10-Q 1 v083722_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2007

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

For the transition period from _______ to _______

Commission file number 001-31937

SHENGDATECH, INC.

(Exact name of registrant as specified in its charter)

Nevada		n/a
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Youth Pioneer Park Tai-an Economic and Technological Development Zone Tai'an City, Shandong Province 271000 People's Republic of China
(Address of principal executive offices)

Registrant’s telephone number, including area code: (86-538) 856-0668

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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

The number of shares of Common Stock outstanding on July 31, 2007 was 54,095,103 shares.

SHENGDATECH, INC. AND SUBSIDIARIES

INDEX


Part I — Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets - June 30, 2007 and December 31, 2006 (unaudited)	3

		Condensed Consolidated Statements of Operations and Comprehensive Income- Three and Six months ended June 30, 2007 and 2006 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows -Three and Six months ended June 30, 2007 and 2006 (unaudited)	5

		Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

	Item 4.	Controls and Procedures	23

Part II — Other Information

	Item 1A.	Risk Factors	25

	Item 6.	Exhibits	33

	Signatures		34

See the accompanying notes to the condensed consolidated financial statements

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

SHENGDATECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30,		December 31,
	2007		2006
ASSETS
Current Assets
Cash and cash equivalents	$	27,625,972	$	34,684,142
Trade accounts receivable, less allowance for doubtful accounts
of $0 and $0, respectively.		8,235,904		5,588,676
Other receivables		18,570		157,352
Advances to suppliers		50,085		872,289
Inventory		1,592,078		2,151,612
Receivable from related parties		4,841,391		1,601
Total Current Assets		42,364,000		43,455,672
Property and Equipment, net of accumulated depreciation of
$4,637,977 and $3,674,605, respectively		39,731,340		23,573,680
Land use rights, net of accumulated amortization of $0		94,580		-

TOTAL ASSETS	$	82,189,920	$	67,029,352

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable	$	4,779,217	$	2,957,413
Other payables and accrued expenses		2,377,754		2,235,758
Income and other taxes payable		2,011,593		1,237,180
Advances from customers		-		119,923
Payable to related parties		3,002,727		3,349,814
Total Current Liabilities		12,171,291		9,900,088
Shareholders' Equity
Common stock - $0.00001 par value; 100,000,000 shares
authorized, 54,095,103 shares (unaudited) and 54,095,103
shares outstanding, respectively		540		540
Additional paid-in capital		21,673,396		21,824,121
Statutory reserves		3,301,379		3,301,379
Retained earnings		41,627,255		30,187,740
Accumulated other comprehensive income		3,416,059		1,815,484
Total Shareholders' Equity		70,018,629		57,129,264
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	82,189,920	$	67,029,352

See the accompanying notes to the condensed consolidated financial statements

SHENGDATECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(unaudited)

		For the Three Months					For the Six Months
		Ended June 30,					Ended June 30,
		2007		2006			2007		2006
Sale of Products	$	22,680,529	$	14,291,787		$	44,860,800	$	30,616,657
Cost of Products Sold		15,015,622		10,289,848			30,221,308		22,489,406

Gross Profit		7,664,907		4,001,939			14,639,492		8,127,251

Operating Expenses:
Selling expense		355,885		204,449			840,725		442,862
General and administrative expense		722,280		648,416			1,194,371		1,187,423
Total Operating Expenses		1,078,165		852,865			2,035,096		1,630,285

Income from Operations		6,586,742		3,149,074			12,604,396		6,496,966

Other Income (Expense):
Interest income		64,549		25,080			132,286		44,476
Other income		-		(16,294	)		-		109,996
Net Other Income		64,549		8,786			132,286		154,472

Income Before Income Taxes		6,651,291		3,157,860			12,736,682		6,651,438
Provision for income taxes		618,404		-			1,297,167		-

Net Income	$	6,032,887	$	3,157,860		$	11,439,515	$	6,651,438
Comprehensive income: foreign
currency translation adjustments		1,015,358		6,506			1,600,575		28,724
Comprehensive income	$	7,048,245	$	3,164,366		$	13,040,090	$	6,680,162

Earnings Per Share:
Basic	$	0.11	$	0.06		$	0.21	$	0.13
Diluted	$	0.11	$	0.06		$	0.21	$	0.13
Weighted Average Shares Outstanding:
Basic		54,095,103		54,095,103			54,095,103		49,657,413
Diluted		54,257,388		54,257,388			54,257,388		49,738,556

See the accompanying notes to the condensed consolidated financial statements

SHENGDATECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Six Months
	Ended June 30,
	2007			2006
Cash Flows from Operating Activities:
Net income	$	11,439,515		$	6,651,438
Depreciation and amortization		858,658			343,939
Changes in assets and liabilities:
Accounts receivable		(2,471,886	)		288,228
Other receivables		139,273			12,339
Advances to suppliers		832,760			(5,533,361	)
Inventory		605,558			317,380
Trade accounts payable		1,723,938			(64,592	)
Other payables and accrued expenses		84,329			(13,618	)
Income and other taxes payable		733,034			(823,838	)
Advances from customers		(121,281	)		-
Net Cash provided by Operating Activities		13,823,898			1,177,915

Cash Flows from Investing Activities:
Purchase of property and equipment		(16,113,759	)		(1,169,052	)
Purchase of land use rights		(93,293	)		-
Net Cash used in Investing Activities		(16,207,052	)		(1,169,052	)

Cash Flows from Financing Activities:
Proceeds from issuance of common stock		-			13,969,714
Changes in related party receivable / payable		(5,199,760	)		(1,926,450	)
Distribution to shareholder		(150,725	)		-
Net Cash (used in) provided by Financing Activities		(5,350,485	)		12,043,264

Effect of Exchange Rate Changes in Cash		675,469			303,477

Net Change in Cash		(7,058,170	)		12,355,604
Cash and Cash Equivalents at Beginning of Period		34,684,142			10,749,300
Cash and Cash Equivalents at End of Period	$	27,625,972		$	23,104,904

Supplemental Cash Flow Disclosures:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	682,396		$	-

NOTE 1 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ShengdaTech Inc. and Subsidiaries (the “Company”) were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K filed on March 30, 2007 and other filings filed from time to time with the Securities and Exchange Commission.

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of Management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

NOTE 2 - Organization and Nature of Operations

Organization and nature of operations - On March 2, 1998, a group of 19 investors (referred to herein as the Investors), of which Mr. Chen Xiangzhi (Mr. Chen) holds a controlling interest, formed Shandong Shengda Nano Co., Ltd. (Shengda Nano) under the laws of the People’s Republic of China (PRC). Shengda Nano has developed, and manufactures and markets nano-sized precipitated calcium carbonate in the PRC for use in the production of automobile tires.

On November 13, 2001, the Investors formed Shandong Shengda Chemical Co., Ltd. (Shengda Chemical) under the laws of the PRC. Shengda Chemical manufactures and sells ammonium bicarbonate, liquid ammonia and methanol in the PRC for use as chemical fertilizer and in the production of other organic and inorganic chemical products including formaldehyde and pesticides.

During September 2004, the Investors formed Dongfang Nano-Materials Pte. Limited, a Singapore private limited company, subsequently renamed Eastern Nano-Materials Holdings Pte. Ltd. (Eastern Nano), and formed Shandong Haize Nano Co. Ltd. (Haize Nano) and Shandong Bangsheng Chemical Co. Ltd. (Bangsheng Chemical) as subsidiaries of Eastern Nano in the PRC (the Eastern Nano Subsidiaries). On November 24, 2004, the Investors agreed to transfer all of the operations and all of the assets and liabilities of Shengda Nano and Shengda Chemical, except for $7,822,477 of cash, $301,111 of other non-trade receivables, their land, land use rights and buildings, (the Acquired Assets) to the Eastern Nano Subsidiaries and to cause the Eastern Nano Subsidiaries to assume $1,343,442 of additional liabilities from the Investors. In June 2005, the Eastern Nano Subsidiaries consummated the acquisition of the Acquired Assets for $5,164,922. The purchase was financed and paid by Mr. Chen personally borrowing $5,250,000 from a third-party lender and paying $5,164,922 thereof to the Investors. The payments were made to the Investors in order to accomplish the transfer in accordance with the laws of the PRC and in accordance with the terms of the purchase agreement. Immediately thereafter, the Investors each repaid their proportionate share of $5,164,922 of Mr. Chen’s note payable to the third-party. The land, land use rights and buildings that Shengda Nano and Shengda Chemical retained were thereafter leased to the Eastern Nano Subsidiaries.

The transfer of the Acquired Assets to the Eastern Nano Subsidiaries was recognized in June 2005 as a reorganization of Shengda Nano and Shengda Chemical into the Eastern Nano Subsidiaries. The assets and liabilities of Shengda Nano and Shengda Chemical, including the assets retained by Shengda Nano and Shengda Chemical, were recorded at their historical carrying value of $28,249,003. The net assets that were retained by Shengda Nano and Shengda Chemical and the liabilities assumed from the Investors were recognized as distributions to the Investors at their fair values and consisted of the following:

Distribution to shareholders:
Cash	$	7,822,477
Other non-trade receivables		301,111
Land and buildings		5,821,565
Intangible assets - land use rights		7,795,486
Liabilities assumed		1,343,442

	$	23,084,081

Those net assets and the $5,164,922 paid to the Investors by Mr. Chen were recognized as capital distributions to the Investors totaling $28,249,003. The repayment by the Investors of $5,164,922 of Mr. Chen’s note payable to the third-party lender was recognized as an $8,609,846 non-cash capital investment into Eastern Nano by the Investors, which included a $3,444,924 receivable from a shareholder. The accompanying consolidated financial statements include the operations of Shengda Nano and Shengda Chemical for the periods prior to the reorganization and the operations of Eastern Nano and its subsidiaries for the periods after the reorganization.

On November 15, 2005, the Investors formed Faith Bloom Limited (Faith Bloom) under the laws of the British Virgin Islands. On December 31, 2005, Eastern Nano transferred the Eastern Nano Subsidiaries to Faith Bloom in exchange for the issuance of 10,000,000 shares of Faith Bloom common stock to the Investors. The transfer of the Eastern Nano Subsidiaries to Faith Bloom was recognized as a reorganization of Eastern Nano and the Eastern Nano Subsidiaries into Faith Bloom with the assets and liabilities remaining at their historical cost.

On March 31, 2006, Faith Bloom issued 1,293,795 shares of common stock to certain unrelated institutional and accredited investors in exchange for $15,000,000 less $1,030,286 of costs associated therewith. Upon consummation of this transaction and on the same date, Faith Bloom entered into an agreement with Zeolite Exploration Company, a Nevada corporation (”Zeolite”), to exchange all of Faith Bloom’s 11,293,785 outstanding common shares for 50,957,603 shares of Zeolite’s common stock. Subsequent to this transaction, the Faith Bloom shareholders owned 94.2% of Zeolite. Before the transaction, Zeolite had no operations. The transaction with Zeolite was recognized as a 4.5-for-1 stock split of the Faith Bloom common stock and the reverse acquisition of Zeolite’s net monetary assets totaling $63,509 in exchange for the 3,137,500 shares of common stock that remained outstanding. Faith Bloom’s assets and liabilities remained at their historical cost.

The accompanying consolidated financial statements have been restated on a retroactive basis to present the reorganizations of the Eastern Nano Subsidiaries into Faith Bloom and Faith Bloom into Zeolite as though the reorganizations had been in place for all periods presented. The operations of ShengdaTech, Inc. have been included in the accompanying financial statements from March 31, 2006.

During January 2007, the shareholders of Zeolite changed its name to ShengdaTech, Inc.

NOTE 3 - Significant Accounting Policies

Basis of Presentation and Translating Financial Statements - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of the operating subsidiaries in the PRC is the Chinese Yuan Renminbi (CNY); however, the accompanying financial statements have been expressed in United States Dollars (“USD”). The accompanying consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The accompanying consolidated statements of operations have been translated using the average exchange rates prevailing during the periods of each statement.

Consolidation - The accompanying consolidated financial statements include the accounts and transactions of Shengda Nano and Shengda Chemical through June 2005, the accounts of Eastern Nano from September 2004 through November 15, 2005, the accounts and transactions of Faith Bloom and its wholly owned subsidiaries from November 15, 2005 through March 31, 2006 and the accounts of ShengdaTech, Inc. and its wholly owned subsidiaries from March 31, 2006. These combined entities are referred to herein as “the Company.”

Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Fair Values of Financial Instruments - The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other non-trade receivables, advances to suppliers, receivable from related parties, trade accounts payable, other payables and accrued expenses, advances from customers, and payable to related parties approximate fair value because of the immediate or short-term maturity of these financial instruments.

Cash and Cash Equivalents - Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term certificates of deposit with original maturities of three months or less.

Trade Receivables and Allowance for Doubtful Accounts - Trade receivables are carried at original invoiced amounts. As a result of the Company historically having no write-offs and all accounts receivables being current, there were no doubtful accounts recorded as of June 30, 2007 and December 31, 2006

Inventory - Inventories are stated at the lower of cost or net realizable value, with cost determined on an average cost basis.

Valuation of Long-lived Assets - The carrying values of the Company's long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, the Company projects the undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections were to indicate that the carrying value of the long-lived asset will not be recovered, the carrying value of the long-lived asset is reduced by the estimated excess of the carrying value over the projected discounted cash flows.

Property and Equipment - Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Gains or losses on sales, trade-ins, or retirements are included in the statements of operations in the period of disposition, determined by reference to their carrying amounts.

Intangible Assets - Acquisition costs of land use rights are capitalized and amortized using the straight-line method over their estimated useful lives.

Advances to Suppliers and Advances from Customers - The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for materials, property, and equipment, or receive advance payments from customers. Advances to suppliers were $50,085 and $872,289 as of June 30, 2007 and December 31, 2006, respectively. Advances from customers were $0 and $119,923 as of June 30, 2007 and December 31, 2006, respectively.

Revenue Recognition - The Company recognizes revenues from the sale of products when they are realized and earned. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied. The Company sells all products to end-users and recognizes revenues when the products are shipped. The Company has no post-delivery obligations on its products sold.

Cost of Products Sold - Cost of products sold include wages, materials, handling charges, and other expenses associated with the manufacture and delivery of product.

Shipping and Handling Costs - Shipping and handling billed to customers are recorded as revenue. Shipping and handling costs are included in cost of products sold.

Research and product development expenses - Research and product development expenses are included in general and administrative expenses in the statements of income and include researching, developing, and testing of the Company’s products.

Retirement Benefit Plans - The Company contributes to various employee retirement benefit plans organized by provincial governments under which it is required to make monthly contributions at rates prescribed by the related provincial governments. The provincial governments undertake to assume the retirement benefit obligations of all existing and future retired employees of the Company. Contributions to these plans are charged to expense as incurred.

Basic and Diluted Earnings per Share - The computation of basic and diluted earning per share is based on the weighted-average number of shares outstanding during the periods presented. The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share and the weighted-average common shares outstanding, respectively:

		Three Months Ended June 30,				Six Months Ended June 30,
		2007		2006		2007		2006

Net income	$	6,032,887	$	3,157,860	$	11,439,515	$	6,651,438

Basic weighted-average common shares
outstanding		54,095,103		54,095,103		54,095,103		49,657,413
Effect of dilutive securities:
Warrants		162,285		162,285		162,285		81,143
Diluted weighted-average common shares
outstanding		54,257,388		54,257,388		54,257,388		49,738,556

Basic earnings per share	$	0.11	$	0.06	$	0.21	$	0.13
Diluted earnings per share	$	0.11	$	0.06	$	0.21	$	0.13

Other Comprehensive Income - Other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.

Credit Risk - The carrying amounts of trade accounts receivable and other non-trade receivables included in the consolidated balance sheets represent the Company’s exposure to credit risk in relation to its financial assets. No other financial assets carry a significant exposure to credit risk. The Company performs ongoing credit evaluations of each customer’s financial condition.

Recently Enacted Accounting Standards -In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). This pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and to recognize the resulting gains and losses in the results of operations. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The impact of adopting SFAS 159 on the Company’s consolidated financial statements, if any, has not yet been determined.

NOTE 4 - Inventory

Inventory consisted of the following:
	June 30, 2007		December 31, 2006
Raw materials	$	1,487,311	$	1,806,312
Finished goods		104,767		345,300
Total Inventory	$	1,592,078	$	2,151,612

NOTE 5 - Property and Equipment

Property and equipment consisted of the following:

	June 30, 2007			December 31, 2006
Building		8,011,128			1,854,717
Plant, machinery and equipment		36,149,038			25,106,521
Motor vehicle		120,058			108,851
Office equipment		89,092			84,241
Construction in progress		-			93,955
Total property and equipment		44,369,316			27,248,285
Less: accumulated depreciation		(4,637,976	)		(3,674,605	)

Total property and equipment, net		39,731,340			23,573,680

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which were as follows:

Asset		Life
Building		15 - 25
Plant, machinery and equipment		10 - 17
Motor vehicle		5 - 10
Office equipment		3 -5

Depreciation expense for the six months ended June 30, 2007 and 2006 was $858,658 and $343,939, respectively.

During the six months ended June 30, 2007, property and equipment increased $16,113,759. The increase was primarily due to the purchase of equipment for $9,755,250 to increase the NPCC production capacity of the Shanxi plant by an additional 40,000 tons. The increase was also due to the purchase of the NPCC factory plants in Shanxi for $5,837,707, purchase of equipment for the Shanghai R&D center of $106,830, and purchase of equipment for the Chemical segment of $413,972.

NOTE 6 - Intangible Assets

The Company’s intangible assets as of June 30, 2007 of $94,580 consist of land use rights, which are amortized over the 50-year life of those rights. Amortization expense for all periods presented is $0 as the rights were acquired on June 30, 2007 as described more fully in Note 9.

NOTE 7 - Income Taxes

Upon completion of the reorganization referred to in Note 2, the Company changed its fiscal year to December to conform to the fiscal year of its operating subsidiaries. The Company is not subject to any income taxes in the United States or the British Virgin Islands. The Company’s pre-tax income is comprised entirely from operations in the PRC. Enterprises with foreign investment and foreign enterprises doing business in the PRC are generally subject to federal (state) enterprise income tax at a rate of 30% and a local income tax at a rate of 3%. Effective at the beginning of 2005, the Company was granted a “tax holiday” that allows the Company to be exempt from both the federal and local income taxes for the first two profitable years. The “tax holiday” allows the Company to be exempt from 50% of both the federal and local income taxes during the third through the fifth years. The reduced federal and local rates for 2007 through 2009 are 15% and 1.5%, respectively.

NOTE 8 - Contingencies

Economic environment - Since all of the Company’s operations are conducted in the PRC, the Company is subject to special considerations and significant risks not typically associated with companies operating in the United States of America. These risks include, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Foreign currency remittance - All of the Company’s revenue is earned in the PRC and is denominated in the PRC’s currency of CNY, which must be converted into other currencies before remittance out of the PRC. Both the conversion of CNY into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government.

NOTE 9 - Related Parties

Receivable from related parties - At June 30, 2007 the Company had a receivable from Shandong Shengda Technology Co. Ltd. of $4,841,391 related to an advance made in anticipation of an acquisition of certain buildings. The transaction was not consummated and the funds were returned to the Company in July, 2007. At December 31, 2006, the Company had $1,601 receivable from Shengda Nanomaterials Company, respectively, which was used primarily for the purchase of equipment and machinery and was recorded at the cost of the assets purchased.

On June 30, 2007 the Company purchased certain buildings and land use rights from Shandong Shengda Technology Co. Ltd. The purchase price of $5,972,912 exceeded the cost of the assets paid by Shandong Shengda Technology Co. Ltd by $150,725 and, accordingly, this amount was treated as a distribution to Shandong Shengda Technology Co. Ltd. The cost of the building was recorded at $5,727,607 and the land use rights were recorded at $94,580, which represents the price originally paid to an unrelated third party.

NOTE 10 - Shareholders’ Equity

Common and preferred shares - In January 2007, the shareholders of the Company amended and restated the Company’s articles of incorporation and thereby: 1) changed the name of the Company from Zeolite Exploration Company to ShengdaTech, Inc.; 2) increased the authorized number of shares of common stock to 100,000,000, $0.0001 par value; and 3) authorized the issuance of 10,000,000 shares of preferred stock, $0.00001 par value. The shares of preferred stock may be issued in one or more series and may be granted voting rights, at the discretion of the Company’s board of directors.

Statutory Reserves - According to the Articles of Association, the Company is required to transfer a certain portion of its net profits, as determined under PRC accounting regulations, from net income to both the surplus reserve fund and the public welfare fund.

Warrant - On April 1, 2006, the Company issued a warrant to purchase 162,285 shares of common stock to a vendor for services provided. The exercise price was $2.57 per share and the warrant has a term of two years. The warrant had not been exercised as of June 30, 2007.

NOTE 11 - Segment Information

The Company operates in the following segments:

Nano-Materials - The Company is engaged in the development, manufacture, and marketing of nano-sized ultra fine Precipitated Calcium Carbonated (NPCC). Limestone is converted into NPCC by a proprietary production method. The unique chemical and physical attributes make NPCC a valuable functional ingredient in tire products.

Chemical - The Company is also engaged in the manufacture and sale of ammonia-based products, namely ammonium bicarbonate, liquid ammonia, and methanol. The ammonia-based products are mainly used as chemical fertilizers and raw materials for the production of other chemical products (both organic and inorganic,) including formaldehyde and pesticides.

Certain condensed segment information for the three and six month periods ending June 30, 2007 and 2006 follows:

For the Three Months Ended June 30, 2007	Chemical		Nano-Materials		Total
Sale of products	$	11,852,425	$	10,828,104	$	22,680,529
Cost of products sold		8,810,308		6,205,314		15,015,622
Selling expense		19,434		336,450		355,884
General and administrative expense		154,237		568,043		722,280
Depreciation and amortization		93,881		365,381		459,262
Segment income		2,433,818		3,599,069		6,032,887
Segment assets		38,556,937		43,632,983		82,189,920
Expenditures for segment assets		413,972		15,694,671		16,108,643

For the Three Months Ended June 30, 2006		Chemical		Nano-Materials		Total
Sale of products	$	10,774,346	$	3,517,441	$	14,291,787
Cost of products sold		8,062,882		2,226,966		10,289,848
Selling expense		18,110		186,339		204,449
General and administrative expense		228,070		420,346		648,416
Depreciation and amortization		76,194		99,584		175,778
Segment income		2,528,227		629,633		3,157,860
Segment assets		23,832,929		27,722,845		51,555,774
Expenditures for segment assets		-		58,295		58,295

For the Six Months Ended June 30, 2007		Chemical		Nano-Materials		Total
Sale of products	$	25,057,296	$	19,803,504	$	44,860,800
Cost of products sold		18,724,737		11,496,571		30,221,308
Selling expense		41,195		799,529		840,725
General and administrative expense		311,278		883,093		1,194,371
Depreciation and amortization		183,654		675,004		858,658
Segment income		5,069,815		6,369,700		11,439,515
Segment assets		38,556,937		43,632,983		82,189,920
Expenditures for segment assets		413,972		15,793,080		16,207,052

For the Six Months Ended June 30, 2006		Chemical		Nano-Materials		Total
Sale of products	$	23,349,984	$	7,266,673	$	30,616,657
Cost of products sold		17,875,496		4,613,910		22,489,406
Selling expense		32,920		409,942		442,862
General and administrative expense		503,047		684,376		1,187,423
Depreciation and amortization		151,866		192,073		343,939
Segment income		5,069,815		1,581,623		6,651,438
Segment assets		23,832,929		27,722,845		51,555,774
Expenditures for segment assets		1,110,757		58,295		1,169,052

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this quarterly report on Form 10Q. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those identified below, in “Risk Factors” and elsewhere in this quarterly report.

Overview

We are a leading manufacturer and supplier of NPCC for tires, plastics, paints, inks, papers and other products in China. We sell our NPCC products directly to leading tire and plastics manufacturers in Northern China. We also manufacture coal-based chemicals including ammonia bicarbonate, liquid ammonia, methanol and melamine. Our coal-based chemicals are delivered directly to our customers or through distributors in Shandong Province, China.

Reorganization

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

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

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

Revenue

We derive our revenues from two segments: NPCC and coal-based chemicals. The most significant factors that directly or indirectly affect our revenues are as follows:

manufacturing capacity of NPCC;

pricing of our NPCC; and

industry demand.

Manufacturing Capacity of NPCC. Our manufacturing capacity of NPCC products has been 30,000 metric tons annually from April, 2003. Sufficient capacity ensures a stable supply of NPCC for our customers which typically have a large demand for NPCC. We increased our annual manufacturing capacity of NPCC to 90,000 metric tons as of December 31, 2006 and 130,000 metric tons as of June 30, 2007. We plan to add an additional 60,000 metric tons of capacity in 2007.

Pricing of our NPCC product. The pricing of NPCC products is generally determined by the volume of NPCC we manufacture. The more we manufacture, the lower the price of NPCC will be. With respect to tire and PVC building materials, the pricing of NPCC products is principally affected by the cost saving benefit our customers realize by replacing some of the relatively expensive carbon black and PVC. With respect to paper, the pricing of NPCC is principally affected by comparable imports. In the next few years, we may reduce the selling price in order to compete with relatively small competitors. However, we still remain confident in retaining the current gross profit margin level because our unit costs of products are reduced by achieving economies of scale.

Industry demand. Our business and revenue growth depends on the industry demand of NPCC. The downstream industries we supply are tire, PVC building rubber, paints and oil ink. Given the difference between the overall demand of those industries, our growing R&D capacity and the quantity we currently supply our customers, we believe in the growth potential of our business.

Our ammonia-based chemicals supply local farmers and chemical plants located in Shandong and other surrounding provinces. We have a good relationship with our customers and our products have a good reputation in their markets. We believe the demand for our coal-based chemicals will remain stable in the next few years. But our chemical factory is located in the residential district. With the strong China governmental security and environment protection standards, it is possible the government will order us to shut down the factory or move to another location. As of June 30, 2007, we haven’t received any such order or notice from the government.

Seasonality. Our chemical business is generally the busiest between February and November of each year, when our ammonium bicarbonate is in the most demand due to the farming season in northern China. Our chemical revenue from this season generally accounts for 70-80% of the total chemical revenue per year. December to January is typically our slowest period during which the price of our ammonium bicarbonate drops approximately 6-8%.

Cost of Revenue

Cost of revenue for both NPCC and chemicals consists primarily of (a) consumption of raw materials and auxiliary raw materials (b) use of water and electricity (c) machinery’s depreciation and (d) workers’ salaries.

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

processing technologies of NPCC; and

availability and price of coal.

Process technologies of NPCC. The advancement of NPCC processing technologies is crucial in order to deliver value to our clients. We have successfully completed the research of a new generation membrane-dispersion technology in conjunction with Tsinghua University. The technology has been verified by experts and is in the process of becoming patented. The Company and Tsinghua University each have 50% ownership of the technology and the Company has the exclusive (100%) right to use the technology. This new technology will enable us to produce NPCC in a more efficient and cost effective way.

Availability and Price of Coal. Coal is the key raw material for making our coal-based chemicals as well as the key fuel for calcination of limestone. We have long-term relationships with our coal suppliers. We have developed a network of supplier alternatives for backup purposes. Coal prices have fluctuated in the past few years and the price curve turned relatively flat in the second half of 2005. The average price of coal was approximately $70 per metric ton in 2004 and increased to approximately $80 per metric ton in 2005 and $90 in 2006. In second quarter of 2007, it was approximately $97 per metric ton.

Gross Profit

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

Operating Expenses

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

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

Significant Accounting Policies

Fair Values of Financial Instruments - The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, receivable from related parties, trade accounts payable, other payables and accrued expenses, advances from customers, and payable to related parties approximate fair value because of the immediate or short-term maturity of these financial instruments.

Inventory - Inventories are stated at the lower of cost or net realizable value, with cost determined on an average cost basis.

Advances to Suppliers and Advances from Customers - The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for materials and manufactures for equipments and plants, or receive advance payments from customers. Advances to suppliers were $50,085 and $872,289 as of June 30, 2007 and December 31, 2006, respectively. Advances from customers were $0 and $119,923 as of June 30, 2007 and December 31, 2006, respectively.

Cost of Products Sold - Cost of products sold include wages, materials, handling charges, and other expenses associated with the manufacture and delivery of product.

Shipping and Handling Costs - Shipping and handling billed to customers is recorded as revenue. Shipping and handling costs are included in cost of products sold.

Basic and Diluted Earnings per Share - The computation of basic and diluted earning per share is based on the weighted-average number of shares outstanding during the period presented.

Other Comprehensive Income - Other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.

Results of Operations

Comparison of Three Months Ended June 30, 2007 and 2006

Revenue

	For the Three Months Ended June 30,
	2007				2006				Period to Period Change
	Amount($)		% of Total Revenue		Amount ($)		% of Total Revenue		Amount ($)		%
Chemical		11,852,425		52.26		10,774,346		75.39		1,078,079		10.01
Nano		10,828,104		47.74		3,517,441		24.61		7,310,663		207.84
Total Revenue		22,680,529		100		14,291,787		100		8,388,742		58.70

Total Revenue

The total revenue of our chemical business increased by $1,078,079 or 10.01% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to (i) additional revenue of $538,225 from an increase in sales of liquid ammonia by 1,527.94 tons and an increase in sale price by $2.8 per ton; (ii) additional $396,658 from an increase in sales of melamine by 411 tons which was offset by a decrease in sale price by $6.57 per ton; (iii) $8,885 from a decrease in sales of ammonium bicarbonate by 632 tons which was offset by an increase in sale price by $0.85 per ton, and (iv) additional $351,593 from the change of exchange rate between RMB and USD, for our functional currency is RMB, which was offset by decreased revenue from methanol for $217,282. The reason for the decrease in revenue of methanol was due to the decrease in sale price by $22.94 per ton and a decrease in sales by 132 tons. The increase and decrease of sales for the chemical products were caused by the adjustment of our product mix due to market conditions and the fluctuation of the chemical market.

The increase of total revenue from our NPCC business was $7,310,663 or 207.84% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to (i) $7,298,089 additional revenue from an increase in sales by 19,382.50 tons as a result of our capacity expansion, (ii) additional $168,321 from the change of the exchange rate between RMB and USD, which was offset by the $155,747 revenue decrease as a result of the decreased sales price. The average sale price of NPCC for the second quarter of 2007 was $17.34 lower per ton compared to the corresponding period of the prior year. We have a cost advantage due to the adoption of new technology and lower raw materials cost at our Shannxi NPCC facilities. As a result, we sold our products to our customers at a more competitive price while being able to maintaining our gross profit margin.

Cost of Revenue and Gross Profit

	For the Three Months Ended June 30,								Period to Period
	2007				2006				Change
	Amount ($)		% of Total Revenue		Amount ($)		% of Total Revenue		Amount ($)		%
Cost of Revenue
Chemical		8,810,308		74.33		8,062,882		74.83		747,426		9.27
Nano-material		6,205,314		57.31		2,226,966		63.31		3,978,348		178.64
Total Cost of Revenue		15,015,622		66.20		10,289,848		72.00		4,725,774		45.93

Gross Profit
Chemical		3,042,117		25.67		2,711,464		25.17		330,653		12.19
Nano-material		4,622,790		42.69		1,290,475		36.69		3,332,315		258.22
Total Gross Profit		7,664,907		33.80		4,001,939		28.00		3,662,968		91.53

The cost of revenue for our chemical business increased by $747,426 or 9.27% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to: (i) additional $545,803 from the increase in sales of liquid ammonia and melamine, (ii) additional $135,276 from the increase in the price of coal by $1.38 per ton; (iii) additional $ 217,342 from the increased price of electricity by $0.0039 per kwh, which was offset by $150,995 from the decreased sales of methanol.

The gross profit of our chemical business increased from 25.17% for the second quarter in 2006 to 25.67% for the second quarter in 2007. The gross profit increased by $330,653 or 12.19% for the following reasons (1) an increase of gross profit by $149,935 as a result of increase of the sales of liquid ammonia by 1,527 tons and the average selling price of liquid ammonia by $2.79 per ton; (2) an increase of gross profit by $150,379 as a result of an increase of sales of melamine, which was offset by a decrease of gross profit by $89,437 caused by a decreasein sales of methanol by 131.7 tons.

The cost of revenue of our NPCC business increased by $3,978,348 or 178.64% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. This was mainly due to the increase in sales by 19,382.50 tons as a result of capacity expansion.

Our gross profit of NPCC increased from 36.69% for the second quarter in 2006 to 42.69% for the second quarter in 2007. This was mainly due to several reasons (i) the unit cost of our products decreased by 17.52% as the result of the introduction of new technology and the expansion of capacity and lower cost of raw materials at our new factory; which was offset by the average selling price decrease by 8.9%, which resulted in an increase in gross profit of $3,332,315 or 258.22%.

Operating Expenses

	For the Three Months Ended June 30,								Period to Period
	2007				2006				Change
	Amount ($)		% of Total Revenue		Amount ($)		% of Total Revenue		Amount ($)		%
Sales and Marketing Expenses
Chemical		19,435		0.16		18,110		0.17		1,325		7.31
NPCC		336,450		3.11		186,339		5.30		150,111		80.56
Total Sales and Marketing Expenses		355,885		1.57		204,449		1.43		151,436		74.07
General and Administration Expenses
Chemical		154,237		1.30		228,070		2.09		-73,833		-32.37
NPCC		568,043		5.25		420,346		11.74		147,697		35.14
Total General and Administration Expenses		722,280		3.18		648,416		4.48		73,864		11.39

Sales and Marketing expenses of our chemical business increased by $1,325 or 7.31% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The main reason was that sales commission increased as a result of the increase of sales.

Sales and Marketing expenses of our NPCC business increased by $150,111 or 80.56% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The main reason was that sales commission increased by $233,734 as a result of the increase of sales, which was offset by the decrease of $83,623 caused by the lower sales commission rate.

The general and administrative expenses of our chemical business decreased by $73,833 or -32.37% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The main reasons were: (i) a $10,513 decrease in business expenses and office expenses; and (ii) a $70,054 decrease in the expenses related to being a public company, which was offset by a $6,734 increase in insurance costs.

The general and administrative expenses of our NPCC business increased by $147,697 or 35.14% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. The main reasons were: (i) a $142,591 increase in salary, business expenses, office expenses and insurance etc. as a result of the opening of the new facility in Shaanxi; and (ii) a $283,419 increase in the expenses related to being a public company, which was offset by a $278,313 decrease in technology license fees.

Operating and Other Income

	For the Three Months Ended June 30,
	2007				2006				Period to Period Change
	Amount($)		% of Total Revenue		Amount($)		% of Total Revenue		Amount($)		%
Income from Operations		6,586,742		29.04		3,149,074		22.04		3,437,668		109.16
Interest Income		64,549		0.28		8,786		0.06		55,763		634.68
Provision for income taxes		618,404		2.73		-				618,404
Net Profit		6,032,887		26.60		3,157,860		22.10		2,875,027		91.04

Operating income increased by $3,437,668 or 109.16% for the quarter ended June 30, 2007 compared to the corresponding period of the prior year. This was mainly due to the increased revenues of $8,388,742 which was offset by an increase of cost of revenue of $4,725,774 and an increase in operating expenses in the amount of $225,299.

Interest income for the quarter ended June 30, 2007 increased by $55,763 or 634.68%. Such increase was due to the fact that more cash was on deposit at our banks.

For the quarter ended June 30, 2007, an increase in income tax by $618,404 due to the fact that the tax holidays for two of our facilities expired. Under the Chinese tax law, these two facilities are subject to an income tax at the rate of 16.5% from the third year to the fifth year of generating profits.

Comparison of Six Months Ended June 30, 2007 and 2006

Revenue

	For the Six Months Ended June 30,								Period to Period
	2007				2006				Change
	Amount ($)		% of Total Revenue		Amount ($)		% of Total Revenue		Amount ($)		%
Chemical		25,057,296		55.86		23,349,984		76.27		1,707,312		7.31
Nano-material		19,803,504		44.14		7,266,673		23.73		12,536,831		172.53
Total Sales		44,860,800		100		30,616,657		100		14,244,143		46.52

The total revenue of our chemical business increased by $1,707,312 or 7.31% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to: (1) additional revenue of $2,846,792 from increased sales of liquid ammonia by 11,210.96 tons which was offset by the decrease in selling price by $1.39 per ton; (2) additional $944,560 from an increase in sales of melamine by 663.5 tons whose selling price increased by $3.71 per ton; (3) additional $151,322 from an increase in sales of methanol by 591.07 tons which was offset by the decrease in selling price by $1.99 per ton; (4) additional $580,761 from the change of exchange rate between RMB and USD, which was offset by a $2,816,133 decrease in the revenue of ammonium bicarbonate as a result of a 48,434 tons decrease of sales due to products mix adjustments according to the market demand.

The increase of total revenue of our NPCC business was $12,536,831 or 172.53% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. The increase was primarily caused by: (i) additional $12,421,314 of revenue from an increase in sales by 33,377.17 tons as a result of our capacity expansion; and (ii) additional $393,550 revenue from the change of exchange rate; which was offset by the $278,033 decrease as a result of the lower selling price. The average selling price of NPCC decreased by $15.87 per ton for the six months ended June 30, 2007 compared to the corresponding period of the prior year. We have a cost advantage due to the adoption of new technology and lower raw materials cost. As a result, we sold our products to our customers at a more competitive price while still maintaining our gross profit. margin.

Cost of Revenue and Gross Profit

	For the Six Months Ended June 30,
									Period to Period
	2007				2006				Change
	Amount($)		% of Total Revenue		Amount($)		% of Total Revenue		Amount ($)		%
Cost of Revenue
Chemical		18,724,737		74.73		17,875,496		75.92		849,241		4.75
Nano-material		11,496,571		58.05		4,613,910		62.40		6,882,661		149.17
Total Cost of Revenue		30,221,308		67.37		22,489,406		72.69		7,731,902		34.38

Gross Profit
Chemical		6,332,559		25.27		5,474,488		23.45		858,071		15.67
Nano-material		8,306,933		41.95		2,652,743		36.51		5,654,170		213.14
Total Gross Profit		14,639,492		32.63		8,127,251		26.55		6,512,241		80.13

The cost of revenue of our chemical business increased by $849,241 or 4.75% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. The main reasons were: (i) an increase of $2,243,595 due to a sales increase of liquid ammonia, melamine and methanol; (ii) the price of coal increased by $1.30 per ton, which resulted in an increase of $375,532 in cost of revenue; and (iii) the electricity price increased by $0.0039 per kw/h, resulting an increase of $554,916; which was offset by a $2,324,802 decrease due to the decrease in ammonia bicarbonate sales by 48,434 tons.

The gross profit margin of our chemical business increased from 23.45% to 25.27%. This was mainly because we carried out technological improvements in the second quarter and lowered the coal consumptions. As a result, the unit price of ammonia bicarbonate deceased by 3.72%. The price of liquid ammonia and methanol decreased $1.39 per ton and $1.99 per ton, respectively compared to the same period last year, which lowered the gross margin by 1.77% and 0.77%, respectively. The cost reductions brought about by the technological improvements were offset by the gross margin decrease due to the product price decrease, which resulted in a gross profit increase of $858,071 or 15.67%.

The cost of revenue of NPCC business increased by $6,882,661 or 149.17% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. This was mainly due to the increase in sales by 33,377.17 tons as a result of capacity expansion.

Our gross profit margin of NPCC increased from 36.51% to 41.95%. This was mainly due to the unit cost of our products decreased by 22.35% as the result of the introduction of new technology and the expansion of capacity and lower cost of raw materials at our new factory in Shaanxi; which was offset by a decrease by the average selling price of 8.5 %, which together resulted in an increase in gross profit of $5,654,170 or 213.14%.

Operating Expenses

	For the Six Months Ended June 30,
	2007				2006				Period to Period Change
	Amount($)		% of Total Revenue		Amount($)		% of Total Revenue		Amount($)		%
Selling Expenses
Chemical		41,196		0.16		32,920		0.14		8,276		25.14
Nano		799,529		4.04		409,942		5.64		389,587		95.03
Total		840,725		1.87		442,862		1.45		397,863		89.84
G&A Expenses
Chemical		311,278		1.24		503,047		2.15		-191,769		-38.12
Nano		883,093		4.46		684,376		9.42		198,717		29.04
Total		1,194,371		2.66		1,187,423		3.88		6,948		0.59

Selling expenses of chemical business for the six months ended June 30, 2007 increased by $8,276 or 25.14%, compared to the corresponding period of the prior year. The main reason was that sales commission increased as a result of the increase of sales.

Selling expenses of NPCC for the six months ended June 30, 2007 increased by $389,587 or 95.03%, compared to the corresponding period of the prior year. The main reason was due to the increase of $523,737 of sales commission as a result of the increase of sales which was offset by a decrease of $134,150 due to a decrease in sales commission rate. In April 2007 we adjusted the commission rate for NPCC products from 5% to 3%. Such adjustments were based on the continuous increase of our market share and expansion of our capacity; therefore, there appeared to be no negative effects on our business.

The general and administrative expenses of chemical business decreased by $191,769 or -38.12% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. The main reasons were 1) less expenses related to being a public company; 2) a $15,061 decrease of business and office expenses which was offset by the increase of insurance fees and salary for $57,299 and $15,992, respectively.

The general and administrative expenses of NPCC increased by $198,717 or 29.04% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. The main reasons were (i) the increase of $193,668 in salary, business expenses, office expenses, insurance expenses, etc at the new facility in Shannxi and (ii) $280,308 of expenses related to being a public company, which were offset by a decrease of $275,259 in technology license fees..

Operating and Other Income

	For the Six Months Ended June 30
	2007				2006				Period to Period Change
	Amount($)		% of Total Revenue		Amount($)		% of Total Revenue		Amount($)		%
Income from Operations		12,604,396		28.10		6,496,966		21.22		6,107,430		94.00
Interest Income		132,286		0.29		44,476		0.15		87,810		197.43
Other Income						109,996		0.35		-109,996
Income Tax		1,297,167		2.89		-				1,297,167
Net Profit		11,439,515		25.50		6,651,438		21.72		4,788,077		71.99

Operating income increased by $6,107,430 or 94.00% for the six months ended June 30, 2007 compared to the corresponding period of the prior year. This was mainly due to the increased revenues of $14,244,143 which was offset by an increase of cost of revenue for $7,731,902 and an increase in operating expenses of $404,811.

Interest income for the six months ended June 30, 2007 increased by $87,810 or 197.43%. Such increase was due to the fact that more cash was on deposit at our banks.

For the six months ended June 30, 2007, there was no other income.

For the six months ended June 30, 2007, an increase in income tax by $1,297,167 due to the fact that the tax holidays for two of our facilities expired. Under the Chinese tax law, these two facilities are subject to income tax at the rate of 16.5% from the third year to the fifth year of generating profit.

Liquidity and Capital Resources

The following tables sets forth certain information about our liquidity and capital resources:

	As of June 30, 2007	As of December 31, 2006
Cash and Cash Equivalents	27,625,972	34,684,142
Trade Account Receivable, Net	8,235,904	5,588,676
Working Capital	30,189,709	33,555,584

	For the six months ended June, 30, 2007	For the six months ended June 30, 2006
Net cash provided by operating activities	13,823,898	1,177,915
Net cash used in investing activities	(16,207,052)	(1,169,052)
Net cash used in (provided by) financing activities	(5,350,485)	12,043,264

As of June 30, 2007, we had working capital of $30,189,709, including cash and cash equivalents of $27,625,972, and accounts receivable of $8,235,904; As of December 31, 2006, we had working capital of $33,555,584, including cash and cash equivalents of $34,684,142, and accounts receivables of $5,588,676. During the six months ended June 30, 2007, our working capital decreased by $3,365,875, with cash and cash equivalents decreased by $7,058,170 and accounts receivables increased by $2,647,228. The changes were primarily due to expansion of our NPCC capacity.

Net cash provided by operating activities was $13,823,898 for the six months ended June 30, 2007 as compared to $1,177,915 provided by operating activities for the six months ended June 30, 2006.

Net cash used in investing activities for the six months ended June 30, 2007 was $16,207,052, representing amounts used to purchase property and equipment. Net cash used in investing activities for the six months ended June 30, 2006 was $1,169,052, which was also used for the purchase of property and equipment.

Net cash used in financing activities for the six months ended June 30, 2007 was $5,350,485. Accounts receivable related parties increased by $4,839,790 which was paid in July 2007. In addition, the difference between the purchasing price and cost of plant and land use rights purchased from related parties in the amount of $93,293 was considered a distribution to shareholders. Net cash provided by financing activities for the six months ended June 30, 2006 was $12,043,264, consisting of $13,969,714 in net proceeds from the sale of equity securities of Faith Bloom and $1,926,450 in other receivables.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We currently do not have any long-term debt. Our exposure to interest rate risk primarily relates to the interest income generated by excess cash invested in demand deposits. We have not used derivative financial instruments in our investment portfolio in order to reduce interest rate risk. Interest earning instruments carry a degree of interest rate risk and our future interest income may change, depending on market interest rate movement.

Foreign Currency Risk

Our business is operated in the PRC, and its value is effectively denominated in Renminbi. The fluctuation of foreign exchange rate between U.S. dollars and Renminbi could affect the value of our common stock. Our revenues and expenses are primarily denominated in Renminbi, and so our exposure to foreign exchange risks should generally be limited. We do not have material monetary assets and liabilities denominated in U.S. dollars, although to the extent that we do in the future, the fluctuation of foreign exchange rate would affect the value of these monetary assets and liabilities denominated in U.S. dollars. Generally, appreciation of Renminbi against U.S. dollars will devaluate the assets and liabilities denominated in U.S. dollar, while devaluation of Renminbi again U.S. dollars will appreciate the assets and liabilities denominated in U.S. dollar. In China, very limited hedging transactions are available to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all.

ITEM 4—CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”); and whether any change has occurred in the Company’s internal control over financial reporting pursuant to Exchange Act Rules 13a-15(d) and 15d-15(d). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b) Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting that occurred in the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1A—RISK FACTORS

Risks Related To Our NPCC Business

We may not be able to maintain our lead in NPCC technology. At present, we are the only NPCC manufacturer that supplies the tire industry in China and also the largest NPCC manufacturer in China in terms of manufacturing capacity. Our competitive edge depends heavily on the new technology employed in our NPCC manufacturing process. If a better technology than ours can be developed for manufacturing NPCC or a new product can be developed to replace NPCC, we may lose our competitive advantage and our results may be adversely impacted.

Our NPCC products have limited application. We may not be able to increase the market for our NPCC products. Presently, our existing NPCC products are used as additives for tires, polyvinyl chloride (“PVC”) building materials, paints and inks. Our products, therefore, depend heavily on a limited number of industries. Our growth potential may be limited if we cannot expand the market for our existing NPCC products or develop new products for other industries. Although we have increased our research and development to expand the range of application of our NPCC products, there is no assurance that we will succeed in our effort.

We may not be able to continue to produce high-quality NPCC products, which may negatively impact our business. Our NPCC products are in demand because of their high quality. If we fail to continue to produce high quality NPCC products, our reputation may be harmed and our business may suffer as a result.

Our NPCC business depends significantly on the tire industry. If the composition of tires changes and we fail to develop formulas that are applicable for the new composition, our NPCC business could be harmed. Currently, our NPCC business derives a significant amount of revenues from sales to tire manufacturers. Due to our modification technology, our modified NPCC products can be used in tire production to obtain desired properties since the current tire composition allows for calcium carbonate as an additive. If the composition of tires changes in the future, our modification technology may not be compatible with the change. As a result, our NPCC business could suffer.

Risks Related to Our Coal-Based Chemical Business

Our revenues from coal-based chemical products depend heavily on government policies. If the government changes its policies, our revenues and profit from our chemical products could decrease significantly. To boost the income of millions of Chinese farmers and enhance China’s national security, the Chinese government has instituted policies that encourage farmers in China to increase their production of grains by limiting the price of ammonium fertilizers while at the same time providing the fertilizer industry some relief, including capping the price of raw materials, providing for preferential pricing for electricity and exempting value added tax. Due to the policies, our chemical business is able to realize a profitable margin. However, the Chinese government changes its policies from time to time. If the Chinese government changes the policies currently in place that compensate our loss due to the price control, our revenues and profit from our chemical business could suffer.

Our coal-based chemical manufacturing business is highly risky and hazardous. We may face environmental and safety problems. Our chemical manufacturing process produces exhaust gas and waste water which may pollute the environment. If an accident occurs in our chemical plant, toxic gas and other pollutants could leak and cause serious pollution problems. Moreover, most of our chemical products are flammable, explosive, and dangerous, and pose a threat to the health and safety of our employees and residents around our facility, and if any accident occurs during manufacturing or in transportation, there could be dire consequences.

Some of our coal-based chemical products experience a glut of supply. Our chemical business may suffer if the oversupply lasts for an extended period. Due to an overcapacity of production facilities and increase in foreign imports, the price for coal based chemicals, especially methanol and melamine, has decreased significantly in the last two years. Due to the low cost of our production process, this price decrease has not had a significant impact on our results. However if the oversupply lasts for an extended period, our chemical business may suffer.

China is tightening its environmental law and strengthening its enforcement, which could adversely affect our chemical business. With increased environmental awareness among Chinese citizens, the Chinese government is beginning to tighten environmental laws and regulations. Recently, the Chinese government has stepped up its enforcement efforts due to the occurrence of several significant environmental disasters. Our coal-based chemical plant is located very close to residential and business properties. If the government decides to toughen its environmental policies and order us to cease operation or relocate, our business could be significantly harmed.

Risks Related to Our Operations

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

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

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

Risks Related to Our Material Supply and Product Distribution

The cost of our raw materials fluctuates significantly, which may adversely impact our profit margin and financial position. Both our NPCC and chemical businesses use coal as raw material. In the last few years, coal prices have fluctuated substantially. Although the price for coal dropped last year, it may increase in the future due to the rapid development of the Chinese economy and the resulting demand for energy. If the price for coal increases again, our profit margin could decrease considerably.

We are dependent on our suppliers for key materials such as coal and limestone. Coal and limestone are the key raw materials for our business. We use a large amount of coal and limestone in our manufacturing process. We have to purchase these raw materials from suppliers since we do not mine coal or limestone ourselves. As a result, any failure to secure and maintain the purchase and management of such key raw materials could materially and adversely affect our business, financial condition and operating results.

We receive a significant portion of our revenues from a small number of customers. Our business will be harmed if our customers reduce their orders from us. Our NPCC products are sold to only a small number of major customers mainly located in Shandong Province and northern China with large orders each year. Our major chemical product liquid ammonia is sold only to a small number of major customers with large orders located within a short distance of our facilities due to the fact that shipping any product long-distance will make it non-competitive in price. Although no customer individually accounted for more than 10% of our total revenues for the fiscal year ended December 31, 2006 in our aggregate business, our four largest customers in the tire and PVC segments accounted for 42.5% and 59.48%, respectively, of our revenues from these segments in fiscal 2006. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer ceases purchasing. If we lose any customers and are unable to replace them with other customers that would purchase a similar amount of our products, our revenues and net income would decline considerably.

We extend relatively long payment terms for accounts receivable. If any of our customers fails to pay us, our revenues may be affected as a result. As is customary in China, we extend relatively long payment terms to our customers ranging from 45 to 90 days. As a result of the size of many of our orders, these extended terms adversely affect our cash flow and our ability to fund our operations from our operating cash flow. The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.

Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely fashion, even on our extended terms. This failure to pay timely may defer or delay further product orders from us, which may adversely affect our cash flows, sales or income in subsequent periods.

Risks Related to Our Management and Personnel

Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any increased demand for our NPCC products and possibly hurting our operating results. Our business plan is to significantly grow our operations to meet anticipated growth in demand for existing NPCC products. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

the continued acceptance of our NPCC products by the tire industry;

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

the costs associated with such growth, which are difficult to quantify, but could be significant;

rapid technological change; and

the highly competitive nature of the fine calcium carbonate industry.

If we are successful in obtaining rapid market growth of our NPCC products, we will be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost to those customers. Meeting any such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we produce products. Such demands would require more capital and working capital than we currently have available.

We depend on key personnel for our business operations. Our future success depends substantially on the continued services of our executive officers, especially Xiangzhi Chen, our chief executive officer and chairman of our board of directors, Xukui Chen, head of chemical business, and Zhaowei Ma, head of our NPCC business. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.

We have difficulties attracting highly-trained personnel. Our business may be harmed as a result. Our business is located in a small city where there are few institutions of higher learning. Our business, however, requires well-trained technical and engineering personnel. Experienced personnel typically tend to be concentrated in major metropolitan areas and may be unwilling to relocate to a small city. If we are not able to recruit the necessary experienced personnel, we could have a shortage of skilled workers and may not be able to cope with the rapid expansion of our business.

Risks Related to Our Technology

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

We claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We protect our proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements. If these contractual measures fail to protect our proprietary rights, any advantage those proprietary rights provide to us would be negated. Our NPCC products are differently formulated for different applications. The formulas are maintained as trade secrets and are revealed only to a small number of technical and management personnel. The trade secrets provide us a competitive edge in the tire industry and no other NPCC manufacturers have successfully entered the tire industry. If any of the trade secrets are divulged, we could lose our competitive edge in the tire industry and others.

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

We may not be able to secure patent for our membrane dispersion technology for manufacturing NPCC, which may have an adverse impact on our business. Our new NPCC facility in Shaanxi employs the membrane dispersion technology which was developed jointly by us and Tsinghua University. The technology enables us to manufacture NPCC with better quality and lower costs. We have applied to China’s State Patent Office for a patent on the technology. Although our application was published for public comments in May last year, there is no assurance that we will eventually obtain the patent. If the Chinese state Patent Office denies our application because our technology is not patentable or someone challenges our application, our business may be adversely impacted.

Risks Related To Our Industry

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

Our failure to comply with ongoing governmental regulations could hurt our operations and reduce our market share. In China, the chemical industry is undergoing increasing regulations as environmental awareness increases in China. The trend is that the Chinese government toughens its regulations and penalties for violations of environmental regulations. New regulatory actions are constantly changing our industry. Although we believe we have complied with applicable government regulations, there is no assurance that we will be able to do so in the future.

If we cannot compete successfully for market share against other NPCC product companies, we may not achieve sufficient product revenues, and our business could suffer. The market for our products is characterized by intense competition and rapid technological advances. Our products compete with a multitude of products developed, manufactured and marketed by others and we expect competition from new market entrants in the future. Existing or future competing products may provide better quality, greater utility, lower cost or other benefits from their intended uses than our products, or may offer comparable performance at lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues, and our business would suffer.

Risks Related To Doing Business In China

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

Level of government involvement in the economy;

Control of foreign exchange;

Methods of allocating resources;

Balance of payments position;

International trade restrictions; and

International conflict.

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

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

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. China only recently has permitted provincial and local economic autonomy and private economic activities. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy, or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we hold in Chinese properties.

Future inflation in China may inhibit our activity to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

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

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

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

We may be treated as a resident enterprise for PRC tax purposes after the Enterprise Income Tax Law becomes effective on January 1, 2008, which may subject us to PRC income tax for any dividends we receive from our subsidiaries and PRC income tax withholding for any dividends we pay to our non-PRC shareholders. The Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and will generally be subject to the uniform 25.0% enterprise income tax rate as to their global income, including income we receive from our subsidiaries. The term “de facto management bodies” is not defined under the Enterprise Income Tax Law and it is currently unclear in which situations a non-PRC enterprise’s “de facto management body” is located in China. All of our management is currently based in China, and if a majority of the members of our management team continue to be located in China after the effective date of the Enterprise Income Tax Law, we may be considered a PRC resident enterprise and therefore subject to PRC enterprise income tax at the rate of 25% on our worldwide income, which will include any dividend income we receive from our subsidiaries. If we are required under the Enterprise Income Tax Law to pay income tax for any dividends we receive from our subsidiaries, our revenues could decrease significantly.

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

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

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

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

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

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

·	a general slowdown in the Chinese economy.

Risks Related To The Market For Our Stock

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

·	actual or anticipated variations in our quarterly operating results;

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

·	announcements relating to strategic relationships or acquisitions;

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

·	statements by securities analysts regarding us or our industry;

·	conditions or trends in the our industry; and

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

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

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

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

We will incur increased costs as a result of changes in laws and regulations relating to corporate governance matters. As a public reporting company, we will need to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC and by The NASDAQ Capital Market, including expanded disclosures, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional management resources. Additionally, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements.

We may not be able to achieve and maintain an effective system of internal control over financial reporting, a failure which may prevent us from accurately reporting our financial results or detecting and preventing fraud. We will be subject to reporting obligations under the U.S. securities law. Beginning with out annual report on Form 10-K for the fiscal year ending December 31, 2007, we will be required to prepare a management report on our internal control over financial reporting containing our management’s assessment of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal controls over our financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective our independent registered public accounting firm may still decline to attest to the effectiveness or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

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

If our executive officers, directors and principal stockholders choose to act together, they will be able to exert significant influence over us and our significant corporate decisions and may act in a manner that advances their best interests and not necessarily those of other stockholders. Our executive officers, directors, and beneficial owners of 5% or more of our outstanding common stock and their affiliates will beneficially own approximately 48.2% of our outstanding common stock. As a result, these persons, acting together, will have the ability to influence significantly the outcome of all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including investors in this offering, by, among other things:

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

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entrenching our management and/or our board of directors;

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

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

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

It may be difficult for you to enforce any judgment in the United States against our company, which may limit the remedies otherwise available to our shareholders. All of our executive officers and our directors are residents of China, and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

ITEM 6. EXHIBITS


31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SHENGDATECH, INC.

Date: August 9, 2007	By:	/s/ XIANGZHI CHEN
		Xiangzhi Chen Chief Executive Officer (Principal Executive Officer)


	SHENGDATECH, INC.

Date: August 9, 2007	By:	/s/ ANHUI GUO
		Anhui Guo Chief Financial Officer (Principal Financial and Accounting Officer)