omniture

ShengdaTech, Inc. Announces Record Fourth Quarter and Full-Year 2008 Results

2009-04-03 02:36 1594

Record full-year revenue climbs 48.5% to $149.4 million, year-over-year

TAI'AN CITY, China, April 3 /PRNewswire-Asia/ -- ShengdaTech Inc. ("ShengdaTech" or "The Company") (Nasdaq: SDTH), a leading manufacturer of nano precipitated calcium carbonate ("NPCC"), today reported financial results for the fourth quarter ended December 31, and full-year 2008.

Fourth Quarter 2008 Highlights

-- Revenue increased 11.0% year-over-year to $31.8 million, with only one

month chemical segment revenue

-- Gross margin increased 7.2 percentage points year-over-year to 43.0%

-- Net income increased 62.8% year-over-year to $12.7 million, or $0.11

per diluted share

-- EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

increased 104.6% year-over-year to $18.5 million

-- Ceased production at Bangsheng chemical facility in Tai'an City

-- Engaged KPMG as the Company's new independent registered public

accounting firm

-- Recorded a $9.0 million pretax gain related to the repurchases of $19.8

million face value of the Company's 6.0% convertible senior notes

during the fourth quarter

Full-Year 2008 Highlights

-- Revenue increased 48.5% to $149.4 million, exceeding guidance of $132

million, to $134 million

-- NPCC revenue increased 76.4% to $82.4 million, contributing 55.2% to

total revenue

-- Net income increased 48.1% to $40.0 million, or $0.60 per diluted share,

exceeding guidance of $33 million, to $35 million

-- EBITDA increased 80.1% to $57.1 million

-- Successfully developed new NPCC application for color ink jet paper,

polyethylene (PE) plastic products and NPCC for automobile undercoating

paints

-- Commenced the production and product shipment from the three new

stainless steel NPCC lines with an annual capacity of 60,000 metric ton

("MT") NPCC at the Company's Xianyang City factory in Shaanxi Province

-- Total production capacity reached 190,000 MT compared to 130,000 MT in

2007

The Company is reporting pro forma financial statements for the fourth quarter and full-year 2008 because such presentation reflects ShengdaTech's historical GAAP results adjusted to remove (1) the impact of $3.9 million in expenses recorded in the fourth quarter associated with the impairment of property, plant and equipment related to the cessation of production at Shandong Bangsheng Chemical Co., Ltd. ("Bangsheng Chemical"), the Company's sole manufacturing facility in Tai'an City, effective October 31, 2008 pursuant to a notice from the local government; as of December 31, 2008, management had plans to continue the Bangsheng Chemical operations through the acquisition of Jinan Fertilizer Co., Ltd. ("Jinan Fertilizer"), therefore concluded that the Company did not satisfy the criteria for discontinued operations reporting; in addition, management had not yet determined its plan for Bangsheng Chemical's equipment, therefore, the equipment is still considered as being held for use, (2) the impact of a $9.0 million pretax gain related to the repurchases of $19.8 million face value of the Company's 6.0% convertible senior notes during the fourth quarter, (3) the impact of $0.7 million charges in compensation to employees as the result of the cessation of production at the Bangsheng Chemical facility. The Company believes these pro forma results provide investors with useful information in analyzing the Company's year-over-year financial performance directly related to operations.

Pro forma highlights for fourth quarter 2008

-- Pro forma operating income for the fourth quarter, excluding $3.9

million in expenses associated with the impairment of property and

equipment and $0.7 million in compensation to staff related to the

cessation of production at the chemical facility, increased 54.5%

year-over-year to $13.0 million and pro forma operating profit margin

was 41.0%

-- Pro forma net income for the fourth quarter, excluding the gain related

to the repurchase of the Company's convertible senior notes, increased

12.3% year-over-year to $8.7 million, or $0.13 per diluted share with

pro forma net margin of 27.5%

Fourth Quarter 2008 Results

ShengdaTech's revenue for the fourth quarter of 2008 increased to $31.8 million, up 11.0% from $28.6 million in the fourth quarter of 2007. The strong revenue growth was attributable to higher average selling prices and increased demand for NPCC products. The Company added 60,000 metric tons of NPCC capacity in April 2008, which was operating at 100% utilization rate during the quarter to meet the market demand. At quarter end, total annual NPCC production capacity was 190,000 metric tons compared with 130,000 metric tons a year ago. The NPCC segment contributed 76.7% of total revenue in the quarter and the chemical segment contributed the remaining 23.3%, compared with 48.2% and 51.8%, respectively, in the same period a year ago. The chemical segment's contribution to total revenue declined significantly during the fourth quarter as the Company ceased production at Bangsheng Chemical effective October 31, 2008, pursuant to a notice from the local government, resulting in zero revenue produced from the segment in the last two months of the quarter. The Company is currently seeking strategic investment opportunities to continue its chemical operations.

"We are excited to report another year of strong financial performance despite the fact that we ceased production at our Bangsheng Chemical facility mid way through the quarter. We continue to generate ever-increasing interest in NPCC from domestic and international companies. We are working closely with our potential customers to develop and test a wide range of applications using NPCC that will improve their products and reduce their production costs.

"In 2008, we successfully met our capacity expansion plan to reach 190,000 metric tons of annual NPCC production. All NPCC facilities are currently operating at full capacity as we expand and increase our market penetration," commented Mr. Xiangzhi Chen, President and CEO of ShengdaTech. "During 2008, we added 47 domestic and international customers, including 12 tire manufacturers, 4 PVC producers, 14 PE producers, 4 in latex and adhesives, 1 ink manufacturer, 9 coating manufacturers, 1 in automobile undercoating paint, and 2 paper manufacturers."

Revenue from NPCC products increased 76.7% to $24.4 million in the fourth quarter of 2008 from $13.8 million in the fourth quarter of 2007. The increase in year-over-year revenue was due to the growing demand for NPCC products as an increasing number of companies integrated the NPCC technology into their production processes. The additional 60,000 metric tons of NPCC capacity added in April 2008, which, operating at 100% utilization starting in the third quarter, supported the Company in meeting the increased demand as compared to the fourth quarter of 2007. Total volume of NPCC sold during the fourth quarter of 2008 was 49,143 metric tons, up 15,438 metric tons, or 37.7%, from 35,680 metric tons in the fourth quarter of 2007. NPCC for use in tires and PVC represented the majority of NPCC sales at 43.1% and 30.0% of total NPCC revenue, respectively. NPCC used in ink increased to 11.0% of total NPCC revenue, an increase of 8.0% compared with the fourth quarter 2007. Sales from the NPCC product for use in paper, increased to 8.8% of total NPCC revenue during the fourth quarter. NPCC used in PE, adhesives, latex, and paint, combined to generate 8.4% of NPCC revenue.

Revenue from the chemical segment for the fourth quarter of 2008 was $7.4 million, a decrease of 50.1% from $14.8 million in the fourth quarter of 2007. Bangsheng Chemical was in operation for only 30 days during the fourth quarter of 2008 before the Company ceased production. Sales of liquid ammonia and ammonia bicarbonate represented the majority of sales in the chemical segment with 41.4% and 25.9% for the fourth quarter 2008, respectively. Methanol and melamine represented 18.2% and 14.4% respectively of the chemical segment's revenue during the quarter.

The Company's gross profit for the fourth quarter of 2008 was $13.7 million, up 33.3% from $10.3 million in the fourth quarter 2007. Gross margin for the quarter was 43.0% compared with 35.8% for the same period in 2007. The chemical segment benefited from strong pricing for liquid ammonia, methanol, and melamine in the quarter resulting in gross margin of 49.5%, up 20 percentage points from 29.5% in the same period in 2007. The significant increase in gross margin of the chemical segment during the quarter was primarily due to increased prices of chemical products in the month of October. Later in the quarter, the coal-based chemical industry experienced significantly lower margins due to pressure on selling prices of coal-based chemical products and the increased cost of raw materials. Gross margin for the NPCC segment was 41.1% in the fourth quarter compared to gross margin of 42.6% in the same quarter last year. The average selling price of the Company's NPCC products increased to $480 per MT, an increase of 13.5% from $423 per MT in the fourth quarter of 2007, which partially offset the increase in cost of coal used in the manufacturing process and an increase in transportation costs related to raw material procurement.

Selling expenses for the fourth quarter of 2008 were $0.6 million, or 1.9% of revenue, up from $0.5 million, or 1.7% of revenue, in the same period last year due to higher sales commissions and related expenses in proportion with increased sales volume. Selling expenses also increased as a result of increases in freight and other costs in relation to the growth in NPCC exports during the fourth quarter of 2008. General and administrative (G&A) expenses were $0.7 million, or 2.2% of revenue, down from $1.3 million, or 4.6% of revenue for the same period last year. The decrease in G&A expenses was mainly attributable to reduced office, business, and entertainment fees, as well as the cessation of production at Bangsheng Chemical. This was partially offset by increases in R&D expenses, a higher service fee paid to the newly engaged leading global independent auditing firm, and a one-time compensation expense of $0.7 million paid to employees who worked at Bangsheng Chemical prior to the cessation of production. During the quarter, the Company reported a $3.9 million impairment of property and equipment expense in order to depreciate the fixed assets related to the chemical business to their estimated net realizable value at December 31, 2008.

Operating income for the fourth quarter of 2008 was $8.4 million, unchanged from the same period a year ago. Operating margin was 26.5% compared to 29.5% in the fourth quarter of 2007.

Fourth quarter interest expense of $2.5 million was directly associated with the Company's long-term convertible notes issued in June 2008. No such expense was recorded in the fourth quarter of 2007. During the quarter, the Company reported a pretax gain of $9.0 million in other income as a result of repurchasing $19.8 million in face value of the Company's 6.0% convertible senior notes during the fourth quarter of 2008. No such gain was recorded during the fourth quarter of 2007.

Provision for income tax in the fourth quarter of 2008 was $2.3 million up from $0.7 million in the fourth quarter of 2007 due primarily to an increase in taxable income and US tax on the gain from the repurchase of long-term convertible notes.

EBITDA for the fourth quarter of 2008 increased 104.6% year-over-year to $18.5 million from $9.1 million in the fourth quarter of 2007.

Net income in the fourth quarter of 2008 was $12.7 million, up 62.8% from $7.8 million in the same period last year. Fully diluted earnings per share for the fourth quarter of 2008 were $0.11, compared with fully diluted earnings per share of $0.15 in the fourth quarter of 2007. Fully diluted weighted average shares outstanding were 69,343,542 in the fourth quarter of 2008, up from 54,193,667 in the same quarter last year, due to the Company's 6.0% convertible senior notes issued in May and June 2008.

Full-Year 2008 Results

-- Pro forma income from operations for the full-year 2008 was $48.9

million, up 65.3% from reported income from operations for full-year

2007

-- Pro forma net income for full-year 2008 was $36.4 million, up 34.8%

from reported net income for full-year 2007. Fully diluted pro forma

earnings per share were $0.64 per compared to $0.50 in 2007.

Revenue for the full-year 2008 increased 48.5% to a record $149.4 million compared with $100.7 million in 2007. Revenue from the chemical business was $67.0 million, up 24.2% from $53.9 million in 2007, representing 44.8% of total revenue. The NPCC business generated the remaining 55.2% of revenue at $82.4 million in 2008, up 76.4% from $46.7 million in 2007. Gross profit was $55.1 million, up 59.5% from $34.6 million for the full-year 2007. Gross margin was 36.9% in 2008 compared to 34.3% in 2007. Income from operations was $44.2 million in 2008, up 49.7% from $29.6 million in 2007. EBITDA was $57.1 million in 2008, up 80.1% from $31.7 million in 2007. Net income increased 48.1% to $40.0 million from $27.0 million in 2007. Fully diluted earnings per share for 2008 were $0.60 compared to $0.50 for the full-year 2007.

Pro forma gross profit for the full-year 2008 was $55.1 million, increased 59.5% from reported gross profit a year ago. Pro forma gross margin was 36.9% for the full-year of 2008 compared with reported gross margin of 34.3% for the full-year 2007. Pro forma income from operations for the full-year 2008 was $48.9 million, up 65.3% from reported income from operations for full-year 2007. Pro forma net income for full-year 2008 was $36.4 million, up 34.8% from reported net income for full-year 2007. Fully diluted pro forma earnings per share were $0.64 per diluted share for the full-year of 2008 compared to reported fully diluted earnings per share of $0.50 in 2007.

Financial Condition

As of December 31, 2008, ShengdaTech had $114.3 million in cash, $112.7 million in working capital and $95.3 million in long-term convertible senior notes. Shareholders' equity stood at $135.8 million, up from $89.0 million at year-end 2007. In 2008, the Company generated net cash flow from operating activities of $38.9 million.

In November 2008, the Company repurchased an aggregate of $19.8 million face value of its 6.0% Convertible Senior Notes due 2018, for consideration of approximately $9.9 million, plus accrued interest in cash. These repurchases reduced the dilution of ShengdaTech's common stock outstanding by nearly 2.0 million shares.

Recent Events

On March 13, 2009, ShengdaTech announced that the Company has repurchased, in a series of privately negotiated transactions executed between February 17 and February 26, 2009, an aggregate of $5.2 million face value of its 6.0% Convertible Senior Notes due 2018, for consideration of approximately $2.5 million, plus accrued interest in cash.

On March 17, 2009, ShengdaTech announced that the Company's Board of Directors decided that the Company will no longer pursue the acquisition of Jinan Fertilizer Co., Ltd. The agreement to acquire Jinan Fertilizer entered into with Shandong Shengda expired on March 31, 2009. The Company did not incur any liability or costs, except for reasonable costs for due-diligence undertaken by our independent directors as a group, as a result of not consummating the acquisition of Jinan Fertilizer. The Company is currently seeking strategic investment opportunities to continue its chemical operations and aggressively grow its NPCC business.

In February 2009, the Company announced that it will relocate its world headquarters from Tai'an City to Shanghai in April 2009. As one of China's major commerce centers, Shanghai will provide ShengdaTech with easier access to business partners, customers and prospects and allow the Company to attract a higher caliber of management and administrative professionals.

Business Outlook

ShengdaTech expects to complete construction of Phase I (60,000 MT) of the Company's new NPCC facility in Zibo, Shandong Province by July or August 2009. The Company expects to receive mining rights for limestone, an essential NPCC ingredient, from the government by the end of the second quarter of 2009.

In 2009, the Company expects to achieve 100% utilization of its 190,000 MT capacity, and anticipates that, by year-end, they will achieve approximately 80% run-rate utilization of the additional 60,000 MT in the Zibo facility. The Company will actively pursue strategic acquisition targets to grow its NPCC production capacity. The Company plans to focus on the growth of the NPCC business by expanding market penetration, by increasing the customer base with additional sales and marketing resources, and by offering an ever-broadening and diversified product line through its advanced research and development capabilities. The new-product pipeline for NPCC applications includes asphalt, epoxy resin, and other high-end NPCC applications. The Company is applying for patents for NPCC proprietary formulas used in applications for asphalt, paint, and for modifier, a cost-reducing element used in the production process. The applications also will include exclusive NPCC production technology that warrants patent protection.

The Company expects 2009 revenue and net income from NPCC to be in the range of $92 million to $94 million and $18 million to $19 million, respectively, for fully diluted earnings per share of $0.32 - $0.34.

"The strong commitment of our management, research and sales teams has helped us to execute effectively our NPCC growth strategy in 2008. Going forward, our strategic focus on NPCC is substantiated by a Company commissioned study conducted by Frost & Sullivan, a worldwide company that specializes in market research. According to the report, the global NPCC market presents a huge growth opportunity. The report states that the Chinese market is projected to continue in a high-growth mode with an estimated compounded annual growth rate of over 20 percent through 2012," commented Mr. Chen. "We believe our market standing as a recognized high-quality NPCC supplier, our advanced technological production capabilities, strong and proven research and development capabilities, and exclusive formulations, together with our compelling value proposition to our customers, provide us with a definitive competitive advantage. We are convinced that the strength of this combination will allow us to meet our market expansion objectives, domestically and internationally. We are abundantly confident that our vision is sound, our strategy is well thought out, and that we have the right people in place to successfully execute our short and long-term plans. By so doing, we will deliver to our shareholders the growth and profitability that will result in continually increasing the value of our Company."

Conference Call

ShengdaTech will host a conference call at 9:00 a.m. EDT on Friday, April 3, 2009, to discuss the 2008 fourth quarter and year-end financial results. To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: 1-888-419-5570. International callers should dial +1-617-896-9871. The pass code for the call is 71736647. If you are unable to participate in the call at this time, a replay will be available for 14 days starting on Friday, April 3, 2009 at 11:00 a.m. EDT. To access the replay, dial 1-888-286-8010. International callers should dial +1-617-801-6888. The conference pass code is 12258082. This conference call will be broadcast live over the Internet and can be accessed by all interested parties by clicking on http://www.shengdatechinc.com . Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. For those unable to participate during the live broadcast, a 90-day replay will be available shortly after the call by accessing the same link.

About ShengdaTech, Inc.

ShengdaTech is engaged in the business of manufacturing, marketing and selling nano-precipitated calcium carbonate ("NPCC") products The Company converts limestone into NPCC using its proprietary technology co-developed with Tsinghua University. ShengdaTech is the only company possessing proprietary NPCC technology in China. Its NPCC products are mainly exported to Singapore, Thailand, South Korea, Malaysia, Vietnam, the Philippines, Iran, India and Israel. For more information, contact CCG Investor Relations directly or go to ShengdaTech's website at http://www.shengdatechinc.com .

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:

Certain statements in this press release and oral statements made by ShengdaTech on its conference call in relation to this release constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding the Company's ability to prepare for growth, the Company's planned manufacturing capacity expansion, acquisition of Jinan Fertilizer, outlook for its coal based chemical operations and predictions and guidance relating to the Company's future financial performance. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs but they involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, which may include, but are not limited to, such factors as unanticipated changes in product demand especially in the tire industry, changes in composition of tires, the Company's ability to identify strategic investment opportunities to continue its chemical operations, the Company's ability to meet the planned expansion schedule for its NPCC capacity, changes to government regulations, risk associated with operation of the Company's new manufacturing facility, risk associated with large scale implementation of the new NPCC manufacturing process, the ability to attract new customers, ability to increase its product's applications, ability of its customers to sell products, cost of raw material, downturns in the Chinese economy, and other information detailed from time to time in the Company's filings and future filings with the United States Securities and Exchange Commission. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. The forward-looking statements made herein speak only as of the date of this press release and the Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations.

Table 1

SHENGDATECH, INC. AND SUBSIDIARIES

SELECTED BALANCE SHEET

Balance sheet items:

December 31, 2008 December 31, 2007

Cash $114,287,073 $26,366,568

Total assets $243,908,940 $100,943,938

Long-term convertible notes $95,250,000 --

Total liabilities $108,068,363 $11,940,753

Total shareholders' equity $135,840,577 $89,003,185

Table 2

SHENGDATECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the three months For the fiscal-year ended

ended December 31, December 31

2008 2007 2008 2007

(unaudited) (unaudited) (audited) (audited)

Net sales 31,775,575 28,623,203 149,427,139 100,654,793

Cost of goods sold 18,101,041 18,363,696 94,302,741 66,094,838

Gross profit 13,674,534 10,259,507 55,124,398 34,559,955

Operating expenses:

Selling 605,583 495,032 2,549,721 1,771,168

General and

administrative 713,843 1,328,920 4,394,896 3,232,911

Impairment of property,

plant and equipment 3,931,253 0 3,931,253 0

Total operating expenses 5,250,679 1,823,952 10,875,870 5,004,079

Operating income 8,423,855 8,435,555 44,248,528 29,555,876

Other income (expense):

Interest income 85,323 71,318 235,219 274,203

Interest expense (2,475,427) 0 (4,766,681) 0

Gain on extinguishment

of long-term

convertible notes 9,018,169 -- 9,018,169 --

Other expense, net (52,833) (12,094) (52,833) (12,094)

Other income, net 6,575,232 59,224 4,433,874 262,109

Earnings before income

taxes 14,999,087 8,494,779 48,682,402 29,817,985

Provision for tax 2,335,844 715,209 8,646,951 2,787,640

Net Income 12,663,243 7,779,570 40,035,451 27,030,345

Earnings per share:

Basic 0.23 0.15 0.74 0.50

Diluted 0.11 0.15 0.60 0.50

Weighted average shares

outstanding:

Basic 54,202,036 54,143,920 54,202,036 54,107,408

Diluted 67,247,616 54,193,667 62,205,660 54,188,410

Table 3

SHENGDATECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Year Ended December 31,

2008 2007 2006

Cash flows from operating

activities:

Net income 40,035,451 27,030,345 17,526,648

Adjustments to reconcile net income

to net cash provided by operating

activities:

Depreciation 3,734,433 2,127,990 1,031,387

Land use rights expense 107,121 990 --

Amortization of debt issuance costs 1,092,675 -- --

Impairment of property, plant and

equipment 3,931,253 -- --

Gain on extinguishment of long-term

convertible notes (9,018,169) -- --

Loss on disposal of property, plant

and equipment -- 1,845 16,377

Share-based compensation expense 58,945 -- 153,619

Changes in operating assets and

liabilities:

Accounts receivable 1,587,245 (1,839,452) (1,635,713)

Other receivables (496,157) 144,500 4,040,220

Deferred tax assets (260,056) -- --

Inventories (552,135) 330,614 (611,842)

Due from related parties 1,798 -- 952,552

Accounts payable (1,821,581) 1,033,008 614,532

Accrued expenses and other payables (914,920) 696,887 262,936

Income taxes payable 1,578,462 728,255 --

Due to related parties (199,795) (11,863) 736,564

Net cash provided by operating

activities 38,864,570 30,243,119 23,087,280

Cash flows from investing

activities:

Purchase of property, plant and

equipment, including interest

capitalized (36,654,578) (38,199,879) (14,903,456)

Purchase of land use rights (15,328,370) (120,083) --

Distribution to shareholders -- (207,651) (971,496)

Net cash used in investing

activities (51,982,948) (38,527,613) (15,874,952)

Cash flows from financing

activities:

Proceeds from issuance of long-term

convertible notes 115,000,000 -- --

Payment of debt issuance costs (5,859,663) -- --

Extinguishment of long-term

convertible notes (9,890,000) -- --

Due to related parties -- (1,995,105) 1,903,947

Proceeds from issuance of common

stock -- -- 13,969,714

Excess tax benefit from exercise of

warrant 221,903 -- --

Net cash provided by (used in)

financing activities 99,472,240 (1,995,105) 15,873,661

Effect of exchange rate changes on

cash 1,566,643 1,962,025 848,853

Net increase (decrease) in cash 87,920,505 (8,317,574) 23,934,842

Cash at beginning of year 26,366,568 34,684,142 10,749,300

Cash at end of year 114,287,073 26,366,568 34,684,142

Non-cash investing activities:

Accounts payable for purchase

of property, plant and

equipment 740,951 1,218,497 854,068

Due to related parties for

purchase of property, plant

and equipment 741,263 (354,316) 289,111

Supplemental disclosures of cash

flow information:

Cash paid for income taxes 7,109,351 2,088,364 415,334

Cash paid for interest, net of

capitalized interest 3,197,756 -- --

Table 4

SHENGDATECH, INC. AND SUBSIDIARIES

Reconciliation of Net Income to EBITDA

(Amounts expressed in United States dollars)

Three Months Ended Fiscal Year Ended

December 31, December 31,

2008 2007 2008 2007

Net Income 12,663,243 7,779,570 40,035,451 27,030,345

Income Tax 2,335,844 715,209 8,646,951 2,787,640

Interest expense, net 2,403,646 -71,318 4,531,462 -274,203

Depreciation and

amortization 1,120,763 631,134 3,841,554 2,128,980

EBITDA 18,523,496 9,054,595 57,055,418 31,672,762

Note 1 EBITDA is a financial measure that is not defined by US GAAP.

EBITDA was derived by calculating earnings before interest, taxes,

depreciation, and amortization. The Company's management believes

that the presentation of EBITDA provides useful information

regarding ShengdaTech's results of operations because it assists in

analyzing and benchmarking the performance and value of

ShengdaTech's business. The Company's calculation of EBITDA may not

be consistent with similarly titled measures of other companies.

The table above provides a reconciliation of EBITDA to net income,

the most comparable GAAP measure.

Table 5

RECONCILIATION OF PRO FORMA CONSOLIDATED STATEMENT

OF OPERATIONS AND COMPREHENSIVE INCOME

For the Three Months Ended

December 31, 2008

As Reported Adjustments Pro Forma

Sale of Products 31,775,575 $31,775,575

Cost of Products Sold 18,101,041 18,101,041

Gross Profit 13,674,534 13,674,534

Gross Profit Margin 43.03% 43.03%

Operating Expenses: --

Selling expense 605,583 605,583

General and administrative

expense 713,843 675,690(3) 38,153

Impairment of fixed assets 3,931,253 3,931,253(1) 0

Total Operating Expenses 5,250,679 643,736

Operating income 8,423,855 4,606,943 13,030,798

Operating Margin 26.51% 41.01%

Other Income (Expense):

Interest expense (2,475,427) (2,475,427)

Interest income 85,323 85,323

Gain on extinguishment of

long-term convertible notes 9,018,169 (9,018,169)(2) 0

Other expense, net (52,833) (52,833)

Other income (expenses), net 6,575,232 (2,403,646)

Earnings before income taxes 14,999,087 10,627,152

Income tax expense 2,335,844 (444,211) 1,891,633(4)

Net income 12,663,243 (3,967,015) $8,735,519

Net margin 39.85% 27.49%

Earnings per share:

Basic $0.23 $0.16

Diluted $0.11 $0.13(5)

Weighted average shares

outstanding:

Basic 54,202,036 54,202,036

Diluted 67,246,616 67,246,616

Fiscal Year Ended

December 31, 2008

As Reported Adjustments Pro Forma

Sale of Products $149,427,139 $149,427,139

Cost of Products Sold 94,302,741 94,302,741

Gross Profit 55,124,398 55,124,398

Gross Profit Margin 36.89% 36.89%

Operating Expenses:

Selling expense 2,549,721 2,549,721

General and administrative

expense 4,394,896 675,690(3) 3,719,206

Impairment of fixed assets 3,931,253 3,931,253(1) 0

Total Operating Expenses 10,875,870 6,268,927

Operating income 44,248,528 4,606,943 48,855,471

Operating Margin 29.61% 32.70%

Other Income (Expense):

Interest expense (4,766,681) (4,766,681)

Interest income 235,219 235,219

Gain on extinguishment of

long-term convertible

notes 9,018,169 (9,018,169)(2) 0

Other expense, net (52,833) (52,833)

Other income (expenses),

net 4,433,874 (4,531,462)

Earnings before income taxes $48,682,402 44,324,009

Income tax expense 8,646,951 (757,277) 7,889,674(4)

Net income 40,035,451 (3,653,949) 36,434,335

Net margin 26.79% 24.38%

Earnings per share:

Basic $0.74 $0.67

Diluted $0.60 $0.64(5)

Weighted average shares

outstanding:

Basic 54,202,036 54,202,036

Diluted 62,205,660 62,205,660

Note: The unaudited pro forma income statement results for the three months and fiscal year ended December 31, 2008, presented above reflect ShengdaTech's historical GAAP results adjusted to remove:

(1) the impact of $3.9 million in expenses associated with the impairment

of property and equipment related to the cessation of production at

the Company's Tai'an City chemical facility in the fourth quarter;

(2) the impact of a $9.0 million gain related to the repurchases of $19.8

million face value of the Company's 6.0% convertible senior notes

during the fourth quarter;

(3) the impact of charges of $0.7 million in compensation for staff as the

result of the cessation of production at the Company's Bangsheng

Chemical Facility;

(4) Pro forma calculations assume an effective tax rate of 17.8%;

(5) Pro forma diluted earnings per share are calculated by dividing pro

forma net income by diluted weighted average shares outstanding.

The Company believes these pro forma results provide investors with useful information in analyzing the Company's year over year financial performance.

Source: ShengdaTech, Inc.
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