 20,000 and 40,000 shares of common stock granted to Mr. Zhao on
August 11 and December 11, 2008 respectively, which will vest 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 Company’s 2008 Equity
Incentive Plan.




(2)
Aggregate market price of unvested shares owned as of December 31,
2008.


80


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
2008.  We did not provide any other retirement or deferred
compensation to any of our named executive officers in fiscal year
2008.




None of our named executive officers
had any post termination or change of control benefits.




Compensation
of Directors




We appointed three new directors in
fiscal year 2007, Messers. Jianfei Ni, Lawrence S. Wizel and C. Mark
Tang.





On June
29, 2007, Puda entered into a director contract with Mr. Ni. 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 10,000 shares of common stock of the Company per year. The
term of the warrants is 5 years and the exercise price is $2.50 per
share.  On December 29, 2008, Puda entered into an amendment to
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 (59,524 shares for August 11, 2008 to August 10, 2009),
calculated based on the closing sale price of the Company’s common stock on the
grant date of August 11, 2008 and then, 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 Mr. Wizel. 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 12,500 shares 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
stock compensation will be $25,000 worth of shares of common stock of the
Company (59,524 shares for August 11, 2008 to August 10, 2009), calculated based
on the closing sale price of the Company’s common stock on the grant date of
August 11, 2008 and then, each anniversary date of the grant date, and such
stock grants are subject to the 2008 Plan.  The cash compensation of
$40,000 remains the same.





On
October 9, 2007, Puda entered into a contract with Mr, Tang. 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 13,021 shares of common stock of the Company.   On
December 29, 2008, the Company entered into an amendment to director’s contract
with C. Mark Tang dated October 9, 2007.  Pursuant to the
amendment, the annual fee will be $25,000, and the stock compensation to
Dr. Tang will be $15,000 worth of shares of common stock (75,000 shares for
August 11, 2008 to August 10, 2009), calculated based on the closing sale price
of the Company’s common stock on the grant date of October 9, 2008 and then each
anniversary date of the grant date, and such stock grants are subject to the
2008 Plan.




The
amounts of compensation reported in the director compensation table for fiscal
year 2008 are the amounts of the compensation the directors received from Puda
Coal. Our directors did not receive any additional compensation from Shanxi
Coal.




Name (1)
                        
                        Fees Earned or
                          Paid in
                          Cash
                          ($)
                        
                        
                        Stock
                          Awards ($)(2)
                        
                        
                        Total ($)Lawrence
      Wizel
                        
                        
                        40,000
                        (3)
                        
                        
                        24,375.04
                        (4)
                        
                        
                        64,375.04C
      Mark Tang
                        
                        
                        32,500
                        (5)
                        
                        
                        20,521
                        (6)
                        
                        
                        53,021Jianfei
      Ni
                        
                        
                        -
                        
                        
                        
                        12,500.04
                        (7)
                        
                        
                        12,500.04




(1)
            Mr.
      Ming Zhao, Chairman of our board of directors, is also our
      CEO.  He received no compensation for his service as a director
      in 2008.


81




(2)
            Represents
      the dollar amount recognized for financial statements reporting purpose
      with respect to fiscal year 2008 in accordance with FAS
    123R.




(3)
            50%
      of the $40,000 annual cash fee to Mr. Wizel was earned on March 3, 2008;
      the remaining 50% was earned on August 11,
2008.




(4)
            $11,875
      of the stock awards to Mr. Wizel was vested on March 3, 2008 and
      $12,500.04 of the stock awards to Mr. Wizel was vested on August 11,
      2008.  The grants date fair value of the shares is computed in
      accordance with FASA 123(R).




(5)
            50%
      of the $40,000 annual cash fee to Mr. Tang was earned on April 9, 2008;
      50% of the $25,000 was earned on October 9,
  2008.




(6)
            $13,021
      of the stock awards to Mr. Tang was vested on April 9, 2008 and $7,500 of
      the stock awards to Mr. Tang was vested on October 9, 2008.  The
      grants date fair value of the shares is computed in accordance with FASA
      123(R).




(7)
            $12,500.04
      of the stock awards to Mr. Ni was vested on August 11,
      2008.  The grants date fair value of the shares is computed in
      accordance with FASA 123(R).




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.


82




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 6, 2009, 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 6, 2009, we had 107,335,759 shares
of our common stock outstanding.




Name of Beneficial Owner
                                
                                Amount of
                                  Beneficial
                                  Ownership
                                
                                
                                Percent of
                                  Beneficial
                                  Ownership
                                  %(2)Ming
      Zhao, Former President and CEO; Chairman of the Board
    (1)
                                
                                
                                53,100,000
                                (3)
                                
                                
                                49.47
                                %Yao
      Zhao
                                
                                
                                13,275,000
                                
                                
                                
                                12.37
                                %Liping
      Zhu, President and CEO
                                
                                
                                0
                                
                                
                                
                                0Xia
      Jin, Former CFO (1)
                                
                                
                                0
                                
                                
                                
                                0Laby
      Wu, CFO
                                
                                
                                0
                                
                                
                                
                                0Wenwei
      Tian, COO (1)
                                
                                
                                0
                                
                                
                                
                                0Lawrence
      S. Wizel, director (1)
                                
                                
                                12,500
                                (3)
                                
                                
                                0.01
                                %C.
      Mark Tang, director (1)
                                
                                
                                13,021
                                (3)
                                
                                
                                0.01
                                %Jianfei
      Ni, director (1)
                                
                                
                                0
                                
                                
                                
                                0All
      executive officers and directors as a group
                                
                                
                                66,400,521
                                
                                
                                
                                61.86
                                %





(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, 2008, none of the additional shares and warrants granted
      to the director or officer in 2008 (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% ower 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.


83


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
2008, the rent expense paid to Resource Group was $6,000, and as an 80% owner
and 10% owner of Resources Group, Ming Zhao and Yao Zhao had interest of $4,800
and $600 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,
2008. The land use rights were for use of the land upon which the old Shanxi
Liulin Jucai Plant was constructed.




Acquisition of Shanxi Coal.
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% 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 (61.84%, and 53.39% after the Conversion), they can
control the actions which we take. Ming Zhao is our CEO and Chairman of the
board of directors. 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, 2008 and 2007, the Group had the following amounts due from/to
related parties:





December 31,
                                              2008
                                            
                                            
                                            December 31,
                                              2007$’000
                                            
                                            
                                            $’000Other
      receivable from Ming Zhao, director and major shareholder of
      Puda
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            4Advance
      to Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”), a
      related company with a common owner
                                            
                                            $
                                            879
                                            
                                            
                                            $
                                            685Accounts
      payable to Jucai Coal
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            182Other
      payable to Shanxi Puda Resources Group Limited (“Resources Group”), a
      related company with common owners
                                            
                                            $
                                            796
                                            
                                            
                                            $
                                            743Other
      payable to Yao Zhao, manager and shareholder of Puda
                                            
                                            
                                            234
                                            
                                            
                                            
                                            215Other
      payable to Ming Zhao and Yao Zhao
                                            
                                            
                                            -
                                            
                                            
                                            
                                            893$
                                            1,030
                                            
                                            
                                            $
                                            1,851Distribution
      payable to Ming Zhao and Yao Zhao
                                            
                                            $
                                            117
                                            
                                            
                                            $
                                            1,096Loan
      payable to Resources Group-current
      portion
                                            
                                            $
                                            1,300
                                            
                                            
                                            $
                                            1,300-long-term
      portion
                                            
                                            
                                            7,800
                                            
                                            
                                            
                                            9,100$
                                            9,100
                                            
                                            
                                            $
                                            10,400


84


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 $796,000 includes professional and
regulatory charges related to the public listing paid by Resources Group on
behalf of the Company of $901,000, netted against other receivables of $105,000
due from Resources Group.





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





The Group
paid $893,000 in 2008 to Ming Zhao and Yao Zhao for the balance of the purchase
price for the exercise of the Option.





In 2001,
Shanxi Coal entered into agreements with Resources Group to lease an office and
certain equipment.  In the years ended December 31, 2008 and 2007,
rental expenses paid to Resources Group were $7,000 and $6,000
respectively.





In the
years ended December 31, 2008 and 2007, Shanxi Coal purchased raw coal from
Jucai Coal in the amounts of $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 $4 to $6 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, 2008, Shanxi Coal paid principal of $1,300,000 (2007: $1,300,0000) and
interest of $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.  The conveyance loans
financing the acquisitions are subordinated to the convertible
notes.  Payments by Shanxi Coal to Resources Group under the
conveyance loans may not be accelerated while Puda has obligations of principal
or interest outstanding to investors under the convertible notes, nor may Shanxi
Coal make payments under the conveyance loan if Puda is in default to the
investors under the notes.  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 Nasdaq Stock Market. 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.


85





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 49% shareholder of us and therefore is
not “independent” under the Nasdaq Marketplace Rules. Lawrence S. Wizel, C. Mark
Tang and Jianfei Ni are “independent” under Nasdaq Marketplace
Rules.




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, 2008, were as follows:





Audit Fees. This category
consists of fees for the audit of financial statements and review of 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, 2008 and December 31,
2007, Moore Stephens billed us for audit fees in the amount of approximately
$98,000, and $75,000, 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
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, 2008 and December 31, 2007, Moore Stephens billed us for
audit related fees in the amount of approximately $60,000 and $30,000,
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, 2008
and December 31, 2007, 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, 2008 and December 31, 2007, Moore
Stephens bill us for other fees in the amount of approximately $0 and
$0.





PART
IV




Item
15. Exhibits, Financial Statement and Schedules




The
following exhibits are filed herewith or incorporated by reference into this
report on Form 10-K:





Exhibit
                          No.
                        
                        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
                        
                        Audit
      Committee Charter (incorporated by reference to Exhibit 3.1 to Current
      Report of the Company filed on Form 8-K filed September 4,
      2007).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.


86





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).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).


87





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).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).31.1
      *
                
                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





88


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, 2009
                    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, 2009(ii)
      Principal Financial and Accounting Officer:/s/ Qiong WuQiong
      Wu
              
              Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
              
              Dated:
      March  31, 2009(iii)
      Directors:/s/ Ming ZhaoMing
      Zhao
              
              Chairman
      of the Board
              
              Dated:
      March 31 2009/s/ Jianfei NiJianfei
      Ni
              
              Director
              
              Dated:
      March 31, 2009/s/ C. Mark TangC.
      Mark Tang
              
              Director
              
              Dated:
      March 31, 2009/s/ Lawrence WizelLawrence
      Wizel
              
              Director
              
              Dated:
      March 31, 2009


89