China Carbon Graphite Group, Inc. - Quarter Report: 2013 September (Form 10-Q)
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 AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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: 333-114564
(Exact Name of Registrant as specified in its charter)
Nevada
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98-0550699
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(State or other jurisdiction of
incorporation of organization)
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(I.R.S. Employer
Identification No.)
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c/o XingheYongle Carbon Co., Ltd.
787 XichengWai
Chengguantown
Xinghe County
Inner Mongolia, China
(Address of principal executive offices)
(86) 474-7209723
(Registrant’s telephone number, including area code)
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 o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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(Do not check if smaller reporting company)
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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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 26,342,518 shares of common stock are issued and outstanding as of November 21, 2013.
CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2013
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Page No.
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Item 1.
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Financial Statements:
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1
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Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012
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1
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Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine months Ended September 30, 2013 and 2012
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2
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Unaudited Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2013 and 2012
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3
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Notes to Unaudited Consolidated Financial Statements
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4
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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37
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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60
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Item 4.
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Controls and Procedures
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60
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings
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62
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Item 1A.
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Risk Factors
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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62
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Item 3.
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Defaults Upon Senior Securities
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62
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Item 4.
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Mine Safety Disclosures
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62
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Item 5.
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Other Information
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62
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Item 6.
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Exhibits
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62
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Signatures
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63
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China Carbon Graphite Group, Inc. and subsidiaries
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Consolidated Balance Sheets
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September 30, 2013
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December 31, 2012
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|||||||
(Unaudited)
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(Audited)
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|||||||
ASSETS
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||||||||
Current Assets
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||||||||
Cash and cash equivalents
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$ | 197,636 | $ | 129,746 | ||||
Restricted cash
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30,718,954 | 22,149,000 | ||||||
Accounts receivable, Net
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6,232,675 | 11,239,002 | ||||||
Advance to suppliers
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11,912,484 | 1,177,462 | ||||||
Inventories
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45,645,068 | 48,417,875 | ||||||
Prepaid expenses
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721,491 | 280,779 | ||||||
Other receivables, net of allowance of $224,319 and $220,339, respectively
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452,695 | 35,655 | ||||||
Total current assets
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95,881,003 | 83,429,519 | ||||||
Property, Plant And Equipment, Net
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36,334,180 | 40,964,363 | ||||||
Construction In Progress
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27,543,023 | 7,324,379 | ||||||
Land Use Rights, Net
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9,654,207 | 9,657,419 | ||||||
Total Assets
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$ | 169,412,413 | $ | 141,375,680 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||||
Current Liabilities
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||||||||
Accounts payable and accrued expenses
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$ | 3,492,996 | $ | 2,250,745 | ||||
Advance from customers
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1,697,436 | 1,368,525 | ||||||
Short term bank loans
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45,915,033 | 38,680,500 | ||||||
Notes payable
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57,679,739 | 40,606,500 | ||||||
Other payables
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2,345,935 | 630,179 | ||||||
Loan from unrelated parties
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265,826 | 338,002 | ||||||
Dividends payable
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55,015 | 46,816 | ||||||
Total current liabilities
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111,451,980 | 83,921,267 | ||||||
Amount due to related parties
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4,761,875 | 4,795,593 | ||||||
Long Term Bank Loan
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22,352,941 | 4,782,900 | ||||||
Accounts Payable - Long Term
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- | |||||||
Warrant Liabilities
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25,657 | 224,362 | ||||||
Total Liabilities
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138,592,453 | 93,724,122 | ||||||
Redeemable convertible series B preferred stock, $0.001 par value; 3,000,000 shares authorized; 300,000 and 300,000 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively.
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310,000 | 360,000 | ||||||
Stockholders' Equity
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||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized 26,342,518 and 25,077,518 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
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26,342 | 25,077 | ||||||
Additional paid-in capital
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18,551,966 | 18,223,781 | ||||||
Accumulated other comprehensive income
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9,714,447 | 8,982,925 | ||||||
Retained earnings
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2,217,206 | 20,059,775 | ||||||
Total stockholders' equity
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30,509,960 | 47,291,558 | ||||||
Total Liabilities and Stockholders' Equity
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$ | 169,412,413 | $ | 141,375,680 |
The accompanying notes are an integral part of these consolidated financial statements.
1
China Carbon Graphite Group, Inc and subsidiaries
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|||||||||
Consolidated Statements of Operations and Comprehensive Income
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|||||||||
For the Three and Nine Months Ended September 30, 2013 and 2012
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|||||||||
(Unaudited)
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Three months ended
September 30,
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Nine months ended
September 30,
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||||||||||||||||
2013
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2012
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2013
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2012
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Sales
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$ | 2,721,723 | $ | 6,491,133 | $ | 8,496,893 | $ | 28,429,886 | |||||||||
Cost of Goods Sold
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2,269,493 | 4,722,151 | 13,202,146 | 20,850,882 | |||||||||||||
Gross Profit (Loss)
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452,230 | 1,768,982 | (4,705,253 | ) | 7,579,004 | ||||||||||||
Operating Expenses
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|||||||||||||||||
Selling expenses
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8,252 | 64,487 | 46,088 | 140,437 | |||||||||||||
General and administrative
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2,715,815
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1,056,283 |
6,638,182
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3,078,144 | |||||||||||||
Impairment of property and equipment
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3,542,153
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- |
3,542,153
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- | |||||||||||||
Depreciation and amortization
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187,803 | 56,198 | 307,505 | 160,028 | |||||||||||||
Total operating expenses
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6,454,023 | 1,176,968 | 10,533,928 | 3,378,609 | |||||||||||||
Operating (Loss) Income Before Other Income (Expense)
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(6,001,793 | ) | 592,014 | (15,239,181 | ) | 4,200,395 | |||||||||||
Other Income (Expense)
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|||||||||||||||||
Interest expense
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(1,501,867 | ) | (1,208,970 | ) | (3,418,517 | ) | (3,658,888 | ) | |||||||||
Interest income
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562,916 |
1
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624,722 | 44 | |||||||||||||
Other expense
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- | 272 | - | (215,196 | ) | ||||||||||||
Other income (expense), net
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(352 | ) | 6,080 | (99 | ) | 221,270 | |||||||||||
Change in fair value of warrants
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52,997 | (188,046 | ) | 198,705 | (221,846 | ) | |||||||||||
Total other expense (income), net
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886,306 |
(1,390,663
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) | 2,595,189 | (3,874,616 | ) | |||||||||||
(Loss) Income Before Income Tax Expense
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(6,888,099 | ) | (798,649 | ) | (17,834,370 | ) | 325,779 | ||||||||||
Income Tax Expense
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- | - | - | - | |||||||||||||
Net Income (Loss)
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(6,888,099 | ) |
(798,649
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) | (17,834,370 | ) | 325,779 | ||||||||||
Preferred Stock Dividends
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826 | (4,537 | ) | (8,199 | ) | (14,180 | ) | ||||||||||
Net Income (Loss) Available To Common Shareholders
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(6,887,273 | ) |
(803,186
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) | (17,842,569 | ) | 311,599 | ||||||||||
Other Comprehensive Income
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|||||||||||||||||
Foreign currency translation gain
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92,843 | 528,509 | 731,522 | 518,452 | |||||||||||||
Total Comprehensive Income (Loss)
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$ | (6,795,256 | ) | $ |
(270,140
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) | $ | (17,102,848 | ) | $ | 844,231 | ||||||
Share Data
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|||||||||||||||||
Basic earnings (loss) per share
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$ | (0.26 | ) | $ | (0.03 | ) | $ | (0.69 | ) | $ | 0.01 | ||||||
Diluted earnings (loss) per share
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$ | (0.26 | ) | $ | (0.03 | ) | $ | (0.69 | ) | $ | 0.01 | ||||||
Weighted average common shares outstanding, basic
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26,336,648 | 24,260,834 | 25,754,899 | 23,843,306 | |||||||||||||
Weighted average common shares outstanding, diluted
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26,336,648 | 24,560,834 | 25,754,899 | 24,143,306 |
The accompanying notes are an integral part of these consolidated financial statements.
2
China Carbon Graphite Group, Inc and subsidiaries
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Consolidated Statements of Cash Flows
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(Unaudited)
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Nine months ended September 30,
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2013
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2012
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Cash Flows from Operating Activities
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Net income (loss)
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$ | (17,834,370 | ) | $ | 325,779 | |||
Adjustments to reconcile net cash provided by (used in) operating activities
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- | |||||||
Depreciation and Amortization
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2,144,180 | 1,925,159 | ||||||
Related party interest expenses contribution
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- | 344,401 | ||||||
Stock compensation
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262,650 | 512,158 | ||||||
Change in fair value of warrants
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(198,705 | ) | 221,846 | |||||
Bad debt expenses
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2,187,134 | - | ||||||
Impairment of property and equipment
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3,542,153 | - | ||||||
Inventory impairment
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3,266,648 | - | ||||||
Changes in operating assets and liabilities
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||||||||
Accounts receivable
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2,982,054 | 858,426 | ||||||
Notes receivable
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- | 156,266 | ||||||
Other receivables
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(413,189 | ) | (46,790 | ) | ||||
Advance to suppliers
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(10,631,243 | ) | 3,405,974 | |||||
Inventory
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352,515 | (9,963,519 | ) | |||||
Prepaid expenses
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(416,248 | ) | 1,906 | |||||
Accounts payable and accrued liabilities
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1,193,573 | 3,460,160 | ||||||
Advance from customers
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301,852 | (44,443 | ) | |||||
Taxes payable
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289,304 | (760,615 | ) | |||||
Other payables
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1,400,248 | 141,370 | ||||||
Net cash (used in) provided by operating activities
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(11,571,444 | ) | 538,078 | |||||
Cash flows from investing activities
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||||||||
Acquisition of property, plant and equipment
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(64,803 | ) | (65,156 | ) | ||||
Increase of land use rights
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(116,611 | ) | - | |||||
Addition of construction in progress
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(19,931,665 | ) | (1,479,435 | ) | ||||
Net cash used in investing activities
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(20,113,079 | ) | (1,544,591 | ) | ||||
Cash flows from financing activities
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||||||||
Proceeds from issuing common stock
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- | 472,000 | ||||||
Proceeds from short term loans
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39,886,502 | 37,256,400 | ||||||
Repayments for short term loans
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(33,400,892 | ) | (50,370,400 | ) | ||||
Proceeds from long term loans
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17,835,428 | 4,708,400 | ||||||
Repayments of long term loans
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(486,421 | ) | - | |||||
Proceeds from loan from unrelated parties
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11,090,543 | 11,351,261 | ||||||
Repayment of loans to unrelated parties
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(11,168,221 | ) | (9,151,360 | ) | ||||
Proceeds from loan from related parties
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122,254 | 821,600 | ||||||
Repayments to related parties
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(236,625 | ) | (158,000 | ) | ||||
Proceeds from stock not yet issued
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- | (137,000 | ) | |||||
Restrict cash
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(8,107,013 | ) | (1,532,600 | ) | ||||
Proceeds from notes payable
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57,235,509 | 35,234,000 | ||||||
Repayments to notes payable
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(41,021,484 | ) | (27,887,000 | ) | ||||
Net cash provided by financing activities
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31,749,580 | 607,301 | ||||||
Effect of exchange rate fluctuation
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2,833 | (2,353 | ) | |||||
Net increase (decrease) in cash
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67,890 | (401,565 | ) | |||||
Cash and cash equivalents at beginning of period
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129,746 | 521,450 | ||||||
Cash and cash equivalents at ending of period
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$ | 197,636 | $ | 119,885 | ||||
Supplemental disclosure of cash flow information
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||||||||
Interest paid
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$ | 3,866,767 | $ | 3,358,169 | ||||
Income taxes paid
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$ | - | $ | - | ||||
Non-cash activities:
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||||||||
Preferred stock conversion to common stock
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$ | - | $ | 151 | ||||
Issuance of common stock for compensation
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$ | 262,650 | $ | 135,350 |
The accompanying notes are an integral part of these consolidated financial statements.
3
China Carbon Graphite Group, Inc. and Subsidiaries
(Unaudited)
(1) Organization and Business
China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture of graphite-based products in the People’s Republic of China (“China” or the “PRC”). The Company’s products are used in the manufacturing process of other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors. The Company manufactures and sells three types of products throughout China and internationally: graphite electrodes; fine grain graphite; and high purity graphite.
The Company was incorporated on February 13, 2003 in Nevada under the name Achievers Magazine Inc. In connection with the reverse merger transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.
On December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement with Sincere Investment (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation. Sincere was the sole stockholder of Talent International Investment Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of XingheYongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Pursuant to the share exchange agreement, the Company issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding on stock of Talent, and Talent became a wholly-owned subsidiary of the Company. Upon completion of the reverse merger, the Company’s business became the business of Talent, its subsidiaries and its affiliated variable interest entities.
Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. Yongle is party to a series of contractual agreements with XingheXingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized under the laws of the PRC. These agreements allow the Company to operate its business in the PRC and to control the management of Xingyong and receive economic remuneration from Xingyong’s business. Xingyong’s principal stockholder is Mr. Denyong Jin, the General Manager of the Company’s China operations. As a result, Xingyong is a variable interest entity and the operations of Xingyong are consolidated with those of the Company for financial reporting purposes.
4
The relationship among the above companies is as follows:
Accounting Standard Codification (“ASC”) 810-10-45-25 calls for balance sheet disclosure of (a) assets of a consolidated variable interest entity (VIE) that can be used only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated VIE for which creditors (or beneficial interest owners) do not have recourse to the general credit of the primary beneficiary. The entire operating business of the Company is conducted by Xingyong and the consolidated balance sheet of the Company reflects Xingyong’s balance sheet. There are no such assets or liabilities on the balance sheet of Xingyong. The Operating Agreement dated December 7, 2007 provides that Yongle is a full-recourse guarantor of all obligations of Xingyong, and Xingyong has pledged all of its assets to Yongle. The Consulting Agreement of that date includes an assignment of all of the revenues of Xingyong to Yongle. Yongle is 100% owned by Talent and Talent is 100% owned by the Company. Accordingly, there are no assets or liabilities of Xingyong that in which the Company does not share.
The consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries, Talent and Yongle. Also consolidated are the financial statements of Xingyong. The financial statements of Xingyong are consolidated with our financial statements because Xingyong is a variable interest entity. The entire operating business operations of the Company are located in Xingyong. Therefore the financial position and results of operations and cash flows of the Company are significantly influenced by the results of Xingyong, the VIE. Talent is party to four agreements dated December 7, 2007 with the owners of the registered equity of Xingyong. The agreements transfer to Talent benefits and all of the risk arising from the operations of Xingyong, as well as complete managerial authority over the operations of Xingyong.
5
The following paragraphs briefly describe the key provisions of each contractual agreement that prescribes the Company’s relationship with Xingyong:
Exclusive Technical Consulting and Services Agreement. Technical consulting and services agreement entered into on December 7, 2007 between Yongle and Xingyong, pursuant to which Yongle has agreed to provide technical and consulting services related to the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee equal to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined based on a number of factors, including but not limited to the complexity of the services provided and the commercial value of the services provided. The exclusive technical consulting and services agreement has a 10 year term. Yongle may extend the term of such agreement. The parties may terminate the agreement, prior to its expiration, upon the mutual consent of Yongle and Xingyong.
Business Operations Agreement. Pursuant to the business operations agreement entered into on December 7, 2007 between Yongle, Xingyong, and the shareholders of Xingyong, Xingyong has agreed not to conduct any material transaction or corporate action without obtaining the prior written consent of Yongle. Furthermore, Xingyong and its shareholders have agreed to implement proposals made by Yongle with respect to the operations of Xingyong’s business and the appointment of directors and officers of Xingyong. Yongle may terminate the business operations agreement at any time. The term of the business operations agreement is indefinite.
Option Agreement . Yongle entered into an option agreement on December 7, 2007 with Xingyong and each of the shareholders of Xingyong, pursuant to which Yongle has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Xingyong owned by the shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase price for the entire equity interest shall equal the actual price designated by Yongle to the extent permitted by relevant laws and regulations. The option agreement has a 10 year term. Upon the request of Yongle, the parties shall extend the term of the option agreement.
Equity Pledge Agreement . Pursuant to an equity pledge agreement, dated December 7, 2007, each of the shareholders of Xingyong pledged his equity interest in Xingyong to Yongle to secure Xingyong’s obligations under the VIE agreements described above. In addition, the shareholders of Xingyong agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Xingyong that would affect Yongle’s interests. The equity pledge agreement will expire when Xingyong fully performs its obligations under the various VIE agreements described above.
Because the relationship between Xingyong and Yongle is entirely contractual, the Company’s interest in Xingyong depends on the enforceability of those agreements under the laws of the PRC. The Company is not aware of any judicial decision as to the enforceability of similar agreements under PRC law. However, since the owner of the registered equity of Xingyong is Mr. Jin, the Company’s major shareholder and General Manager, the Company does not believe that there is a significant risk that Xingyong will seek to terminate the relationship or otherwise breach the agreements. Accordingly, the Company believes that consolidation of the financial statements of Xingyong with those of the Company is appropriate. The shareholders of Xingyong do not have any kick-back rights.
6
Liquidity and Working Capital Deficit
As of September 30, 2013 and as of December 31, 2012, the Company managed to operate its business with a negative working capital. The Company has been able to operate with negative working capital primarily due to its ability to borrow substantial short-term loans and notes payables from banks with the support of the local government in lnner Mongolia.
The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:
1.
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10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
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2.
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If the cumulative balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
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3.
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Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.
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Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The Company has never distributed earnings to shareholders and has no intentions to do so.
(2) Going Concern
The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended September 30, 2013, the Company has incurred significant operating losses, working capital deficit, and negative net cash flows from operating activities. While the Company’s sales revenue declined significantly for the period ended September 30, 2013 as compared to the same period prior year, the demand for the Company’s products remains highly uncertain. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s Plan to Continue as a Going Concern
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
7
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
(3) Basis for Preparation of the Financial Statements
Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2012. The consolidated balance sheet as of December 31, 2012 has been derived from the audited financial statements. The results of the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013.
The accompanying unaudited consolidated financial statements for China Carbon Graphite Group, Inc. and its subsidiaries and variable interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
The Company maintains its books and accounting records in Renminbi (“RMB”), but its reporting currency is U.S. dollars.
The financial statements have been prepared in order to present the financial position and results of operations of the Company, its subsidiaries and Xingyong, a variable interest entity whose financial condition is consolidated with the Company pursuant to ASC Topic 810-10, Consolidation, in accordance with U.S. GAAP. All significant intercompany accounts and transactions have been eliminated.
(4) Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
8
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Some of the significant estimates include values and lives assigned to acquired property, equipment and intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation. Actual results may differ from these estimates.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with maturity periods of three months or less to be cash equivalents. The carrying amounts reported in the accompanying balance sheet for cash and cash equivalents approximate their fair value. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. The Company’s bank account in the United States is protected by FDIC insurance.
Restricted cash
Restricted cash represents amounts held by a bank as security for short-term bank notes payable and therefore is subject to withdrawal restrictions. As of September 30, 2013 and December 31, 2012, these amounts totaled $30,718,954 and $22,149,000, respectively. The restricted cash is expected to be released within the next twelve months after the bank notes have matured. Upon release the restricted cash will be used to repay the liabilities or as security for new debt.
Accounts receivable
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary.
Inventory
Inventory is stated at the lower of cost or market. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. Cost is determined using the weighted average method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.
9
As of September 30, 2013 and December 31, 2012, the Company has provision for inventory in regards to slow moving or obsolete items of $3,266,648 and $0, respectively. Impairment of inventories is recorded in cost of goods sold.
Property, plant and equipment
Property, plant and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property, plant and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:
Buildings
|
25 - 40 years
|
Machinery and equipment
|
10 - 20 years
|
Motor vehicles
|
5 years
|
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $3,542,153 and $0 of impairment expenses for property, plant, and equipment recorded in operating expenses as of September 30, 2013 and 2012, respectively.
Construction in progress
Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. The Company has capitalized interest expenses of $385,407 and $0 for the three months ended at September 30, 2013 and 2012, respectively. The Company has capitalized interest expenses of $809,696 and $0 for the nine months ended at September 30, 2013 and 2012, respectively.
10
The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment recorded for construction in progress during the nine months ended September 30, 2013 and 2012.
Land use rights
The Company has land use rights of 386,853 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 130,220 square meters expiring in 2052 and the land use right with respect to 256,633 square meters expiring in 2053. In addition, in 2011, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee but we have obtained its land use right certificate. In exchange, the Company will allow public use of this 387,838 square meters of land, provide improvements to the land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. We used level 1, the most observable market inputs, to arrive at fair market value. In particular, we used market price of land use right in the open market to determine the fair market value of the public use land. The land use right is about 387,838 square meters. The market price for each square meter for industrial use land use right in that area is about $41. The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies. Because of the relationship and agreement with the local government to keep provide improvements to the land and keep it in good condition, the Company believes that it is unlikely to have to pay for the land use right. The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans.
Stock-based compensation
Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation” and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.
11
Common stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued are recorded in common stock to be issued.
Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service.
The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
Foreign currency translation
The reporting currency of the Company is U.S. dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the three months ended September 30, 2013 and 2012 were $118,311 and $528,509, respectively. Translation adjustments for the nine months ended September 30, 2013 and 2012 were $756,990 and $518,452, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the three months ended September 30, 2013 and 2012 were $(954) and $1,832, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2013 and 2012 were $2,833 and $(2,353), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Assets and liabilities were translated at 6.12 RMB and 6.23 RMB to $1.00 at September 30, 2013 and December 31, 2012, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the nine months ended September 30, 2013 and 2012 were 6.17 RMB and 6.33 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
12
Revenue recognition
We recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.
In accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the nine months ended September 30, 2013 and 2012.
Cost of goods sold
Cost of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process and commission expenses. Cost of goods sold also includes impairment charge of inventories.
Shipping and handling costs
The Company follows ASC 605-45, Handling Costs, and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the three months ended September 30, 2013 and 2012, shipping and handling costs were $3,239 and $29,203, respectively. For the nine months ended September 30, 2013 and 2012, shipping and handling costs were $9,537 and $61,927, respectively.
13
Segment reporting
ASC 280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.
Because the Company sells only carbon graphite products to Chinese distributors and end users, it has only one business segment.
Taxation
Taxation on profits earned in the PRC has been calculated based on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed in the county of operations.
The Company does not accrue U.S. income tax since it has no operations in the United States. Its operating subsidiaries are organized and located in the PRC and do not conduct any business in the United States.
In 2006, the Financial Accounting Standards Board (“FASB”) issued ASC, 740 Income Tax, formerly known as FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.
The Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.
Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September 30, 2013 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of September 30, 2013, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions, including the Enterprise Income Tax holiday from Xing He District Local Tax Authority, for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.
14
Enterprise income tax
The Company has been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. Therefore, Xing He District Local Tax Authority in the Nei Mongol province granted the Company a 100% tax holiday from the enterprise income tax for 10 years from 2008 through 2017. When the tax holiday ends, based on the present tax law and the Company’s status as a high technology and science company, the Company will be subject to a corporate income tax rate of 15% effective in 2018.
The enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit is computed differently than the Company’s net income under U.S. GAAP.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Value added tax
The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.
VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. VAT payable (recoverable), which is included in other payables, was $141,063 and $(79,346) as of September 30, 2013 and December 31, 2012, respectively.
Contingent liabilities and contingent assets
A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company will incur it.
15
A contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit. When the benefit is virtually certain, the asset is recognized.
Retirement benefit costs
According to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal government in the province in which the Company is registered and all qualified employees are eligible to participate in the program. Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.
Fair value of financial instruments
The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
●
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
The fair value of the 2007 Warrants to purchase 125,000 shares of common stock was $0 at September 30, 2013 and December 31, 2012, respectively. The Company recognized a gain of $0 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $0 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $0 from the change in fair value of these warrants for the three months ended September 30, 2013.
16
The fair value of the 2009 Warrants to purchase 200,000 shares of common stock was $2,164 and $31,717 at September 30, 2013 and December 31, 2012, respectively. The Company recognized a gain of $8,011 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $14,868 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $6,675 from the change in fair value of these warrants for the three months ended September 30, 2013.
The fair value of the 2009 Series B Warrants to purchase 804,200 shares of common stock was $20,710 and $170,947 at September 30, 2013, and December 31, 2012, respectively. The Company recognized a gain of $32,362 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $76,800 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $41,075 from the change in fair value of these warrants for the three months ended September 30, 2013.
The fair value of 2010 Series B warrants to purchase 100,000 shares of common stock was $2,784 and $21,698 at September 30, 2013 and December 31, 2012, respectively. The Company recognized a gain of $3,996 from the change in fair value of these warrants for the three months ended March 31, 2013 and a gain of $9,672 from the change in fair value of these warrants for the three months ended June 30, 2013 and a gain of $5,247 from the change in fair value of these warrants for the three months ended September 30, 2013.
In summary, the Company recorded a total amount of $52,997 and $198,705 of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the three months and nine months ended September 30, 2013, respectively. Each reporting period, the change in fair value is recorded into other income (expense).
Warrants referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
September 30, 2013
|
December 31, 2012
|
|||||||
2007 Warrants
|
||||||||
Annual dividend yield
|
-
|
-
|
||||||
Expected life (years)
|
-
|
0.04
|
||||||
Risk-free interest rate
|
0.18
|
%
|
0.18
|
%
|
||||
Expected volatility
|
144
|
%
|
146
|
%
|
17
September 30, 2013
|
December 31, 2012
|
|||||||
2009 Warrants
|
||||||||
Annual dividend yield
|
-
|
-
|
||||||
Expected life (years)
|
0.96
|
1.71
|
||||||
Risk-free interest rate
|
0.18
|
%
|
0.18
|
%
|
||||
Expected volatility
|
144
|
%
|
146
|
%
|
September 30, 2013
|
December 31, 2012
|
|||||||
2009 Series B Warrants
|
||||||||
Annual dividend yield
|
-
|
-
|
||||||
Expected life (years)
|
1.23
|
1.98
|
||||||
Risk-free interest rate
|
0.18
|
%
|
0.18
|
%
|
||||
Expected volatility
|
144
|
%
|
146
|
%
|
September 30, 2013
|
December 31, 2012
|
|||||||
2010 Series B Warrants
|
||||||||
Annual dividend yield
|
-
|
-
|
||||||
Expected life (years)
|
1.28
|
2.03
|
||||||
Risk-free interest rate
|
0.18
|
%
|
0.18
|
%
|
||||
Expected volatility
|
144
|
%
|
146
|
%
|
The carrying amount of restricted cash, other receivables, advance to vendors, advances from customers, other payables, accrued liabilities and short-term loans are reasonable estimates of their fair value because of the short-term nature of these items.
18
The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was accounted for at fair value on a recurring basis or for purposes of disclosures as of September 30, 2013:
Carrying Value at
September 30,
|
Fair Value Measurement at
September 30, 2013
|
|||||||||||||||
2013
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Warrant liability
|
$
|
25,657
|
-
|
-
|
$
|
25,657
|
||||||||||
Notes payable
|
$
|
57,679,739
|
-
|
$
|
57,679,739
|
-
|
The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of December 31, 2012:
Carrying Value at
December 31,
|
Fair Value Measurement at
December 31, 2012
|
|||||||||||||||
2013
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Warrant liability
|
$
|
224,362
|
-
|
-
|
$
|
224,362
|
||||||||||
Notes payable
|
$
|
40,606,500
|
-
|
$
|
40,606,500
|
-
|
The Company uses the black-scholes valuation method approach when determining fair values of its Level 3 recurring fair value measurements. Certain unobservable units for these assets are offered quotes, lack of marketability and volatility. For Level 3 measurements, significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair value measurement. In general, a significant change in the calculated volatility of the Company’s stock price could negatively affect the fair value of the warrant liability.
Warrants
|
Weighted Average
Exercise Price
|
|||||||
Outstanding as of December 31, 2012
|
1,229,200
|
$
|
1.51
|
|||||
Granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Cancelled
|
-
|
-
|
||||||
Outstanding as of September 30, 2013
|
1,229,200
|
$
|
1.51
|
Earnings (loss) per share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company has outstanding warrants to purchase 1,229,200 shares of common stock at an exercise price in the range of $1.30 - $2.00 per share. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.
19
The following table sets forth the computation of the number of net income per share for the nine months ended September 30, 2013 and 2012:
September 30, 2013
|
September 30, 2012
|
|||||||
Weighted average shares of common stock outstanding (basic)
|
25,754,899
|
23,843,306
|
||||||
Shares issuable upon conversion of Series B Preferred Stock
|
-
|
300,000
|
||||||
Weighted average shares of common stock outstanding (diluted)
|
25,754,899
|
24,143,306
|
||||||
Net income (loss) available to common shareholders
|
$
|
(17,842,569
|
)
|
$
|
311,599
|
|||
Net income (loss) per shares of common stock (basic)
|
$
|
(0.69
|
)
|
$
|
0.01
|
|||
Net income (loss) per shares of common stock (diluted)
|
$
|
(0.69
|
)
|
$
|
0.01
|
For the nine months ended September 30, 2013, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.
For the nine months ended September 30, 2013, the Company excluded 1,229,200 shares of common stock issuable upon exercise of warrants, because such issuance would be anti-dilutive.
The following table sets forth the computation of the number of net income per share for the three months ended September 30, 2013 and 2012:
September 30, 2013
|
September 30, 2012
|
|||||||
Weighted average shares of common stock outstanding (basic)
|
26,336,648
|
24,260,834
|
||||||
Shares issuable upon conversion of Series B Preferred Stock
|
-
|
300,000
|
||||||
Weighted average shares of common stock outstanding (diluted)
|
26,336,648
|
24,560,834
|
||||||
Net loss available to common shareholders
|
$
|
(6,887,273
|
)
|
$
|
(803,186
|
)
|
||
Net loss per shares of common stock (basic)
|
$
|
(0.26
|
)
|
$
|
(0.03
|
)
|
||
Net loss per shares of common stock (diluted)
|
$
|
(0.26
|
)
|
$
|
(0.03
|
)
|
For the three months ended September 30, 2013, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.
For the three months ended September 30, 2013, the Company excluded 1,229,200 shares of common stock issuable upon exercise of warrants, because such issuance would be anti-dilutive.
Accumulated other comprehensive income
The Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the nine months ended September 30, 2013 and 2012 included net income and foreign currency translation adjustments.
Related parties
Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions with related parties are disclosed in the financial statements.
20
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
FASB Accounting Standards Update No. 2012-02
On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
FASB Accounting Standards Update No. 2013-02
In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.
21
FASB Accounting Standards Update No. 2013-04
The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.
FASB Accounting Standards Update No. 2013-11
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carry forward in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s financial position and results of operations.
(5) Concentration of Business and Credit Risk
Substantially all of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.
Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.
22
For the nine months ended September 30, 2013, one customer accounted for 10% or more of sales revenues, representing 14.5% of the total sales. For the nine months ended September 30, 2012, two customers accounted for 10% or more of sales revenues, representing 32.5% and 26.2%, respectively of the total sales. As of September 30, 2013, there were two customers that constituted 40.4% and 13.9% of the accounts receivable. As of December 31, 2012, there were three customers that constituted 42.2%, 16.5% and 10.3% of the accounts receivable.
For the nine months ended September 30, 2013, three suppliers accounted for 10% or more of our total purchases, representing 21.5%, 16.0% and 15.6%, respectively. For the nine months ended September 30, 2012, three suppliers accounted for 10% or more of our total purchases, representing 28.0%, 16.1% and 10.4%, respectively.
For the nine months ended September 30, 2013 and 2012, the Company had insurance expense of $0 and $29,938 respectively. Accrual for losses is not recognized until such time as a loss has occurred.
(6) Income Taxes
Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC, which took effect on January 1, 2008, domestic and foreign companies pay a unified corporate income tax of 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises.
The Company has been granted a 100% tax holiday from enterprise income tax from the Xing He District Local Tax Authority for 10 years from 2008 through 2017.
A reconciliation of the provision for income taxes with amounts determined by the PRC statutory income tax rate to income before income taxes is as follows:
Nine months Ended
September 30,
|
||||||||
2013
|
2012
|
|||||||
Computed tax at the PRC statutory rate of 15%
|
$
|
145,934
|
$
|
235,909
|
||||
Benefit of tax holiday
|
145,934
|
(235,909
|
)
|
|||||
Income tax expenses per books
|
$
|
-
|
$
|
-
|
(7) Accounts Receivable, net
The Company establishes an individualized credit and collection policy based on each individual customer’s credit history. The Company does not have a uniform policy that applies equally to all customers. The collection period usually ranges from three months to twelve months. The Company grants extended payment terms only when the Company believes that the payment will be collectible at the end of the term. The Company grants extended payment terms to customers if based on the following factors: (a) whether or not the Company views a real need, from the customer’s perspective, for the extension and (b) how critical the Company’s relationship with the customer and is the customer the Company’s long-term business. The Company grants extended payment terms only when the Company believes that the payment will be collectible at the end of the term. This meets the criteria of revenue recognition under U.S. GAAP, which requires that collection of the resulting receivable be reasonably assured.
23
As of September 30, 2013 and December 31, 2012, accounts receivable consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Amount outstanding
|
$
|
12,378,798
|
$
|
15,111,084
|
||||
Less: Allowance for doubtful accounts, net
|
(6,146,123
|
)
|
(3,872,082
|
)
|
||||
Net amount
|
$
|
6,232,675
|
$
|
11,239,002
|
As of September 30, 2013 and December 31, 2012, allowance for doubtful accounts consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Beginning balance
|
$
|
3,872,082
|
$
|
2,790,662
|
||||
Provision for doubtful accounts
|
2,274,041
|
1,081,420
|
||||||
Ending balance
|
$
|
6,146,123
|
$
|
3,872,082
|
(8) Advances to Suppliers
As of September 30, 2013 and December 31, 2012, advance to suppliers consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Advances for raw material
|
$
|
2,122,063
|
$
|
2,240,039
|
||||
Advances for construction
|
11,397,236
|
515,733
|
||||||
Allowance for advances
|
(1,606,815)
|
(1,578,310)
|
||||||
Advances to suppliers, net
|
$
|
11,912,484
|
$
|
1,177,462
|
(9) Inventories
As of September 30, 2013 and December 31, 2012, inventories consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Raw materials
|
$
|
6,686,138
|
$
|
5,863,406
|
||||
Work in process
|
40,845,738
|
40,387,355
|
||||||
Finished goods
|
1,405,194
|
2,167,114
|
||||||
Reserve for slow moving and obsolete inventory
|
(3,292,002
|
)
|
-
|
|||||
$
|
45,645,068
|
$
|
48,417,875
|
As of September 30, 2013 and December 31, 2012, the Company has provision for inventory in regards to slow moving or obsolete items of $3,292,002 and $0, respectively. Impairment of inventories is recorded in cost of goods sold.
24
(10) Property, plant and Equipment, net
As of September 30, 2013 and December 31, 2012, property, plant and equipment consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Building
|
$
|
27,260,209
|
$
|
26,776,613
|
||||
Machinery and equipment
|
29,275,780
|
28,692,280
|
||||||
Motor vehicles
|
34,314
|
33,705
|
||||||
Impairment of property, plant and equipment
|
(3,569,646)
|
-
|
||||||
53,000,657
|
55,502,598
|
|||||||
Less: accumulated depreciation
|
(16,666,477)
|
(14,538,235)
|
||||||
$
|
36,334,180
|
$
|
40,964,363
|
For the three months ended September 30, 2013 and 2012, depreciation expenses amounted to $621,629 and $508,569, respectively. For the nine months ended September 30, 2013 and 2012, depreciation expenses amounted to $1,851,307 and $1,528,131, respectively. As of September 30, 2013 and December 31, 2012, a net book value of $30,620,214 and $35,193,170 of property, plant and equipment were pledged as collateral for the Company’s short-term loans, respectively.
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $3,569,646 and $0 of impairment for property, plant, and equipment was recorded as of September 30, 2013 and 2012, respectively. Impairment of property, plant, and equipment is recorded in operating expenses.
25
Construction in progress consists of two projects as follows:
September 30, 2013
|
December 31, 2012
|
Estimated
completion time
|
Expected capital needed to complete
|
||||||||||
Production facility
|
$
|
17,073,232
|
$
|
-
|
June 2014
|
$
|
816,993
|
||||||
Land improvements
|
10,469,791
|
7,324,379
|
December 2013
|
81,700
|
|||||||||
$
|
27,543,023
|
$
|
7,324,379
|
$
|
898,693
|
Construction in progress represents the costs incurred in connection with the construction of buildings or additions to the Company’s plant facilities and land improvements to the property adjacent to our plant. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. Construction in progress in the amount of $0 was transferred to fixed assets during the nine months ended September 30, 2013.
Production facility refers to a new manufacturing facility that the Company started building in the first quarter of 2013. We expect the facility to be completed around the end of 2014. Addition of the project during the nine months ended September 30, 2013 includes construction cost and machine and equipment used in the construction.
Land improvement refers to a project to improve the green coverage of a piece of land. We expect it to be completed around the end of 2013. Addition of the project during the nine months ended September 30, 2013 includes construction cost and plants used in the construction.
The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment recorded for construction in progress during the nine months ended September 30, 2013 and 2012.
(11) Land Use Rights
As of September 30, 2013 and December 31, 2012, land use rights consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Land Use Rights
|
$
|
11,934,259
|
$
|
11,607,114
|
||||
Less: Accumulated amortization
|
(2,280,052)
|
(1,949,695)
|
||||||
$
|
9,654,207
|
$
|
9,657,419
|
During the year ended December 31, 2012, the Company increased $14,091 to land use right by paying additional fee. During the nine months ended September 30, 2013, the Company increased $117,516 to land use right by paying additional fee. For the three months ended September 30, 2013 and 2012, amortization expenses were $126,715 and $56,198, respectively. For the nine months ended September 30, 2013 and 2012, amortization expenses were $292,872 and $160,028, respectively.
26
Land use rights are amortized over 50 years. Future amortization of the land use rights is as follows:
Twelve-month period ended September 30,
|
||||
$
|
239,116
|
|||
2015
|
239,116
|
|||
2016
|
239,116
|
|||
2017
|
239,116
|
|||
2018
|
239,116
|
|||
2019 and thereafter
|
8,458,627
|
|||
Total
|
$
|
9,654,207
|
As of September 30, 2013 and December 31, 2012, all land use rights were pledged as collateral for short-term bank loans.
(12) Stockholders’ equity
Restated Articles of Incorporation
On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).
Issuance of Common Stock
(a) Series A Preferred Stock
As of September 30, 2013 and December 31, 2012, no shares of Series A Preferred Stock are issued or outstanding.
27
(b) Series B Preferred Stock
During the year ended December 31, 2012, the Company issued an aggregate of 126,110 shares of common stock to holders of Series B Preferred Stock upon the conversion of an aggregate of 126,110 shares of Series B Preferred Stock.
During the nine months ended September 30, 2013, the Company issued an aggregate of 0 shares of common stock to holders of Series B Preferred Stock upon the conversion of an aggregate of 0 shares of Series B Preferred Stock. The remaining 300,000 shares of Series B Preferred Stock are redeemable by the holder as of September 30, 2013. The Company has reclassified these shares into Temporary Equity as of December 31, 2012 and were booked in Temporary Equity as of September 30, 2013.
In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares. The Company has accrued $320,000 for a potential settlement payment to CNH. In addition, during the three months ended September 2013, the Company paid CNH $50,000 in connection with the redemption of the Series B Preferred Stock.
(c) Exercise of Warrants
On January 19, 2011, the Company issued 45,833 shares of common stock to First Trust Group, Inc. upon the cashless exercise of 100,000 warrants at an exercise price of $2.34 per share. On January 24, 2011, the Company issued 124,025 shares of common stock to Maxim Group LLC upon exercise of warrants at an exercise price of $1.32 per share. On February 7, 2011, the Company issued 160,000 shares of common stock to Silver Rock II, Ltd. upon exercise of warrants at an exercise price of $1.30 per share.
As of September 30, 2013, there are total 1,229,200 shares warrants outstanding.
(d) Stock Issuances for Cash
On January 12, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On March 8, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On April 10, 2012, the Company issued 200,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On May 9, 2012, the Company issued 200,000 shares of common stock at a price of $0.56 per share to unrelated parties to raise money for the Company’s operations.
28
On May 9, 2012, the Company issued 100,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On October 4, 2012, the Company issued 260,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
On December 20, 2012, the Company issued 320,000 shares of common stock at a price of $0.50 per share to unrelated parties to raise money for the Company’s operations.
(e) Stock Issuances to Consultants
During the first quarter of 2011, the Company issued an aggregate of 620,000 shares of common stock pursuant to three consulting agreements in exchange for consulting and investor relations services. A fair value of $1,240,100 was recorded for the consulting expenses relating to all three agreements, with the consulting expenses being amortized over one year for two agreements and one and a half years for the third agreement. The amount of $0 and $0 was amortized and recognized as a general and administrative expense for the three months ended September 30, 2013 and 2012, respectively. The amount of $0 and $175,700 was amortized and recognized as a general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively. As of June 30, 2012, these consulting expenses were fully amortized.
During the second quarter of 2011, the Company issued 365,000 shares of common stock pursuant to a consulting agreement in exchange for consulting and investor relations services. A fair value of $547,500 was recorded for the consulting expenses and amortized over one and a half years. The amount of $0 and $91,250 was amortized and recognized as a general and administrative expense for the three months ended September 30, 2013 and 2012, respectively. The amount of $0 and $273,750 was amortized and recognized as a general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2012, these consulting expenses were fully amortized.
In April 2012, the Company issued an aggregate of 110,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $96,800 was recorded for the expenses and amortized over one year. The amount of $0 and $24,200 was amortized and recognized as a general and administrative expense for the three months ended September 30, 2013and 2012, respectively. The amount of $32,267 and $40,333 was amortized and recognized as a general and administrative expense for the nine months ended September 30, 2013and 2012, respectively. As of June 30, 2013, these consulting expenses were fully amortized.
In June 2012, the Company issued an aggregate of 100,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $57,000 was recorded for the consulting expenses and amortized over four months. In September 2012, these 100,000 shares of common stock had been canceled due to early termination of the consulting agreement.
29
In July 2012, the Company issued an aggregate of 45,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $24,750 was recorded for the expenses and amortized over six months. The amount of $24,750 was amortized and recognized as a general and administrative expense for the year ended December 31, 2012. As of December 31, 2012, these consulting expenses were fully amortized.
In September 2012, the Company issued an aggregate of 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. The agreement was signed on August 30, 2012 and was for services performed beginning on April 22, 2012 through December 31, 2012. This agreement extended a previous consulting agreement with the same investor relations firm. The fair value of the agreement was calculated to be $13,800. The Company expensed $13,800 as a general and administrative expense for the year ended December 31, 2012. As of December 31, 2012, these consulting expenses were fully amortized.
In December 2012, the Company issued an aggregate of 65,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $27,950 was recorded for the expenses and amortized over six months. The amount of $0 and $26,397 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2013, respectively. As of June 30, 2013, these consulting expenses were fully amortized.
In December 2012, the Company issued an aggregate of 60,000 shares of common stock pursuant to a consulting agreement in exchange for consulting services provided in 2012. A fair value of $31,200 was recorded as general and administrative expense for the year ended December 31, 2012.
In January 2013, the Company issued 30,000 shares of common stock pursuant to a consulting agreement in exchange for investor relation’s services. A fair value of $20,400 was recorded for the expenses and amortized over six months. The amount of $0 and $20,400 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2013, respectively. As of June 30, 2013, these consulting expenses were fully amortized.
On March 28, 2013, the Company issued 30,000 shares of common stock to a consultant for services provided. The issuance of these shares was recorded at fair market value, or $12,000 and fully amortized during the three months ended March 31, 2013.
In May 2013, the Company issued 120,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $28,800 was recorded for the expenses and amortized over six months. The amount of $10,800 and $18,000 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2013, respectively. As of September 30, 2013, $10,800 remained to be amortized and was recorded as a prepaid expense.
In July 2013, the Company issued 60,000 shares of common stock pursuant to a consulting agreement in exchange for investor relations services. A fair value of $12,000 was recorded for the expenses and amortized over six months. The amount of $6,000 was amortized and recognized as a general and administrative expense for the three and nine months ended September 30, 2013, respectively. As of September 30, 2013, $6,000 remained to be amortized and was recorded as a prepaid expense.
30
(f) Other Stock Issuances
On December 13, 2012, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2012. On December 13, 2012, the Company issued 60,000 shares of common stock to an employee for services provided in 2012. The issuance of these shares was recorded at fair market value, or $64,000.
On May 8, 2013, the Company issued 1,000,000 shares of restricted common stock to an employee for services provided in 2013. On May 8, 2013, the Company issued 25,000 shares of common stock to a director as compensation for services provided in 2013. The issuance of these shares was recorded at fair market value, or $256,250 and were recorded as general and administration expense.
(g) Shares Held in Escrow
In a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250 shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and 2011.
The Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year 2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company for cancellation. As of September 30, 2013, no Escrow shares have been transferred to investors or returned to the Company.
31
Dividend Distribution for Series B Preferred Stock
Pursuant to the terms of a private placement that closed on December 22, 2009 and January 13, 2010, the Series B Preferred Stock offers a 6% dividend. The preferred stock dividend is payable quarterly commencing April 1, 2010 until December 31, 2011.
For the nine months ended September 30, 2013 and 2012, no payment was made for dividends declared.
(13) Amount Due to Related Parties
As of September 30, 2013 and December 31, 2012, the Company had related parties payable in the amount of $4,761,875 and $4,795,593, respectively. As of September 30, 2013, $4,761,875 is due to Mr. Dengyong Jin, who is General Manager of the Company’s China operations and chief executive officer and principal shareholder of Xingyong. These amounts are not due prior to September 30, 2014 and are made to the Company by Mr. Jin for business operating purposes. The advances are interest free.
(14) Loan from Unrelated Parties
During the quarters ended September 30, 2013, the Company obtained short term borrowings of $265,826 from four unrelated parties. The loans are dated from February 28, 2013 and due on demand. The loans are unsecured and interest free.
(15) Bank Loans
Short-term bank loans:
32
As of September 30, 2013 and December 31, 2012, short-term loans in the amount of $45,915,033 and $38,680,500, respectively, consisted of the following:
September 30, 2013
|
December 31, 2012
|
|||||||
Bank loan from China Construction Bank, dated June 8, 2013, due June 8, 2014 with an annual interest rate of 6.6% payable monthly, secured by property, equipment, building and land use rights
|
$
|
6,535,948
|
$
|
-
|
||||
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on August 7, 2013, due August 6, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
6,535,948
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on August 19, 2013, due August 18, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
6,535,948
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated March 20, 2013, due March 19, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights
|
6,535,948
|
-
|
||||||
Bank loan from Huaxia Bank, dated November 16, 2012, due on November 15, 2013, with an annual interest rate of 7.80% payable quarterly, secured by building and land use rights. This loan was paid on November 15, 2013.
|
5,718,954
|
5,617,500
|
||||||
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on September 26, 2013, due September 25, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
4,901,961
|
4,815,000
|
||||||
Bank loan from China Construction Bank, dated January 11, 2013, due January 10, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights
|
4,901,961
|
-
|
||||||
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013, with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on September 13, 2013, due September 12, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
4,248,366
|
4,173,000
|
||||||
Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 8.834% payable monthly, secured by property, equipment, building and land use rights
|
-
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated January 13, 2012, due January 12, 2013 and repaid, with an annual interest rate of 6.56% payable monthly, secured by property, equipment, building and land use rights
|
-
|
4,815,000
|
||||||
$
|
45,915,033
|
$
|
38,680,500
|
In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $152 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of September 30, 2013, the unpaid principal balance drawn from the secured line of credit was $58.2 million, including $40.2 million of short-term bank loans as disclosed above and $18.0 million of long-term bank loans as disclosed below.
33
Each of these loans is renewable at the lender’s discretion. As of September 30, 2013, all land use rights and certain property, plant and equipment were pledged as collateral for our short-term bank loans.
Interest expenses were $1,501,867 and $1,208,970 for the three months ended September 30, 2013 and 2012, respectively. Interest expenses were 3,418,517 and $3,658,888 for the nine months ended September 30, 2013 and 2012, respectively.
The weighted average interest rates for these short-term loans were 6.77% and 6.92% as of September 30, 2013 and December 31, 2012, respectively.
Capitalized interest were $385,407 and $0 for the three months ended September 30, 2013 and 2012, respectively. Capitalized interest were $809,696 and $0 for the nine months ended September 30, 2013 and 2012, respectively.
Long term bank loans:
September 30, 2013
|
December 31, 2012
|
|||||||
Bank loan from China Construction Bank, dated January 22, 2013, originally due in January 21, 2016, with an annual interest rate of 8.61%, payable monthly, secured by machinery.
|
$
|
11,437,908
|
$
|
-
|
||||
Bank loan from China Construction Bank, dated July 2, 2013, originally due in July 2, 2016, with an annual interest rate of 8.61%, payable monthly, secured by machinery.
|
|
6,535,948
|
-
|
|||||
Bank loan from Credit Union, dated April, 2012, originally due in April 2015, with an annual interest rate of 15.295% payable monthly, secured by machinery.
|
4,379,085
|
4,782,900
|
||||||
$
|
22,352,941
|
$
|
4,782,900
|
(16) Notes Payable
The Company’s notes payable represent payables vouchers in the form of notes issued by the Company with a term of 3 to 6 months. They are issued to suppliers in connection with their purchase contracts with the Company, and endorsed by banks to ensure that note holders will be paid upon maturity. Essentially, notes payable are the payables arising from transactions between the Company and suppliers in the normal course of business that are due within one year on customary trade terms. Therefore, the Company has determined that the notes payable meet the scope exception set forth in ASC 835-30-15-3a and the Company is not required to impute interest for the notes payable pursuant to ASC 835-30-25.
34
As of September 30, 2013 and December 31, 2012, notes payable consisted of the following:
September 30, 2013
|
||||
Notes payable from China Everbright bank co., ltd, dated July 15, 2013, due January 14, 2014, and restricted cash required 50% of loan amount
|
$
|
6,535,948
|
||
Notes payable from China Everbright bank co., ltd, dated July 15, 2013, due January 14, 2014, and restricted cash required 50% of loan amount
|
6,535,948
|
|||
Notes payable from China Everbright bank co., ltd, dated May 9, 2013, due November 8, 2013, and restricted cash required 50% of loan amount, paid back on November 8, 2013.
|
6,535,948
|
|||
Notes payable from China Everbright bank co., ltd, dated May 9, 2013, due November 8, 2013, and restricted cash required 50% of loan amount, paid back on November 8, 2013.
|
3,267,974
|
|||
Notes payable from China Construction bank, dated May 28, 2013, due November 27, 2013, and restricted cash required 60% of loan amount, paid back on November 27, 2013.
|
7,026,144
|
|||
Notes payable from China Construction bank, dated September 20, 2013, due March 19, 2014, and restricted cash required 60% of loan amount
|
4,901,961
|
|||
Notes payable from Huaxia bank, dated May 15, 2013, due November 14, 2013, and restricted cash required 60% of loan amount, paid back on November 14, 2013.
|
6,535,948
|
|||
Notes payable from Credit Union, dated June 13, 2013, due December 12, 2013, and restricted cash required 50% of loan amount
|
9,803,922
|
|||
Notes payable from Bank of Inner Mongolia , dated Augest 13, 2013, due February 12, 2014, and restricted cash required 50% of loan amount
|
6,535,948
|
|||
$
|
57,679,739
|
35
December 31,
2012
|
||||
Notes payable from China Everbright bank co., ltd, dated July 30, 2012, due January 30, 2013, and restricted cash required 50% of loan amount
|
$ | 6,420,000 | ||
Notes payable from China Everbright bank co., ltd, dated July 26, 2012, due January 26, 2013, and restricted cash required 50% of loan amount
|
6,420,000 | |||
Notes payable from China Everbright bank co., ltd, dated November 30, 2012, due May 30, 2013, and restricted cash required 50% of loan amount
|
9,630,000 | |||
Notes payable from China Construction bank, dated August 21, 2012, due February 20, 2013, and restricted cash required 60% of loan amount
|
4,815,000 | |||
Notes payable from China Construction bank, dated November 23, 2012, due May 23, 2013, and restricted cash required 60% of loan amount
|
6,901,500 | |||
Notes payable from Huaxia bank, dated November 27, 2012, due May 27, 2013, and restricted cash required 60% of loan amount
|
6,420,000 | |||
$ | 40,606,500 |
The banks that issue notes payable to us charge a service fee in an amount 0.05% of the total outstanding notes payable amount for all the banks and additional 2.5% of the total outstanding notes payable amount minus security deposit. The service fee is recorded in general and administrative expense.
(17) Other Payable
Other payable amounted $2,345,935 and $630,179 as of September 30, 2013 and December 31, 2012, respectively. For the nine months ended September 30, 2013, other payable mainly included amounts payables to the local bureau of finance of $1,026,144 for VAT. For the year ended December 31, 2012, other payable mainly included amounts payable to the local bureau of finance of $434,955 for VAT.
(18) Subsequent events
In accordance with ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued, the Company has evaluated events and transactions for potential recognition or disclosure through the reporting date, the date the consolidated financial statements were available to be issued and disclose the following.
In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares. The Company anticipates settling this matter for approximately $320,000 in the near future.
The Company borrowed notes payable of $9,803,922 from China Everbright bank co., ltd, dated November 15, 2013, due May 14, 2014, and restricted cash required 50% of loan amount.
The Company borrowed notes payable of $8,169,935 from China Construction bank, dated November 26, 2013, due May 25, 2014, and restricted cash required 50% of loan amount.
36
This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements.
Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. This Annual Report should be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
We are engaged in the manufacture of graphite-based products in the PRC. Our products are used in the manufacturing process of other products, particularly non-ferrous metals and steel, and are incorporated in various types of products or processes, such as atomic reactors. We currently manufacture and sell primarily the following types of graphite products:
o
|
graphite electrodes;
|
o
|
fine grain graphite; and
|
o
|
high purity graphite.
|
37
Based on information we receive about our industry in the course of our business, we believe that we are the largest wholesale supplier of fine grain graphite and high purity graphite in China and one of China’s largest producers and suppliers of graphite products overall. Approximately 40% of our products are sold directly to end users in China, primarily consisting of steel manufacturers. All other sales are made to over 200 distributors located throughout 22 provinces in China. Our distributors then sell our products to end users both in China and in foreign countries, including, among others, Japan, the United States, Spain, England, South Korea and India. Our revenues and profits decreased since 2011 due to a decrease in demand for our products, which resulted from more competitive market conditions and from the slowdown of steel industry which is our important target customer industry. The Company believes that the graphite industry will experience even stronger competition in the rest of 2013 and in 2014.
As of and for the period ended September 30, 2013, the Company has incurred significant operating losses, working capital deficit, and negative net cash flows from operating activities. While the Company’s sales revenue declined significantly for the period ended September 30, 2013 as compared to the same period prior year, the demand for the Company’s products remains highly uncertain. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
During the three months ended September 30, 2013, we had sales of $2,721,723, compared to sales of $6,491,133 for the three months ended September 30, 2012, a decrease of $3,769,410, or approximately 58.1%. During the nine months ended September 30, 2013, we had sales of $8,496,893, compared to sales of $28,429,886 for the nine months ended September 30, 2012, a decrease of $19,932,993, or approximately 70.1%. The fluctuation of the sales is related to the government. In March 2013 a new government was elected. At that time, the general consensus was that the incoming government would provide much needed support to the struggling steel and real estate industries. Such government support would have improved our prospects. However, by the end of June 2013, no relief had been provided by the government to either one of these industries. Consequently, demand for graphite decreased, and many purchasers of graphite even cancelled existing orders. Consequently, we started to take impairment for our inventory at the end of June 2013.
In October 2013, the Chinese premier clearly stated that the government has no plans to stimulate the steel industry. Rather, the government will allow for a decrease in the supply of steel and the closure of some steel companies, in order to address oversupply and environmental concerns in China. As a result, a number of steel companies have closed. This has had a further negative impact on the graphite industry. Furthermore, it seems that the government intends to take a strict approach with the real estate industry, in order to control real estate prices. Consequently, we have booked an impairment charge for property, plant, and equipment and inventory as of September 30, 2013.
Our gross margin for the three months ended September 30, 2013 was 16.6%, compared to 27.3% for the three months ended September 30, 2012 and our gross margin for the nine months ended September 30, 2013 was (55.4)%, compared to 26.7% for the nine months ended September 30, 2012. Our sales did not offset the costs we incurred during this period for raw materials, utilities, labor, and depreciation and impairment cost of inventory. Sales of our products decreased significantly during the three and nine months ended September 30, 2013 due to decreased demand and strong competition. The decrease of gross profit margin during the nine months ended September 30, 2013 is mainly due to inventory impairment cost charged to cost of goods sold and also due to increased allocation of production costs to each unit produced resulting from increased depreciation expenses during the nine months ended September 30, 2013. The decrease of gross profit margin during the three months ended September 30, 2013 is mainly due to increased allocation of production costs to each unit produced resulting from increased depreciation expenses during the nine months ended September 30, 2013. The increased allocation is a result of increased property and equipment related to our ongoing expansion in conjunction with decreased production quantities resulting from decreased sales.
Our cash increased and our accounts receivables decreased as of September 30, 2013 compared to the December 31, 2012, while collectability of our receivables remained highly probable. We believe that our allowance for doubtful accounts as of September 30, 2013 was adequate.
We are currently undergoing new construction, including new buildings and equipment, in connection with the manufacturing of graphite products. Although the current market for our products is extremely weak, we believe the construction will expand our capacity and improve our products quality in the long run. The current budgeted investment for the construction of our new production facility was approximately $18 million in the aggregate. Approximately $17.1 million had been spent as of September 30, 2013. We have used proceeds from a long-term loan to fund this construction.
Some of our expansion plans, including our ongoing construction and the expansion of our product offerings to include nuclear, solar and semiconductor products and pursuing an acquisition, would likely require us to obtain additional financing from equity or debt markets, or borrow additional funds from local banks. There is no assurance that we will be able to raise any funds on terms favorable to us, or at all. In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted. In addition, there is no assurance that we will successfully manage and integrate the production and sale of new products.
38
At September 30, 2013, we had short-term bank loans of approximately $45.9 million. These bank loans, which are secured by liens on our fixed assets and land use rights, are due between January 2014 and September 2014, including approximately $40.2 million owed to the Construction Bank of China. During the nine months ended September 30, 2013, pursuant to a secured line of credit obtained from China Construction Bank in January 2012, the Company rolled over all of its short-term bank loans from the China Construction Bank. In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $152 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of September 30, 2013, the unpaid principal balance drawn from the secured line of credit was $58.2 million, including $40.2 million of short-term bank loans as disclosed above and $18.0 million of long-term bank loans as disclosed below. Historically, we have rolled over our short-term loans when they became due. However, we cannot assure investors that our lenders, including the Construction Bank of China, will not demand repayment when these loans mature. If our lenders demand repayment when due, we may be unable to obtain the necessary funds to pay off these loans, which could result in the imposition of penalties, including a 50% increase in interest rates and a request from the banks for additional security for the loans. At September 30, 2013, our cash reserves, including restricted cash, were $30.9 million and are insufficient to pay off all of our loans when due.
We purchase all of our raw materials from domestic Chinese suppliers. Because we do not have any long-term contracts with our suppliers, any increase in the prices of our raw materials would affect the price at which we can sell our products. If we are unable to pass on increased costs to our customers, we may be unable to maintain our profit margins. Raw material prices increased significantly in 2010 and 2011, but decreased during the year ended December 31, 2012. The price is stable in 2013. Average selling prices of our products decreased during the nine months ended September 30, 2013 compared with average prices in the same period in 2012. As of September 30, 2013 and December 31, 2012, advances to suppliers amounted to $11,912,484 and $1,177,462, respectively. The increase of advances to suppliers is mainly due to increased advance for construction during the nine months ended September 30, 2013.
In times of decreasing prices such as the current downturn, we may have to sell our products at prices that are lower than the prices at which we purchased our raw materials. Furthermore, PRC regulations grant broad powers to the government to adjust the price of raw materials and manufactured products. Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.
39
Results of Operations
Three months ended September 30, 2013 and 2012
The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):
Three months ended September 30,
|
||||||||||||||||
2013
|
2012
|
|||||||||||||||
Sales
|
$
|
2,722
|
100.0
|
%
|
$
|
6,491
|
100.0
|
%
|
||||||||
Cost of goods sold
|
2,269
|
83.4
|
%
|
4,722
|
72.7
|
%
|
||||||||||
Gross profit (loss)
|
452
|
|
16.6
|
%
|
1,769
|
27.3
|
%
|
|||||||||
Operating expenses
|
||||||||||||||||
Selling expenses
|
8
|
0.3
|
%
|
64
|
1.0
|
%
|
||||||||||
General and administrative
|
2,716
|
99.8
|
%
|
1,056
|
16.3
|
%
|
||||||||||
Impairment of property, plant and equipment
|
3,542
|
130.1
|
%
|
-
|
-
|
%
|
||||||||||
Depreciation and amortization
|
188
|
6.9
|
%
|
56
|
0.9
|
%
|
||||||||||
Income (loss) from operations
|
(6,002
|
)
|
(220.5
|
)%
|
592
|
9.1
|
%
|
|||||||||
Other income
|
(0.4
|
)
|
(0.0
|
)%
|
6
|
0.1
|
%
|
|||||||||
Other expense
|
-
|
0.0
|
%
|
0.3
|
0.0
|
%
|
||||||||||
Change in fair value of warrants
|
53
|
1.9
|
%
|
(188
|
)
|
(2.9
|
)%
|
|||||||||
Interest income
|
563
|
20.7
|
%
|
-
|
0.0
|
%
|
||||||||||
Interest expense
|
(1,502
|
)
|
(55.2
|
)%
|
(1,209
|
)
|
(18.6
|
)%
|
||||||||
Net loss
|
(6,888
|
)
|
(253.1
|
)%
|
(799
|
)
|
(12.3
|
)%
|
||||||||
Preferred Stock Dividend
|
0.8
|
|
0.0
|
%
|
(5
|
)
|
(0.1
|
)%
|
||||||||
Net loss available to common shareholders
|
$
|
(6,887
|
)
|
(253.0
|
)%
|
$
|
(803
|
)
|
(12.4
|
)%
|
Sales.
During the three months ended September 30, 2013, we had sales of $2,721,723, compared to sales of $6,491,133 for the three months ended September 30, 2012, a decrease of $3,769,410, or approximately 58.1%. Sales decrease was mainly because the graphite industry experienced low demand during the three months ended September 30, 2013 as a result of the struggles of steel companies in China relating to severe oversupply. In particular, the market for fine grain graphite and high purity graphite products has experienced extremely low demand.
40
The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, during the three months ended September 30, 2013 and 2012, respectively, was as follows:
September 30, 2013
Sales
|
% of Total
Sales
|
September 30, 2012
Sales
|
% of Total
Sales
|
|||||||||||||
Graphite Electrodes
|
$
|
361,069
|
13.3
|
%
|
$
|
788,769
|
12.1
|
%
|
||||||||
Fine Grain Graphite
|
935,145
|
34.4
|
%
|
2,666,957
|
41.1
|
%
|
||||||||||
High Purity Graphite
|
1,188,145
|
43.6
|
%
|
2,763,836
|
42.6
|
%
|
||||||||||
Others (1)
|
237,364
|
8.7
|
%
|
271,571
|
4.2
|
%
|
||||||||||
Total
|
$
|
2,721,723
|
100.0
|
%
|
$
|
6,491,133
|
100.0
|
%
|
(1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products.
Cost of goods sold; gross margin.
Our cost of goods sold consists of the cost of raw materials, utilities, labor, depreciation expenses in our manufacturing facilities, and inventory impairment cost(income). During the three months ended September 30, 2013, our cost of goods sold was $2,269,493, compared to $4,722,151 for the cost of goods sold for the three months ended September 30, 2012, a decrease of $2,452,658, or approximately 51.9%. The decrease in the cost of sales was mainly due to decrease in sales volume. Recovery of inventory impairment cost of 597,658 was recorded for the three months ended September 30, 2013 due to the changes of market price and due to the changes of mix of the inventories. As of September 30, 2013, the Company has provision for inventory in regards to slow moving or obsolete items of $3,266,648 and $0, respectively.
Our gross margin decreased from 27.3% for the three months ended September 30, 2012 to 16.6% for the three months ended September 30, 2013. Our sales did not offset the costs we incurred during this period for raw materials, utilities, labor, and depreciation. Sales of our higher margin products decreased significantly during the three months ended September 30, 2013 due to decreased demand and strong competition. The decrease of gross profit margin is also due to increased allocation of production costs to each unit produced resulting from increased depreciation expenses during the three months ended September 30, 2013. This increased allocation is a result of increased property and equipment related to our ongoing expansion in conjunction with decreased production quantities resulting from decreased sales.
Operating expenses.
Operating expenses totaled $6,454,023 for the three months ended September 30, 2013, compared to $1,176,968 for the three months ended September 30, 2012, an increase of $5,277,055, or approximately 448.4%.
Selling, general and administrative expenses
Selling expenses decreased from $64,487 for the three months ended September 30, 2012 to $8,252 for the three months ended September 30, 2013, a decrease of $56,235, or 87.2%. The decrease was mainly due to decreased sales commission and lower shipping and handling expenses during the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, which resulted from lower sales.
41
Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $2,715,815 for the three months ended September 30, 2013, compared to $1,056,283 for the three months ended September 30, 2012, an increase of $1,659,532, or 157.1%. The increase in general and administrative expenses was mainly due to increased bad debt expenses of $2,204,110 for accounts receivable offset by decreased stock compensation expenses for consulting services of approximately $481,000 for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.
Impairment of property, plant and equipment
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $3,542,153 and $0 of impairment expenses for property, plant, and equipment was recorded during the three months ended September 30, 2013 and 2012, respectively.
Depreciation and amortization expenses
Depreciation and amortization expenses totaled $748,344 for the three months ended September 30, 2013, compared to $564,467 for the three months ended September 30, 2012, an increase of $183,877, or approximately 32.6%. For the three months ended September 30, 2013, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts of $560,541 and $187,803, respectively. For the three months ended September 30, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $508,269 and $56,198, respectively. The increase in depreciation and amortization expenses is due to additional fixed assets placed in service.
Income (Loss) from operations.
As a result of the factors described above, operating loss was $(6,001,793) for the three months ended September 30, 2013, compared to operating income of $592,014 for the three months ended September 30, 2012, a decrease of approximately $6,593,807, or 1,113.8%.
Other income and expenses.
Our interest expense was $1,501,867 for the three months ended September 30, 2013, compared to $1,208,970 for the three months ended September 30, 2012, reflecting increased interest expenses on loans from banks. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $52,997 for the three months ended September 30, 2013, compared to $(188,046) for the three months ended September 30, 2012.
42
Income tax.
During the three months ended September 30, 2013 and 2012, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $0 and $0, respectively, for the three months ended September 30, 2013 and 2012 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.
Net income (loss).
As a result of the factors described above, our net loss for the three months ended September 30, 2013 was $(6,888,099), compared to net loss of $(798,649) for the three months ended September 30, 2012, an inecrease of $6,089,450, or 762.5%.
Foreign currency translation.
Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the three months ended September 30, 2013 was $92,843, compared to $528,509 for the three months ended September 30, 2012, a decrease of $435,666, or 82.4%.
Net income (loss) available to common stockholders.
Net loss available to our common stockholders was $(6,887,273), or $(0.26) per share (basic and diluted), for the three months ended September 30, 2013, compared to net loss of ($803,186), or $(0.03) per share (basic and diluted), for the three months ended September 30, 2012.
43
Nine months ended September 30, 2013 and 2012
The following table sets forth the results of our operations for the periods indicated in U.S. dollars and as a percentage of net sales (dollars in thousands):
Nine months ended September 30,
|
||||||||||||||||
2013
|
2012
|
|||||||||||||||
Sales
|
$
|
8,497
|
100.0
|
%
|
$
|
28,430
|
100.0
|
%
|
||||||||
Cost of goods sold
|
13,202
|
155.4
|
%
|
20,851
|
73.3
|
%
|
||||||||||
Gross profit (loss)
|
(4,705
|
)
|
(55.4
|
)%
|
7,579
|
26.7
|
%
|
|||||||||
Operating expenses
|
||||||||||||||||
Selling expenses
|
46
|
0.5
|
%
|
140
|
0.5
|
%
|
||||||||||
General and administrative
|
6,638
|
78.1
|
%
|
3,078
|
10.8
|
%
|
||||||||||
Impairment of property, plant and equipment
|
3,542
|
41.7
|
%
|
-
|
-
|
%
|
||||||||||
Depreciation and amortization
|
308
|
3.6
|
%
|
160
|
0.6
|
%
|
||||||||||
Income (loss) from operations
|
(15,239
|
)
|
(179.4
|
)%
|
4,200
|
14.8
|
%
|
|||||||||
Other income
|
(0.1
|
)
|
(0.0
|
)%
|
221
|
0.8
|
%
|
|||||||||
Other expense
|
-
|
0.0
|
%
|
(215
|
)
|
(0.8
|
)%
|
|||||||||
Change in fair value of warrants
|
199
|
2.3
|
%
|
(222
|
)
|
(0.8
|
)%
|
|||||||||
Interest Income
|
625
|
7.4
|
%
|
0.04
|
0.0
|
%
|
||||||||||
Interest expense
|
(3,419
|
)
|
(40.2
|
)%
|
(3,659
|
)
|
(12.9
|
)%
|
||||||||
Net income (loss)
|
(17,834
|
)
|
(209.9
|
)%
|
326
|
1.1
|
%
|
|||||||||
Preferred Stock Dividend
|
(8
|
)
|
(0.1
|
)%
|
(14
|
)
|
(0.0
|
)%
|
||||||||
Net income (loss) available to common shareholders
|
$
|
(17,843
|
)
|
(210.0
|
)%
|
$
|
312
|
1.1
|
%
|
Sales.
During the nine months ended September 30, 2013, we had sales of $8,496,893, compared to sales of $28,429,886 for the nine months ended September 30, 2012, a decrease of $19,932,993, or approximately 70.1%. Sales decrease was mainly because the graphite industry experienced low demand during the nine months ended September 30, 2013 as a result of the struggles of steel companies in China relating to severe oversupply. In particular, the market for fine grain graphite and high purity graphite products has experienced extremely low demand.
The breakdown of revenues for each of graphite electrodes, fine grain graphite and high purity graphite, during the nine months ended September 30, 2013 and 2012, respectively, was as follows:
September 30,
2013
Sales
|
% of Total
Sales
|
September 30,
2012
Sales
|
% of Total
Sales
|
|||||||||||||
Graphite Electrodes
|
$
|
2,021,971
|
23.8
|
%
|
$
|
3,434,285
|
12.1
|
%
|
||||||||
Fine Grain Graphite
|
3,247,054
|
38.2
|
%
|
12,443,155
|
43.8
|
%
|
||||||||||
High Purity Graphite
|
2,693,240
|
31.7
|
%
|
12,024,784
|
42.3
|
%
|
||||||||||
Others (1)
|
534,628
|
6.3
|
%
|
527,662
|
1.8
|
%
|
||||||||||
Total
|
$
|
8,496,893
|
100.0
|
%
|
$
|
28,429,886
|
100.0
|
%
|
(1) “Other” sales represent revenue generated by sales of semi-processed products and other types of products.
44
Cost of goods sold; gross margin.
Our cost of goods sold consists of the cost of raw materials, utilities, labor, depreciation expenses in our manufacturing facilities, and inventory impairment cost. During the nine months ended September 30, 2013, our cost of goods sold was $13,202,146, compared to $20,850,882 for the cost of goods sold for the nine months ended September 30, 2012, a decrease of $7,648,736, or approximately 36.7%. The decrease in the cost of sales was mainly due to decrease in sales volume offset by increased inventory impairment cost during the nine months ended September 30, 2013.
Our gross margin decreased from 26.7% for the nine months ended September 30, 2012 to (55.4)% for the nine months ended September 30, 2013. Our sales did not offset the costs we incurred during this period for raw materials, utilities, labor, depreciation, and inventory impairment cost. Sales of our higher margin products decreased significantly during the nine months ended September 30, 2013 due to decreased demand and strong competition. The decrease of gross profit margin is also due to $3,266,648 inventory impairment cost and due to increased allocation of production costs to each unit produced resulting from increased depreciation expenses during the nine months ended September 30, 2013. There was no inventory impairment cost during the nine months ended September 30, 2012. The increased allocation is a result of increased property and equipment related to our ongoing expansion in conjunction with decreased production quantities resulting from decreased sales.
Operating expenses.
Operating expenses totaled $10,533,928 for the nine months ended September 30, 2013, compared to $3,378,609 for the nine months ended September 30, 2012, an increase of $7,155,319, or approximately 211.8%.
Selling, general and administrative expenses
Selling expenses decreased from $140,437 for the nine months ended September 30, 2012 to $46,088 for the nine months ended September 30, 2013, a decrease of $94,349, or 67.2%. The decrease was mainly due to decreased sales commission and lower shipping and handling expenses during the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, which resulted from lower sales.
Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $6,638,182 for the nine months ended September 30, 2013, compared to $3,078,144 for the nine months ended September 30, 2012, an increase of $3,560,038, or 115.7%. The increase in general and administrative expenses was mainly due to increased bad debt expenses of $2,187,134, increased stock compensation expense for directors and officers of $268,250 mainly due to 1,000,000 stock issuance to an officer, and increased $320,000 accrued expenses for potential law suit loss for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.
45
Impairment of property and equipment
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $3,542,153 and $0 of impairment expenses for property, plant, and equipment was recorded during the nine months ended September 30, 2013 and 2012, respectively.
Depreciation and amortization expenses
Depreciation and amortization expenses totaled $2,144,180 for the nine months ended September 30, 2013, compared to $1,925,159 for the nine months ended September 30, 2012, an increase of $219,021, or approximately 11.38%. For the nine months ended September 30, 2013, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts of $1,836,675 and $307,505, respectively. For the nine months ended September 30, 2012, depreciation and amortization was allocated between costs of goods sold and selling, general and administrative expenses in the amounts $1,765,131 and $160,028, respectively. The increase in depreciation and amortization expenses is due to additional fixed assets placed in service.
Income (Loss) from operations.
As a result of the factors described above, operating loss was $(15,239,181) for the nine months ended September 30, 2013, compared to operating income of $4,200,395 for the nine months ended September 30, 2012, a decrease of approximately $19,439,576, or 462.8%.
Other income and expenses.
Our interest expense was $3,418,517 for the nine months ended September 30, 2013, compared to $3,658,888 for the nine months ended September 30, 2012, reflecting decreased interest expenses on loans from banks. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $198,705 for the nine months ended September 30, 2013, compared to $(221,846) for the nine months ended September 30, 2012.
Income tax.
During the nine months ended September 30, 2013 and 2012, we benefited from a 100% tax holiday from the PRC enterprise tax. As a result, we had no income tax due for these periods. The enterprise income tax at the statutory rates would have been approximately $0 and $235,909, respectively, for the nine months ended September 30, 2013 and 2012 without consideration of adjustments on taxable income. The tax holiday is from 2008 through 2017.
46
Net income (loss).
As a result of the factors described above, our net loss for the nine months ended September 30, 2013 was $(17,834,370), compared to net income of $325,779 for the nine months ended September 30, 2012, a decrease of $18,160,149, or 5,574.4%.
Foreign currency translation.
Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the nine months ended September 30, 2013 was $731,522, compared to $518,452 for the nine months ended September 30, 2012, an increase of $213,070, or 41.1%.
Net income (loss) available to common stockholders.
Net loss available to our common stockholders was $(17,842,569), or $(0.69) per share (basic and diluted), for the nine months ended September 30, 2013, compared to net income of $311,599, or $0.01 per share (basic and diluted), for the nine months ended September 30, 2012.
Liquidity and Capital Resources
All of our business operations are carried out by Xingyong, and all of the cash generated by our operations has been held by that entity. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries or VIE entity. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, Xingyong would have to transfer funds to our parent entity through our wholly-owned subsidiaries, Talent and Yongle.
PRC regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:
1.
|
10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
|
2.
|
If the accumulate balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
|
3.
|
Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.
|
47
Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently stated in the Company’s filings it has no intentions to do so.
The RMB is not freely convertible into Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises, such as Xingyong, may purchase foreign currency from designated financial institutions in connection with current account transactions, including profit repatriation.
These factors will limit the amount of funds that we can transfer from Xingyong to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of Xingyong to the United States, those earnings may become subject to United States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly, taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.
Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing have been cash generated from short-term and long-term loans from banks in China, loans from unrelated parties and loans from related parties. Currently and for the last two fiscal years, the Company has managed to operate the business with a low or negative net working capital. The Company’s low working capital is primarily due to substantial short-term loans from banks and borrowing from related parties. The Company is able to operate with a low or negative net working capital because of local community and governmental support in Inner Mongolia. For example, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities, as described below under the heading “Summary of Significant Accounting Policies—Land Use Rights.”
We are currently undergoing new construction, including new buildings and equipment, in connection with the manufacturing of graphite products. Although the current market for our products is extremely weak, we expect the market to improve in the long run. The current budgeted investment for the construction of our new production facility was approximately $18 million in the aggregate. Approximately $17.1 million had been spent as of September 30, 2013. We have used proceeds from a long-term loan to fund this construction.
Some of our expansion plans, including our ongoing construction, would likely require us to obtain additional financing from equity or debt markets, or borrow additional funds from local banks. There is no assurance that we will be able to raise any funds on terms favorable to us, or at all. In the event that we issue shares of equity or convertible securities, holdings of our existing stockholders would be diluted. In addition, there is no assurance that we will successfully manage and integrate the production and sale of new products.
48
At September 30, 2013, we had short-term loans in the aggregate amount of $45,915,033 outstanding, as described below.
September 30, 2013
|
December 31, 2012
|
|||||||
Bank loan from China Construction Bank, dated June 8, 2013, due June 8, 2014 with an annual interest rate of 6.6% payable monthly, secured by property, equipment, building and land use rights
|
$
|
6,535,948
|
$
|
-
|
||||
Bank loan from China Construction Bank, dated August 23, 2012, due August 22, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on August 7, 2013, due August 6, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
6,535,948
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated August 3, 2012, due August 2, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on August 19, 2013, due August 18, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
6,535,948
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated March 20, 2013, due March 19, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights
|
6,535,948
|
-
|
||||||
Bank loan from Huaxia Bank, dated November 16, 2012, due on November 15, 2013, with an annual interest rate of 7.80% payable quarterly, secured by building and land use rights. This loan was paid on November 15, 2013.
|
5,718,954
|
5,617,500
|
||||||
Bank loan from China Construction Bank, dated September 7, 2012, due September 6, 2013 with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on September 26, 2013, due September 25, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
4,901,961
|
4,815,000
|
||||||
Bank loan from China Construction Bank, dated January 11, 2013, due January 10, 2014 with an annual interest rate of 6% payable monthly, secured by property, equipment, building and land use rights
|
4,901,961
|
-
|
||||||
Bank loan from China Construction Bank, dated September 17, 2012, due September 16, 2013, with an annual interest rate of 6.941% payable monthly, secured by property, equipment, building and land use rights. This loan is renewed on September 13, 2013, due September 12, 2014, with an annual interest rate of 6.6% plus 30% floating rate.
|
4,248,366
|
4,173,000
|
||||||
Bank loan from China Construction Bank, dated June 6, 2012, due June 5, 2013 with an annual interest rate of 8.834% payable monthly, secured by property, equipment, building and land use rights
|
-
|
6,420,000
|
||||||
Bank loan from China Construction Bank, dated January 13, 2012, due January 12, 2013 and repaid, with an annual interest rate of 6.56% payable monthly, secured by property, equipment, building and land use rights
|
-
|
4,815,000
|
||||||
$
|
45,915,033
|
$
|
38,680,500
|
49
In January 2012, the Company entered into a secured line of credit agreement with China Construction Bank for borrowings up to $152 million (or RMB 930 million) between January 10, 2012 and August 4, 2015, which is secured by liens on our fixed assets and land use rights. Under the secured line of credit, the Company is entitled to draw funds through sub-agreements of bank loans, foreign currency loans, bank acceptance notes, letter of credit, or bank guarantee letter. As of September 30, 2013, the unpaid principal balance drawn from the secured line of credit was $58.2 million, including $40.2 million of short-term bank loans as disclosed above and $18.0 million of long-term bank loans as disclosed below.
Each of these loans is renewable at the lender’s discretion. As of September 30, 2013, all land use rights and certain property and equipment were pledged as collateral for our short-term bank loans.
Interest expenses were $1,501,867 and $1,208,970 for the three months ended September 30, 2013 and 2012, respectively. Interest expenses were $3,418,517 and $3,658,888 for the nine months ended September 30, 2013 and 2012, respectively.
The weighted average interest rates for these loans were 6.77% and 6.92% as of September 30, 2013 and December 31, 2012, respectively.
Capitalized interest were $385,407 and $0 for the three months ended September 30, 2013 and 2012, respectively. Capitalized interest were $809,696 and $0 for the nine months ended September 30, 2013 and 2012, respectively.
Long term bank loans:
September 30, 2013
|
December 31, 2012
|
|||||||
Bank loan from China Construction Bank, dated January 22, 2013, originally due in January 21, 2016, with an annual interest rate of 8.61%, payable monthly, secured by machinery.
|
$
|
11,437,908
|
$
|
-
|
||||
Bank loan from China Construction Bank, dated July 2, 2013, originally due in July 2, 2016, with an annual interest rate of 8.61%, payable monthly, secured by machinery.
|
|
6,535,948
|
-
|
|||||
Bank loan from Credit Union, dated April, 2012, originally due in April 2015, with an annual interest rate of 15.295% payable monthly, secured by machinery.
|
4,379,085
|
4,782,900
|
||||||
$
|
22,352,941
|
$
|
4,782,900
|
Historically we have been able to renew our short-term loans on an annual basis. Although we believe that we will be able to obtain extensions of these loans when they mature, we cannot assure investors that such extensions will be granted. In the event repayment of the loans is not extended and we default on our obligations, the lenders could call the loans, foreclose on the collateral securing the loans or seek other remedies. If a lender foreclosed on our land, the lender would acquire the land use rights to such land, which rights are currently held by us. In addition, because we did not pay for the land use rights that were granted to us with respect to a portion of our facilities, we are required to keep such property in good condition and to allocate a portion of the land as a park that can be accessed by the public. In such an event, our operations and financial conditions would be materially adversely affected and we would be forced to cease operations if alternative funding is not obtained.
As of September 30, 2013 and December 31, 2012, notes payable consisted of the following:
September 30, 2013
|
||||
Notes payable from China Everbright bank co., ltd, dated July 15, 2013, due January 14, 2014, and restricted cash required 50% of loan amount
|
$
|
6,535,948
|
||
Notes payable from China Everbright bank co., ltd, dated July 15, 2013, due January 14, 2014, and restricted cash required 50% of loan amount
|
6,535,948
|
|||
Notes payable from China Everbright bank co., ltd, dated May 9, 2013, due November 8, 2013, and restricted cash required 50% of loan amount, paid back on November 8, 2013.
|
6,535,948
|
|||
Notes payable from China Everbright bank co., ltd, dated May 9, 2013, due November 8, 2013, and restricted cash required 50% of loan amount, paid back on November 8, 2013.
|
3,267,974
|
|||
Notes payable from China Construction bank, dated May 28, 2013, due November 27, 2013, and restricted cash required 60% of loan amount, paid back on November 27, 2013.
|
7,026,144
|
|||
Notes payable from China Construction bank, dated November 20, 2013, due March 19, 2014, and restricted cash required 60% of loan amount
|
4,901,961
|
|||
Notes payable from Huaxia bank, dated May 15, 2013, due November 14, 2013, and restricted cash required 60% of loan amount, paid back on November 14, 2013.
|
6,535,948
|
|||
Notes payable from Credit Union, dated June 13, 2013, due December 12, 2013, and restricted cash required 50% of loan amount
|
9,803,922
|
|||
Notes payable from Bank of Inner Mongolia, dated August 13, 2013, due February 12, 2014, and restricted cash required 50% of loan amount
|
6,535,948
|
|||
$
|
57,679,739
|
50
December 31,
2012
|
||||
Notes payable from China Everbright bank co., ltd, dated July 30, 2012, due January 30, 2013, and restricted cash required 50% of loan amount
|
$
|
6,420,000
|
||
Notes payable from China Everbright bank co., ltd, dated July 26, 2012, due January 26, 2013, and restricted cash required 50% of loan amount
|
6,420,000
|
|||
Notes payable from China Everbright bank co., ltd, dated September 30, 2012, due May 30, 2013, and restricted cash required 50% of loan amount
|
9,630,000
|
|||
Notes payable from China Construction bank, dated August 21, 2012, due February 20, 2013, and restricted cash required 60% of loan amount
|
4,815,000
|
|||
Notes payable from China Construction bank, dated November 23, 2012, due May 23, 2013, and restricted cash required 60% of loan amount
|
6,901,500
|
|||
Notes payable from Huaxia bank, dated November 27, 2012, due May 27, 2013, and restricted cash required 60% of loan amount
|
6,420,000
|
|||
$
|
40,606,500
|
The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended September 30, 2013, the Company has incurred significant operating losses, working capital deficit, and negative net cash flows from operating activities. While the Company’s sales revenue declined significantly for the period ended September 30, 2013 as compared to the same period prior year, the demand for the Company’s products remains highly uncertain.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
At September 30, 2013, cash and cash equivalents were $197,636, compared to $129,746 at December 31, 2012, an increase of $67,890. Restricted cash increased to $30,718,954 as of September 30, 2013 from $22,149,000 as of December 31, 2012, which was restricted as a requirement by our lenders. Our working capital deficit increased by $15,079,230 to a deficit of $15,570,977 at September 30, 2013 from a deficit of $491,747 at December 31, 2012.
51
As of September 30, 2013, accounts receivable, net of allowance, was $6,232,675, compared to $11,239,002 at December 31, 2012, a decrease of $5,006,327, or 44.54%. The decrease was mainly due to decreased sales during the three and nine months ended September 30, 2013. Accounts receivable are recorded at the invoiced amount and do not bear interest. Our management reviews the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends and the aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The Company believes its allowance was sufficient as of September 30, 2013.
As of September 30, 2013, inventories were $45,645,068, compared to $48,417,875 at December 31, 2012, a decrease of $2,772,807, or 5.73%. As of September 30, 2013 and December 31, 2012, the Company has provision for inventory in regards to slow moving or obsolete items of $3,292,002 and $0, respectively.
As of September 30, 2013, prepaid expenses were $721,491, compared to $280,779 at December 31, 2012, an increase of $440,712, or 156.96%. The increase in prepaid expenses is attributable to increased prepaid services during the quarter ended September 30, 2013 offset by the amortization of various prepaid consulting fees paid from stock issuances.
Advances to suppliers increased from $1,177,462 at December 31, 2012 to $11,912,484 at September 30, 2013, an increase of $10,735,022. The increase of advances to suppliers is mainly due to increased advanced for construction during the nine months ended September 30, 2013. $1,606,815 and $1,578,310 of allowance for doubtful accounts for the balance of advances to suppliers were reserved as of September 30, 2013 and December 31, 2012, respectively.
Notes payable reflect our obligations to bank lenders who have guaranteed our future payment obligations as requested by certain of our suppliers. Notes payable increased from $40,606,500 to $57,679,739 from December 31, 2012 to September 30, 2013. The increase is due to the Company obtaining additional fund to secure its inventory. The notes payable were secured by $30,718,954 of restricted cash at September 30, 2013. Notes payable allow the Company to reserve more cash resources for other operating expenses. Restricted cash represents amounts held by a bank as security for bank acceptance notes and is subject to withdrawal restrictions.
Nine months ended September 30, 2013 Compared to Nine months ended September 30, 2012
The following table sets forth information about our net cash flow for the nine months indicated:
Cash Flows Data:
For Nine months Ended
September 30
|
||||||||
2013
|
2012
|
|||||||
Net cash flows used in operating activities
|
$
|
(11,571,444
|
)
|
$
|
538,078
|
|||
Net cash flows used in investing activities
|
$
|
(20,113,079
|
)
|
$
|
(1,544,591
|
)
|
||
Net cash flows provided by financing activities
|
$
|
31,749,580
|
$
|
607,301
|
52
Net cash flow used in operating activities was $11,571,444 for the nine months ended September 30, 2013, compared to $538,078 provided by operating activities for the nine months ended September 30, 2012, an increase of $12,109,522, or 2,250.5%. The increase in net cash flow used in operating activities was mainly due to increased net loss of $14.9 million, increased payments for advance to suppliers of $14.0 million, more payments made for notes receivable of $0.2 million, and increased accounts payable and accrued liabilities of $2.3 million, which was offset by increased impairment expenses of inventory of $3.5 million due to slow moving inventory, increased impairment of property, plant and equipment of $3.3 million, less increase in accounts receivable of $2.1 million, and less payments made to acquire inventories of $10.3 million.
Net cash flow used in investing activities was $20,113,079 for the nine months ended September 30, 2013, compared to $1,544,591 for the nine months ended September 30, 2012, an increase of $18,568,488, or 1,202.2%. Approximately $0.06 million was spent on construction costs, $0.12 million was spent to acquire land use right, and $19.9 million was spent for construction in progress for our new construction during the nine months ended September 30, 2013. Approximately $1.5 million was spent on construction costs and $0.07 million was spent for property and equipment for our new factory during the nine months ended September 30, 2012.
Net cash flow provided by financing activities was $31,749,580 for the nine months ended September 30, 2013, compared to $607,301 for the nine months ended September 30, 2012, an increase of $31,142,279 or 5,128.0%. The increase in net cash flow provided by financing activities was due to decrease in repayments for short-term loans of $17.0 million, increased proceeds from notes payables of $22.0 million, increased proceeds from long-term loans of $13.1 million, and increased proceeds from short-term loans of $2.6 million entered into during the nine months ended September 30, 2013, which was offset mainly by a decrease in the amount of restricted cash of $6.6 million required to secure our notes payable, increased repayment of notes payable of $13.1 million, and increased repayment of loans to unrelated parties of $2.0 million. The Company borrowed $39.9 million in short-term bank loans and repaid $33.4 million during the nine months ended September 30, 2013, while the Company borrowed $37.3 million in short-term bank loans and repaid $50.4 million for the nine months ended September 30, 2012.
Concentration of Business and Credit Risk
Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.
Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.
53
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.
For the nine months ended September 30, 2013, one customer accounted for 10% or more of sales revenues, representing 14.5% of the total sales. For the nine months ended September 30, 2012, two customers accounted for 10% or more of sales revenues, representing 32.5% and 26.2%, respectively of the total sales. As of September 30, 2013, there were two customers that constituted 40.4% and 13.9% of the accounts receivable. As of December 31, 2012, there were three customers that constituted 42.2%, 16.5% and 10.3% of the accounts receivable.
For the nine months ended September 30, 2013, three suppliers accounted for 10% or more of our total purchases, representing 21.5%, 16.0% and 15.6%, respectively. For the nine months ended September 30, 2012, three suppliers accounted for 10% or more of our total purchases, representing 28.0%, 16.1% and 10.4%, respectively.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Significant Accounting Estimates and Policies
The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an ongoing basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.
54
In accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the nine months ended September 30, 2013 and 2012.
Comprehensive Income
We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.
Income Taxes
We account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation of this law gradually become subject to the new tax rate within five years after the implementation of this law.
55
We have been recognized as a high technology and science company by the Ministry of Science and Technology of the PRC. The Xing He District Local Tax Authority in the Nei Mongol province granted us a 100% tax holiday with respect to enterprise income tax for ten years from 2008 through 2017. Afterwards, based on the present tax law and our status as a qualified high technology and science company, we will be subject to a corporate income tax rate of 15% effective in 2018.
Accounts Receivable and Allowance For Doubtful Accounts
Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $6,146,123 as of September 30, 2013. Management believes that this allowance is sufficient based on a review of customer credit history, historic payment records, aging, the market and other factors.
Inventories
Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. As of September 30, 2013 and December 31, 2012, the Company has provision for inventory in regards to slow moving or obsolete items of $3,292,002 and $0, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, $3,542,153 and $0 of impairment expenses for property, plant, and equipment recorded in operating expenses as of September 30, 2013 and 2012, respectively.
Land Use Rights
There is no private ownership of land in China. All land ownership is held by the government, its agencies and collectives. Land use rights are obtained from the government, and are typically renewable. Land use rights can be transferred upon approval by State Land Administration Bureau and payment of the required transfer fee. We record the property subject to land use rights as intangible asset.
The Company has land use rights of 386,853 square meters used for operations in Xinghe County, Inner Mongolia, China. The land use rights have terms of 50 years, with the land use right relating to 130,220 square meters expiring in 2052 and the land use right with respect to 256,633 square meters expiring in 2053. In addition, in 2011, the local Chinese government and the Company agreed on terms for the land use rights of 387,838 square meters of land located adjacent to the Company’s facilities. The Company was not required to sign a land use right agreement or pay a fee but we have obtained its land use right certificate. In exchange, the Company will allow public use of this 387,838 square meters of land, provide improvements to the land and keep the land in good condition. The land use right has a term of 50 years, with such term expiring in January 2060. The value of the land is estimated to be $14,000,000. We used level 1, the most observable market inputs, to arrive at fair market value. In particular, we used market price of land use right in the open market to determine the fair market value of the public use land. The land use right is about 387,838 square meters. The market price for each square meter for industrial use land use right in that area is about $41. The Company has not accrued the liability or recorded the land use right asset for this property in accordance with ASC 450, Contingencies. Because of the relationship and agreement with the local government to keep provide improvements to the land and keep it in good condition, the Company believes that it is unlikely to have to pay for the land use right. The bank allows, and the Company uses, this land use right as collateral for its short-term bank loans.
Each intangible asset is reviewed periodically or more often if circumstances dictate, to determine whether its carrying value has become impaired. We consider assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. We also re-evaluate the amortization periods to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
56
Research and Development
Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our research and development expense for the nine months ended September 30, 2013 and 2012 has not been significant.
Value Added Tax
Pursuant to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice of the PRC, the Company paid VAT and business tax based on tax invoices issued.
The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.
Fair Value of Financial Instruments
On January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. On January 1, 2009, the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad levels. The three levels are defined as follows:
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
●
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
The carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable, advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and other payables, approximate their fair values because of the short maturity period for these instruments.
57
The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of September 30, 2013:
Carrying Value at
September 30,
|
Fair Value Measurement at
September 30, 2013
|
|||||||||||||||
2013
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Warrant liability
|
$
|
25,657
|
-
|
-
|
$
|
25,657
|
||||||||||
Notes payable
|
$
|
57,679,739
|
-
|
$
|
57,679,739
|
-
|
The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of December 31, 2012:
Carrying Value at
December 31,
|
Fair Value Measurement at
December 31, 2012
|
|||||||||||||||
2012
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Warrant liability
|
$
|
224,362
|
-
|
-
|
$
|
224,362
|
||||||||||
Notes payable
|
$
|
40,606,500
|
-
|
$
|
40,606,500
|
-
|
Please see Note 3 contained in the Notes to the Consolidated Financial Statements for a description of our warrant liability for the nine months ended September 30, 2013 and 2012.
The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet at fair value.
Stock-based Compensation
Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation, and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.
All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.
Common stock awards are granted to directors for services provided.
58
Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service. The Company did not make significant grants to consultants for any of the periods presented.
The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
Stock compensation expenses of $16,800 and $137,825 of were amortized and recognized as general and administrative expenses for the three months ended September 30, 2013 and 2012, respectively. Stock compensation expenses of $95,864 and $512,158 of were amortized and recognized as general and administrative expenses for the nine months ended September 30, 2013 and 2012, respectively.
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
FASB Accounting Standards Update No. 2012-02
On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
FASB Accounting Standards Update No. 2013-02
In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.
59
FASB Accounting Standards Update No. 2013-04
The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.
FASB Accounting Standards Update No. 2013-11
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carry forward in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s financial position and results of operations.
Not applicable to smaller reporting companies.
Item 4.
|
Controls and Procedures.
|
Evaluation of Disclosure Controls and Procedures
60
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of September 30, 2013.
Changes in Internal Control over Financial Reporting
During the nine months ended September 30, 2013, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
61
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our properties or subsidiaries , except for the following:
In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against us in the Southern District of New York. CNH is the sole holder of our Series B Preferred Stock. In its pleadings, CNH has made a claim against us in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares. The Company anticipates settling this matter for approximately $320,000 in the near future.
In July 2013, the Company issued 60,000 shares of common stock pursuant to a consulting agreement in exchange for investor relation’s services.
Based on representations made by the third parties to whom we issued these shares, such issuances were exempt from registration pursuant to Section 4(2) of the Securities Act and either Regulation 506 of the SEC thereunder or Regulation S.
None.
None.
None.
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
32.1
|
Section 1350 Certification of Chief Executive Officer
|
32.2
|
Section 1350 Certification of Chief Financial Officer
|
62
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.
CHINA CARBON GRAPHITE GROUP, INC.
|
|||
Date: November 29, 2013
|
By:
|
/s/ Donghai Yu
|
|
Donghai Yu
|
|||
Chief Executive Officer
|
Date: November 29, 2013
|
By:
|
/s/ Zhenfang Yang
|
|
Zhenfang Yang
|
|||
Chief Financial Officer
|
63