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EX-5.1 - OPINION OF HOLLAND & HART LLP - China Carbon Graphite Group, Inc. | fs10210ex5_chinacarbon.htm |
EX-23.1 - CONSENT OF BERNSTEIN & PINCHUK LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - China Carbon Graphite Group, Inc. | fs10210ex23i_chinacarbon.htm |
EX-22.2 - CONSENT OF AGCA, INC., AN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - China Carbon Graphite Group, Inc. | fs10210ex23ii_chinacarbon.htm |
As filed
with the Securities and Exchange Commission on February 5, 2010
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________________________
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
CHINA CARBON GRAPHITE GROUP,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
2721
|
98-0550699
|
(State
or other jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Classification
Code Number)
|
Identification
No.)
|
c/o
Xinghe Xingyong Carbon Co., Ltd.
787
Xicheng Wai
Chengguantown
Xinghe
County
Inner
Mongolia, China
(+86)
474-7209723
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Resident
Agents of Nevada, Inc.
711
S. Carson Street, Suite 4
Carson
City, Nevada 89701
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Christopher
S. Auguste, Esq.
Bill
Huo, Esq.
Ari
Edelman, Esq.
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of Americas
New
York, New York 10036
(212)
715-9100
___________________________
Approximate
date of commencement of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. 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. (Check one):
Large
Accelerated Filer o
|
Accelerated
Filer
o
|
Non-Accelerated
Filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title
of each Class of
Securities
to be Registered
|
Amount
to be
Registered(1)
|
Proposed
Maximum
Offering
Price Per
Unit
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
|||||||||||
Common
Stock, par value $0.001 per share
|
2,480,500 | $ | 1.45(2) | $ | 3,596,725.00 | $ | 256.45 | ||||||||
Common
Stock, par value $0.001 per share
|
992,200 | $ | 1.30(3) | $ | 1,289,860.00 | $ | 91.95 | ||||||||
Common
Stock, par value $0.001 per share
|
124,025 | $ | 1.32(3) | $ | 163,713.00 | $ | 11.67 | ||||||||
Total
|
3,596,725 | $ | 5,050,298.00 | $ | 360.07 |
(1)
Pursuant to Rule 416 under the Securities Act of 1933, as amended, or the
Securities Act, this registration statement includes an indeterminate number of
shares as may become necessary to adjust the number of shares issued by the
registrant and resold by the selling stockholders resulting from stock splits,
stock dividends or similar transactions involving our common stock.
(2)
Estimated pursuant to Rule 457(c) of the Securities Act solely for the purpose
of computing the amount of the registration fee based on the average bid and
asked prices on the OTC Bulletin Board on February 1, 2010.
(3)
Calculated in accordance with Rule 457(g) based upon the price at which the
warrants may be exercised.
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
PROSPECTUS
Subject
to completion, dated February 5, 2010
CHINA
CARBON GRAPHITE GROUP, INC.
3,596,725
Shares of Common Stock
This prospectus relates to an aggregate of 3,596,725 shares of common stock,
par value $0.001 per share, of China Carbon Graphite Group, Inc., a Nevada
corporation, that may be sold from time to time by the selling stockholders
named in this prospectus, which includes:
·
|
2,480,500
shares of our common stock issuable upon the conversion of the Series B
Convertible Preferred Stock issued to the selling stockholders named in
this prospectus; and
|
·
|
1,116,225
shares of our common stock issuable upon the exercise of the warrants
issued to the selling stockholders named in this
prospectus.
|
We will
not receive any proceeds from the sales of any shares of common stock by the
selling stockholders. We may, however, receive proceeds of up to $1,453,573 from
the exercise of warrants held by the selling stockholders if and when such
warrants are exercised in exchange for cash.
Our
common stock is quoted on the OTC Bulletin Board, or OTC, under the symbol
“CHGI.OB”. The closing price for our common stock on February 2, 2010 was $1.45
per share, as reported on the OTC.
Investing
in our common stock involves a high degree of risk. See the section entitled
“Risk Factors” beginning on page 8 to read about factors you should consider
before buying shares of our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
information in this prospectus is not complete and may be changed. No person may
sell the securities described in this document until the registration statement
filed with the Securities and Exchange Commission is declared effective. This
prospectus is not an offer to sell these securities and no person named in this
prospectus is soliciting offers to buy these securities in any state where the
offer or sale is not permitted.
The date
of this prospectus is ,
2010
PROSPECTUS
SUMMARY
The
following summary highlights some of the information contained in this
prospectus, and it may not contain all of the information that is important to
you in making an investment decision. You should read the following summary
together with the more detailed information regarding our company and the common
stock being sold by the selling stockholders in this offering, including the
“Risk Factors” and our consolidated financial statements and related notes,
included elsewhere in this prospectus.
The
Company
Overview
of Our Business
We are engaged in the manufacture of
graphite products in the People’s Republic of China. 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.
We manufacture three types of products:
graphite electrodes, fine grain graphite products and high purity graphite
products.
Graphite electrodes are conducting
materials used for electric arc furnaces in the manufacture of steel and in
smelting of products such as alloy steel, brown alumina, yellow phosphorus and
other metals. Fine grain graphite is widely used in smelting colored
metals and rare-earth metals as well as in the manufacture of molds. High purity
graphite is used in, among others, the metallurgy, mechanical, aviation,
electronic, atomic energy, chemical and food industries.
Our product types are differentiated
based upon qualities such as density, thermal conductivity, electrical
resistivity, thermal expansion and strength. With respect to each of
our product types, we sell products that vary in size and purity, depending on
the particular specifications requested by our distributors. We also
customize our products in various shapes. We regularly upgrade each
of our products by increasing their size, density and purity, in accordance with
customer demands.
We plan
to expand our business by internal growth over the next several years. Our
short-term growth strategy is to increase our production capacity from 15,000
metric tons to 26,000 metric tons annually, assuming that we are able to obtain
the necessary funds. We are currently manufacturing at full
capacity. Once we increase our production capacity, we expect to
increase sales of our products, in particular our higher margin fine grain
graphite and high purity products.
Our long-term strategy is to expand our
product offerings by manufacturing nuclear graphite used as a reflector or
moderator in nuclear reactors in China, assuming that we are able to obtain the
necessary funds. The profit margin on these products would be significantly
higher than the profit margin on our current line of products.
Organizational
Structure
We were incorporated in Nevada on
February 13, 2003 as Achievers Magazine, Inc. On December 14, 2007,
we completed a reverse merger transaction with Talent International Investment
Limited, or Talent, a company incorporated in the British Virgin Islands, on
February 1, 2007. Following the reverse merger, our name was changed
to China Carbon Graphite Group, Inc.
5
As a result of the reverse merger, we
wholly own Talent. Talent wholly owns Xinghe Yongle Carbon Co., Ltd.,
or Yongle, a wholly foreign owned enterprise organized under the laws of the PRC
on September 18, 2007. On December 14, 2007, Yongle executed a series
of exclusive contractual agreements with Xinghe Xingyong Carbon Co., Ltd., or
Xingyong, an operating company organized under the laws of the PRC in December
2001, pursuant to which we have the ability to substantially influence
Xingyong’s daily operations and affairs. These agreements are
described below under “Our Business – Organizational Structure.”
Below is a chart depicting our
organizational structure:
Summary
of the Offering
Summary of the
Offering
|
|
Common
stock offered by selling stockholders
|
The
selling stockholders are offering an aggregate of 2,480,500 shares of our
common stock, par value $0.001 per share, issuable upon the conversion of
shares of Series B Convertible Preferred Stock, par value $0.001 per share
and an aggregate of 1,116,225 shares of our common stock issuable upon the
exercise of warrants held by the selling stockholders. This number
represents in the aggregate approximately 16.3% of the outstanding shares
of our common stock as of the date of this prospectus. (1)
|
Common
stock to be outstanding immediately after this offering
|
18,406,661 shares(2)
|
Proceeds
to us
|
We
will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders. However, we may receive up
to an aggregate of $1,453,573 from the exercise of warrants held by the
selling stockholders if and when such warrants are exercised in exchange
for cash. We will use any such proceeds for general working
capital purposes.
|
(1) Based on 18,406,661 shares of common
stock outstanding as of February 1, 2010 and the
issuance of 2,480,500 shares of our common stock upon the conversion of all
Series B Preferred Stock held by the selling stockholders, and the issuance of
1,116,225 shares of our common stock upon the exercise of all the warrants
issued to the selling stockholders in a recent financing
transaction.
(2) Does
not include 1,441,225 shares of our common stock issuable upon the exercise of
outstanding warrants and 125,000 shares of our
common stock issuable upon the conversion of shares of Series A Preferred
Stock.
6
Risks
Affecting Our Business
We are
subject to a number of risks, which you should be aware of before deciding to
purchase the securities in this offering. These risks, which are
summarized below and are described in more detail below under the heading “Risk
Factors,” include, but are not limited to, the following:
·
|
Inability
to raise capital or make acquisitions to fuel our
growth;
|
·
|
Inability
to pay off loans if payment is demanded at
maturity;
|
·
|
The
current global economic and financial
crisis;
|
·
|
Credit
risk with respect to our accounts
receivable;
|
·
|
Potential
inability to secure necessary raw materials in sufficient quantities, and
fluctuations in raw material
prices;
|
·
|
Inability
to effectively manage rapid growth;
|
·
|
Potential
loss of key members of our senior management;
and
|
·
|
Potential
failure to have complied with PRC regulations regarding our
restructuring.
|
Any of
the above risks could materially and adversely affect our business, financial
position and results of operations. An investment in our common stock involves
risks. You should read and consider the information set forth below in the
section entitled “Risk Factors” and all other information set forth in this
prospectus before investing in our common stock.
Corporate
Information
Our executive offices are located at
c/o Xinghe Xingyong Carbon Co., Ltd., 787 Xicheng Wai, Chengguantown, Xinghe
County, Inner Mongolia, China, and our telephone number is +(86) 474-7209723. We
maintain a website at http://www.chinacarboninc.com. Information
contained in our website shall not be deemed to be a part of this
prospectus.
7
RISK
FACTORS
An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto, before deciding to invest
in our common stock. Additional risks not presently known to us or that we
presently consider immaterial may also adversely affect our company. If any of
the following risks occur, our business, financial condition and results of
operations, and the value of our common stock, could be materially and adversely
affected.
Risks
Related to Our Business
We
will require additional financing to maintain and develop our business, which
funds may not be available to us on favorable terms, or at
all. Without additional funds, we may not be able to maintain or
expand our business.
We plan
to expand our business by internal growth over the next several years. Our
short-term growth strategy is to increase our production capacity from 15,000
metric tons to 26,000 metric tons annually, assuming that we are able to obtain
the necessary funds. We are currently manufacturing at full
capacity. Once we increase our production capacity, we expect to
increase sales of our products, in particular our higher margin fine grain
graphite and high purity products.
Our long-term strategy is to expand our
product offerings by manufacturing nuclear graphite used as a reflector or
moderator in nuclear reactors in China, assuming that we are able to obtain the
necessary funds. The profit margin on these products would be significantly
higher than the profit margin on our current line of products.
In order for us to increase the
production capacity of our current products and to develop a product line that
manufactures nuclear graphite that meets the minimum requirements for nuclear
power reactors in China, we plan to purchase new equipment and machinery, such
as new machinery for our graphitization and molding processes and larger baking
ovens, and to hire additional employees. We recently raised approximately $3
million pursuant to an equity offering to the selling stockholders, which funds
are being used to increase the production capacity of our current products, in
particular fine grain graphite and high purity graphite. In order to
further increase the production capacity of these products and to expand our
products offerings, we will need to raise a substantial amount of additional
capital from equity or debt markets or to borrow additional funds from local
banks. We currently have no commitments from any financing
source. The low price and low trading volume of our common stock and
the reluctance of many investors to make significant investments in Chinese
companies, together with the global economic downturn make it increasingly
difficult for us to raise funds. 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 additional or new products.
We
plan to expand our business by acquiring one or more companies. Any
such acquisition may disrupt, or otherwise have a negative impact on, our
business operations.
We intend
to expand our business through acquisitions. In the event that we make
acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
effect that any such expansion may have on our core business. Regardless of
whether we are successful in making an acquisition, the negotiations for
potential acquisitions could disrupt our ongoing business, distract our
management and employees and cause us to incur significant expenses. In addition
to the risks described above, acquisitions are accompanied by a number of
inherent risks, including, without limitation, the following:
8
·
|
the
difficulty of integrating acquired products, services or
operations;
|
·
|
the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
|
·
|
the
difficulty of incorporating acquired rights or products into our existing
business;
|
·
|
difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
|
·
|
difficulties
in maintaining uniform standards, controls, procedures and policies,
including disclosure controls and financial
controls;
|
·
|
the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
|
·
|
the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
|
·
|
the
acquisition strategy will likely require additional equity or debt
financing, resulting in additional leverage or dilution of
ownership;
|
·
|
the
effect of any government regulations which relate to the business
acquired, including any additional costs resulting from the failure of the
acquired company to comply with governmental regulations;
and
|
·
|
potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether of not successful, resulting from actions of the
acquired company prior to our
acquisition.
|
Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks, and our results of operations could be
adversely affected.
If
our lenders demand payment when our loans are due, we may have difficulty in
making payments, which could impair our ability to continue operating our
business.
At
September 30, 2009, we had short-term bank loans of approximately $8.5
million. These bank loans, which are secured by a lien on our fixed
assets and land use rights, are due in June 2010. In the past, these
banks extended our loans. However, we cannot assure you that our
lenders will not demand payment on the maturity date of these
loans. If the lenders demand payment when due, we may not be able to
obtain the necessary funds to pay off these loans. Our cash reserves,
which at September 30, 2009 were $6,047,977, are insufficient to pay off such
loans when due.
Our
income has suffered from bad debt charges resulting from customers’ inability to
pay us as a result of the economic downturn.
In the
fourth quarter of 2008, we incurred a net loss of approximately $300,000. This
loss was largely the result of an increase in our bad debt expense of
approximately $200,000 and an increase in our allowance for bad debts of
$860,000. One customer accounted for approximately $450,000 of these charges.
This customer was not one of our top three customers in 2008. Furthermore, the
economic downturn has also affected our accounts receivable, as we have
experienced delays in collection of accounts receivable. This is
reflected in the increase in accounts receivable from $4.2 million at December
31, 2008 to $6.2 million at September 30, 2009, despite a decline in sales
during the nine months ended September 30, 2009. Of the outstanding accounts
receivable at September 30, 2009, approximately $437,000 were also outstanding
at December 31, 2008. In particular, our graphite electrodes are sold mainly to
steel manufacturers, who have been significantly affected by the global economic
downturn. There has been a downturn in the graphite electrode market which has
impacted our business. We cannot predict when or whether the economic downturn
will cease to affect our business.
9
A large percentage of our revenues
depends on a limited number of distributors, the loss of one or more of which
could materially adversely affect our operations and
revenues.
Our
revenue is dependent in large part on significant orders from a limited number
of distributors, who may vary from period to period. During the nine months
ended September 30, 2009, two distributors accounted for approximately $6.4
million, or 52.5% of our revenue, and during the year ended December 31, 2008,
three distributors accounted for approximately $11.5 million, or 42.1% of our
revenue. One distributor was a principal distributor in both the nine months
ended September 30, 2009 and the year ended December 31, 2008 and accounted for
approximately $3.1 million, or 25.1%, of our sales for the nine months ended
September 30, 2009 and $4.1 million, or 14.9%, of our sales for the year ended
December 31, 2008. No other distributor accounted for 10% of our sales in either
period. We do not have long-term contracts with these distributors. Demand for
our products depends on a variety of factors including, but not limited to, the
financial condition of our distributors, the end users of our products and their
customers, and general economic conditions. For instance, our graphite
electrodes are sold mainly to steel manufacturers, who have been significantly
affected by the global economic downturn. As a result, there has been
a downturn in the graphite electrode market which has impacted our business. We
cannot predict when or whether the economic downturn will cease to affect our
business. If sales to any of our large distributors are substantially
reduced for any reason, such reduction may have a material adverse effect on our
business, financial condition and results of operations.
Since
the payments we receive from Xingyong are subject to annual negotiation, we may
not be entitled to receive all of Xingyong’s net income in the
future.
Pursuant
to the business operations agreement between Yongle and Xingyong, Xingyong is
obligated to pay between 80% and 100% of its net income to Yongle, subject to
annual negotiation. While Xingyong has agreed to pay 100% of its net
income to Yongle for 2009 and 2010, there is no assurance that it will continue
to do so in subsequent years. Dengyong Jin, our former chief
executive officer, owns Xingyong. Mr. Jin and his family members also
control Sincere Investment (PTC), Ltd., or Sincere, our controlling
stockholder. Our profitability would be affected if the percentage of
Xingyong’s net income that is payable to us would be decreased.
Our
business and operations are experiencing a downturn following a period of rapid
growth. If we fail to manage our business effectively, our operating results
could be harmed.
Until the
third quarter of 2008, we experienced rapid growth in our operations, which has
placed, and will continue to place, significant demands on our management,
operational and financial infrastructure. Since the fourth quarter of 2008,
however, as a result of the global economic crisis, our business has slowed, our
collection of receivables has slowed and our expense for bad debts has increased
significantly. To manage our business effectively, we need to continue to
improve our operational, financial and management controls. These system
enhancements and improvements may require significant capital expenditures and
management resources. Failure to implement these improvements could impair our
ability to manage our business and could result in a further deterioration of
our financial position and the results of our operations.
If
the PRC government closes our facilities in the future, even temporarily, our
financial condition may be materially affected.
The
Chinese government closed our facilities for a period of almost two months
during the third quarter of 2008 as part of the Chinese government’s program to
reduce air pollution during the Olympics. This shutdown reduced our sales in the
first quarter of 2009 because it takes about three months to six months to
produce graphite products. If the PRC government closes our
facilities in the future, even temporarily, our financial condition may be
materially affected.
Our principal stockholder has the
power to control our business, whose interest may differ from other stockholders.
Our
principal stockholder, Sincere, owns 51.0% of our common stock as of February 1,
2010. As a result, Sincere has the ability to elect all of our directors and to
approve any action requiring stockholder action, without the vote of any other
stockholders, including the outcome of corporate transactions submitted to the
stockholders for approval such as mergers, consolidations and the sale of all or
substantially all of our assets. Sincere has the power to cause or
prevent a change of control. The interest of our principal stockholder may
differ from the interests of other stockholders. Sincere is controlled by Mr.
Jin, who is our former chief executive officer and the principal shareholder and
chief executive officer of Xingyong, and his relatives.
10
If
our competitors sell higher quality products or similar products at a lower
price, or if they are otherwise more successful in penetrating the market, our
financial condition would be affected.
We face
competition from both Chinese and international companies, many of which are
better known and have greater financial resources than us. Many of the
international companies, in particular, have longer operating histories and have
more established relationships with customers and end users. If our competitors
are successful in providing similar or better graphite products or provide
graphite products at a lower price than we offer our products, or if they are
otherwise more successful in penetrating the market, we could experience a
decline in demand for our products, which would negatively impact our sales and
results of operations.
Because
the end users of graphite products seek products that incorporate the latest
technological development, including increased purity, our failure to offer such
products could impair our ability to market our products.
Our
products are either used in the manufacturing process for other products,
particularly metals, or for incorporation in various types of products or
processes. The end users typically view both the purity of the graphite and the
bend strength, compression strength, resistivity, bulk density and porosity of
graphite as key factors in making a decision as to which products to purchase.
Accordingly, our failure or inability to offer products manufactured with the
most current manufacturing technology could adversely affect our
sales.
An
increase in the cost of raw materials will affect our revenues.
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
not able to raise our prices to pass on increased costs to our customers, we
would be unable to maintain our profit margins. Similarly, in times
of decreasing prices, we may have to sell our products at prices which are lower
than the prices at which we purchased our raw materials. Furthermore,
PRC regulations grant broad powers to the government to adjust prices 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.
Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our products.
Our trade
secrets and patents are important assets for us. Our intellectual property
consists of one patent, trade secrets relating to the design and manufacture of
graphite products and our customer lists. Various events outside of our control
pose a threat to our intellectual property rights as well as to our products.
Effective intellectual property protection may not be available in China and
other countries in which our products are sold. Intellectual property rights in
China are still developing, and there are uncertainties involved in the
protection and the enforcement of such rights.
Also, the
efforts we have taken to protect our intellectual property rights may not be
sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete.
We
depend on third party distributors over whom we have no control to market our
products to end users in international markets.
Although
the market for graphite products is international and many of the end users of
our products are located outside of the PRC, most of our direct sales are made
to distributors and customers in the PRC. We do not have any offices outside of
the PRC, and we depend on distributors based in the PRC, over whom we have no
control, to sell our products in the international market. Any problems
encountered by these third parties, including potential violations of laws of
the PRC or other countries, may affect their ability to sell our products which
would, in turn, affect our net sales.
11
Because
our contracts are made pursuant to individual purchase orders, and not long-term
agreements, the results of our operations can vary significantly from quarter to
quarter.
We sell
our products pursuant to purchase orders and, with the exception of one
customer, whose purchases are not material to our overall revenues, we do not
have long-term contracts with any distributors or customers. As a result, we
must continually seek new customers and new orders from existing customers. As a
result, we cannot assure you that we will have a continuing stream of revenue
from any customer. Our failure to generate new business on an ongoing basis
would materially impair our ability to operate profitably.
We
rely on highly skilled personnel and, if we are unable to hire or retain
qualified personnel, we may not be able to grow effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals, including our executive officers and Mr. Denyong Jin, the chief
executive officer of Xingyong and our former chief executive officer. We do not
have employment agreements with any of our executive officers or with Mr. Jin.
Our future success depends on our continuing ability to retain these individuals
and to hire, develop, motivate and retain other highly skilled personnel for all
areas of our organization.
Because
we consume significant amounts of electricity, any failure or interruption in
electricity services could harm our ability to operate our
business.
Our
systems are heavily reliant on the availability of electricity. If we were to
experience a major power outage, we would have to rely on back-up generators.
These back-up generators may not operate properly and their fuel supply could be
inadequate during a major power outage. This could result in a disruption of our
business.
If
we fail to obtain all required licenses, permits, or approvals, we may be unable
to expand our operations.
Before we
develop certain new products, we must obtain a variety of approvals from local
and municipal governments in the PRC. Our products may also be
required to comply with the regulations of foreign countries into which they are
ultimately sold. There is no assurance that we will be able to obtain
all required licenses, permits, or approvals from these government authorities.
If we fail to obtain all required licenses, permits or approvals, we may be
unable to expand our operations.
Compliance
with existing and future environmental laws and regulations could have a
material adverse effect on our operations and financial condition.
As a
manufacturer, we are subject to various Chinese environmental laws and
regulations on air emission, waste water discharge, solid wastes, noise and
safety. We cannot assure you that we are able to comply with these regulations
at all times, as the Chinese environmental legal requirements are evolving and
becoming more stringent. If the Chinese national government or local governments
impose more stringent regulations in the future, we may have to incur
additional, and potentially substantial, costs and expenses in order to comply
with such regulations, which may negatively affect our results of
operations. For instance, during 2009, we incurred significant
expenditures for environmental improvements required by new government
regulations. In addition, if we fail to comply with any of the
present or future environmental regulations in any material aspects, we may
suffer from negative publicity and be subject to claims for damages that may
require us to pay substantial fines or have our operations suspended or even be
forced to cease operations.
Risks
Related to Doing Business in the People’s Republic of China
Our business operations take place
primarily in the People's Republic of China. Because Chinese laws,
regulations and policies are changing, our Chinese operations face several risks
summarized below.
12
Limitations
on Chinese economic market reforms may discourage foreign investment in Chinese
businesses.
The value of investments in Chinese
businesses could be adversely affected by political, economic and social
uncertainties in China. The economic reforms in China in recent years are
regarded by China's central government as a way to introduce economic market
forces into China. Given the overriding desire of the central government
leadership to maintain stability in China amid rapid social and economic changes
in the country, the economic market reforms of recent years could be slowed, or
even reversed.
Any
change in policy by the Chinese government could adversely affect investments in
Chinese businesses.
Changes in policy could result in
imposition of restrictions on currency conversion, imports or the source of
supplies, as well as new laws affecting joint ventures and foreign-owned
enterprises doing business in China. Although China has been pursuing economic
reforms, events such as a change in leadership or social disruptions that may
occur upon the proposed privatization of certain state-owned industries, could
significantly affect the government's ability to continue with its
reform.
We
face economic risks in doing business in China because the Chinese economy is
more volatile than other countries.
As a developing nation, China's economy
is more volatile than those of developed Western industrial economies. It
differs significantly from that of the U.S. or a Western European country in
such respects as structure, level of development, capital reinvestment, legal
recourse, resource allocation and self-sufficiency. Only in recent years has the
Chinese economy moved from what had been a command economy through the 1970s to
one that during the 1990s encouraged substantial private economic activity. In
1993, the Constitution of China was amended to reinforce such economic reforms.
The trends of the 1990s indicate that future policies of the Chinese government
will emphasize greater utilization of market forces. For example, in 1999 the
Government announced plans to amend the Chinese Constitution to recognize
private property, although private business will officially remain subordinate
to state-owned companies, which are the mainstay of the Chinese economy.
However, we cannot assure you that, under some circumstances, the government's
pursuit of economic reforms will not be restrained or curtailed. Actions by the
central government of China could have a significant adverse effect on economic
conditions in the country as a whole and on the economic prospects for our
Chinese operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
limit our ability to acquire PRC companies and adversely affect the
implementation of our strategy as well as our business and
prospects.
The PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by PRC
residents intends to acquire a PRC company, such acquisition will be subject to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a PRC
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.
In April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations.
On May
31, 2007, SAFE issued another official notice known as “Circular 106,” which
requires the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China.
13
If we
decide to acquire a PRC company, we cannot assure you that we or the owners of
such company, as the case may be, will be able to complete the necessary
approvals, filings and registrations for the acquisition. This may restrict our
ability to implement our acquisition strategy and adversely affect our business
and prospects. In addition, if such registration cannot be obtained, our company
will not be able to receive dividends declared and paid by our subsidiaries in
the PRC and may be forbidden from paying dividends for profit distribution or
capital reduction purposes.
Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.
The
change in value of the RMB against the United States dollar and other currencies
is affected by, among other things, changes in China’s political and economic
conditions. On July 21, 2005, the Chinese government changed its decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the new policy,
the RMB is permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has resulted in the
appreciation of the RMB against U.S. dollar. While the international reaction to
the RMB revaluation has generally been positive, there remains significant
international pressure on the Chinese government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar. As approximately 90% of our
costs and expenses is denominated in RMB, the revaluation in July 2005 and
potential future revaluation has and could further increase our costs. In
addition, as we rely entirely on dividends paid to us by our operating
subsidiaries, any significant revaluation of the RMB may have a material adverse
effect on our revenues and financial condition, and the value of, and any of our
dividends payable on our ordinary shares in foreign currency terms.
Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.
The PRC
has adopted currency and capital transfer regulations. These regulations may
require that we comply with complex regulations for the movement of capital and
as a result we may not be able to remit all income earned and proceeds received
in connection with our operations or from the sale of our operating subsidiary
to the United States or to our stockholders.
China’s foreign currency control
policies may impair the ability of our Chinese operating company to pay dividends to
us.
Since our
operations are conducted through our Chinese operating company, we rely on
dividends and other distributions from our Chinese operating company to provide
us with cash flow to pay dividends or meet our other obligations. Any dividend
payment will be subject to foreign exchange rules governing such repatriation.
Any liquidation is subject to the relevant government agency’s approval and
supervision as well as the foreign exchange control. Current regulations in
China would permit our operating company to pay dividends to us only out of
accumulated distributable profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, our operating company will be
required to set aside at least 10% (up to an aggregate amount equal to half of
our registered capital) of its accumulated profits each year for employee
welfare. Such cash reserve may not be distributed as cash dividends. In
addition, if our operating company in China incurs debt on its own behalf in the
future, the instruments governing the debt may restrict its ability to pay
dividends or make other payments to us. The inability of our operating company
to pay dividends or make other payments to us may have a material adverse effect
on our financial condition.
Because
our funds are held in banks that do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
14
Since
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment. We have not obtained fire, casualty
and theft insurance, and there is no insurance coverage for our raw materials,
goods and merchandise, furniture and buildings in China. Any losses incurred by
us will have to be borne by us without any assistance, and we may not have
sufficient capital to cover material damage to, or the loss of, our production
facility due to fire, severe weather, flood or other cause, and such damage or
loss would have a material adverse effect on our financial condition, business
and prospects.
The
Chinese legal and judicial system may negatively impact foreign investors
because the Chinese legal system is not yet comprehensive.
In 1982, the National Peoples Congress
amended the Constitution of China to authorize foreign investment and guarantee
the "lawful rights and interests" of foreign investors in China. However,
China's system of laws is not yet comprehensive. The legal and judicial systems
in China are still under development , and enforcement of existing laws is
inconsistent. Many judges in China lack the depth of legal training and
experience that would be expected of a judge in a more developed country.
Because the Chinese judiciary is relatively inexperienced in enforcing the laws
that exist, anticipation of judicial decision-making is more uncertain than
would be expected in a more developed country. It may be impossible to obtain
swift and equitable enforcement of laws that do exist, or to obtain enforcement
of the judgment of one court by a court of another jurisdiction. China's legal
system is based on written statutes; a decision by one judge does not set a
legal precedent that is required to be followed by judges in other cases. In
addition, the interpretation of Chinese laws may shift to reflect domestic
political changes. The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. We cannot assure you that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life, will not affect the
Chinese government's ability to continue to support and pursue these reforms.
Such a shift could have a material adverse effect on our business and
prospects.
15
The practical effect of the People’s
Republic of China’s legal system on our business operations in China can be
viewed from two separate but intertwined considerations. First, as a matter of
substantive law, the Foreign Invested Enterprise laws provide significant
protection from government interference. In addition, these laws guarantee the
full enjoyment of the benefits of corporate articles and contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the general corporation laws of the several states. Similarly,
the accounting laws and regulations of the People’s Republic of China mandate
accounting practices which are not consistent with U.S. Generally Accepted
Accounting Principles. China's accounting laws require that an annual "statutory
audit" be performed in accordance with People’s Republic of China’s accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. Second, while the enforcement of substantive rights may
appear less clear than United States procedures, Foreign Invested Enterprises
and Wholly Foreign-Owned Enterprises are Chinese registered companies, which
enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Because our principal assets are
located outside of the United States and some of our directors and all of our
executive officers reside outside of the United States, it may be difficult for
you to enforce your rights based on the United States Federal securities laws
against us and our officers and directors in the United States or to enforce
judgments of United States courts against us or them in the People's Republic of
China.
It
may be difficult for our stockholders to affect service of process against our
subsidiaries or our officers and directors.
Our operating subsidiaries and
substantially all of our assets are located outside of the United States. You
will find it difficult to enforce your legal rights based on the civil liability
provisions of the United States Federal securities laws against us in the courts
of either the United States or the People's Republic of China and, even if civil
judgments are obtained in courts of the United States, to enforce such judgments
in the courts of the People's Republic of China. In addition, it is unclear if
extradition treaties in effect between the United States and the People's
Republic of China would permit effective enforcement against us or those of our
officers and directors that reside outside the United States of criminal
penalties, under the United States Federal securities laws or
otherwise.
The
Chinese economy is evolving and we may be harmed by any economic
reform.
Although the Chinese government owns
the majority of productive assets in China, during the past several years the
government has implemented economic reform measures that emphasize
decentralization and encourage private economic activity. Because
these economic reform measures may be inconsistent or ineffectual, we are unable
to assure you that:
·
|
We
will be able to capitalize on economic reforms;
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The
Chinese government will continue its pursuit of economic reform
policies;
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|
·
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The
economic policies, even if pursued, will be successful;
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·
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Economic
policies will not be significantly altered from time to time;
and
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|
·
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Business
operations in China will not become subject to the risk of
nationalization.
|
Since 1979, the Chinese government has
reformed its economic systems. Because many reforms are unprecedented
or experimental, they are expected to be refined and improved. Other political,
economic and social factors, such as political changes, changes in the rates of
economic growth, unemployment or inflation, or in the disparities in per capita
wealth between regions within China, could lead to further readjustment of the
reform measures. This refining and readjustment process may negatively affect
our operations.
16
Inflation
in China may inhibit our ability to conduct business profitably in
China.
Over the last few years, China's
economy has registered a high growth rate. Recently, there have been indications
that rates of inflation have increased. In response, the Chinese government
recently has taken measures to curb this excessively expansive economy. These
measures have included revaluations of the Chinese currency, the Renminbi (RMB),
restrictions on the availability of domestic credit, and limited
re-centralization of the approval process for purchases of some foreign
products. These austerity measures alone may not succeed in slowing down the
economy's excessive expansion or control inflation, and may result in severe
dislocations in the Chinese economy. The Chinese government may adopt additional
measures to further combat inflation, including the establishment of freezes or
restraints on certain projects or markets.
To date, reforms to China's economic
system have not adversely impacted our operations and are not expected to
adversely impact operations in the foreseeable future; however, there can be no
assurance that the reforms to China's economic system will continue or that we
will not be adversely affected by changes in China's political, economic, and
social conditions and by changes in policies of the Chinese government, such as
changes in laws and regulations, measures which may be introduced to control
inflation, changes in the rate or method of taxation, imposition of additional
restrictions on currency conversion and remittance abroad, and reduction in
tariff protection and other import restrictions.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices may occur from time to time in the PRC. We can
make no assurance, however, that our employees or other agents will not engage
in such conduct for which we might be held responsible. If our employees or
other agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
reputation or our business, financial condition and results of
operations.
Risks
Related to our Common Stock
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
The SEC,
as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management’s assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us.
During
our assessment of the effectiveness of internal control over financial reporting
as of September 30, 2009, we identified significant deficiencies related to (i)
the U.S. GAAP expertise of our internal accounting staff, (ii) our internal
audit functions and, and (iii) a lack of segregation of duties within accounting
functions. Although we believe that these deficiencies do not amount to a
material weakness, we cannot assure you that, when our independent auditors are
required to attest to our internal controls, that they will agree with our
analysis or will not have identified other material weaknesses in our internal
controls or disclosure controls.
17
Our
reporting obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to prevent fraud. As a result, our failure to achieve and maintain
effective internal controls over financial reporting could result in the loss of
investor confidence in the reliability of our financial statements, which in
turn could harm our business and negatively impact the trading price of our
stock. Furthermore, we anticipate that we will continue to incur considerable
costs and use significant management time and other resources in an effort to
comply with Section 404 and other requirements of the Sarbanes-Oxley
Act.
There
is a limited market for our common stock, which may make it difficult for you to
sell your stock.
Our
common stock trades on the OTC Bulletin Board under the symbol
CHGI.OB. There is a limited trading market for our common stock and
there is frequently no trading in our common stock. Accordingly, there can be no
assurance as to the liquidity of any markets that may develop for our common
stock, the ability of holders of our common stock to sell our common stock, or
the prices at which holders may be able to sell our common stock. Further, many
brokerage firms will not process transactions involving low price stocks,
regardless of whether they come within the definition of a “penny stock.” If we
cease to be quoted, holders would find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of our common stock, and the
market value of our common stock would likely decline.
If
a more active trading market for our common stock develops, the market price of
our common stock is likely to be highly volatile and subject to wide
fluctuations, and you may be unable to resell your shares at or above the price
at which you acquired them.
The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
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quarterly
variations in our revenues and operating
expenses;
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developments
in the financial markets and worldwide
economies;
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announcements
of innovations or new products or services by us or our
competitors;
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announcements
by the PRC government relating to regulations that govern our
industry;
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significant
sales of our common stock or other securities in the open
market.
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variations
in interest rates;
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changes
in the market valuations of other comparable companies;
and
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changes
in accounting principles.
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If a
stockholder were to file any such class action suit against us following a
period of volatility in the price of our securities, we would incur substantial
legal fees and our management’s attention and resources
would be diverted from operating our business to respond to such litigation,
which could harm our business and reputation.
We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our common stock.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. The certificate of designation for the Series A Preferred
Stock prohibits us from paying dividends to the holders of our common stock
while the Series A Preferred Stock is outstanding. There are currently 125,000
shares of Series A Preferred Stock outstanding. To the extent that we
do not pay dividends, our stock may be less valuable because a return on
investment will only occur if and to the extent our stock price appreciates,
which may never occur. In addition, investors must rely on sales of their common
stock after price appreciation as the only way to realize their investment, and
if the price of our stock does not appreciate, then there will be no return on
investment. Investors seeking cash dividends should not purchase our common
stock.
18
The
rights of the holders of common stock may be impaired by the potential issuance
of preferred stock.
Our board
of directors has the right to create new series of preferred stock. As a result,
the board of directors may, without stockholder approval, issue preferred stock
with voting, dividend, conversion, liquidation or other rights that could
adversely affect the voting power and equity interest of the holders of common
stock. Preferred stock, which could be issued with the right to more than one
vote per share and could be utilized as a method of discouraging, delaying or
preventing a change of control. The possible impact on takeover attempts could
adversely affect the price of our common stock. Without the consent of the
holders of 75% of the outstanding shares of Series A Preferred Stock, we may not
alter or change adversely the rights of the holders of the Series A Preferred
Stock or increase the number of authorized shares of Series A Preferred Stock,
create a class of stock which is senior to or on a parity with the Series A
Preferred Stock, amend our certificate of incorporation in breach of these
provisions or agree to any of the foregoing. Although we have no present
intention to issue any additional shares of preferred stock or to create any new
series of preferred stock and the certificate of designation relating to the
Series A Preferred Stock restricts our ability to issue additional series of
preferred stock, we may issue such shares in the future.
Transactions
engaged in by our principal stockholder may have an adverse effect on the price
of our stock.
We do not
know what plans, if any, Sincere has with respect to its ownership of our stock.
In the event that Sincere sells a substantial number of shares of our common
stock, such sales could have the effect of lowering our stock price. The
perceived risk associated with the possible sale of a large number of shares by
this stockholder, or the adoption of significant short positions by hedge funds
or other significant investors, could cause some of our stockholders to sell
their stock, thus causing the price of our stock to further
decline.
Risks
Related To the Offering
When
the registration statement of which this prospectus forms a part becomes
effective, there will be a significant number of shares of our common stock
eligible for sale, which could depress the market price of our
stock.
Following the effectiveness of the
registration statement of which this prospectus forms a part, an aggregate of
3.6 million shares of our common stock underlying shares of Series B Preferred
Stock and warrants which are currently restricted will be eligible for resale to
the public market without restriction, which could harm the market price of our
stock. Furthermore, the selling stockholders may be eligible to sell
their shares of our common stock even if the registration statement of which
this prospectus forms a part is not then effective, pursuant to Rule 144, and
such sales may harm the market price of our stock.
The
exercise of outstanding shares of preferred stock and warrants issuable for
shares of our common stock may cause dilution to existing
shareholders.
There are currently outstanding 125,000
shares of Series A Preferred Stock and 2,480,500 shares of Series B Preferred
Stock, which are convertible, in the aggregate, into 2,605,500 shares of our
common stock. There are currently warrants outstanding to purchase up
to an aggregate of 1,441,225 shares of our common stock. The
expiration dates of these warrants range from December 2012 to January
2015. The exercise price of these warrants ranges from $1.30 to $3.00
per share, subject to adjustment. If holders of these shares of
preferred stock or warrants convert or exercise such securities in exchange for
shares of our common stock, such transactions may have a dilutive effect on the
stock ownership of existing shareholders and may harm the market price of our
stock. Furthermore, if we were to attempt to obtain additional
financing during the term of these warrants, the terms on which we obtain such
financing may be adversely affected by the existence of these
warrants.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
19
This prospectus contains
forward-looking statements. The forward-looking statements are contained
principally in the sections entitled “Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business.” 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” above.
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 are subject to
risks and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements.
Also, forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus, or that we filed as exhibits to the registration statement of which
this prospectus is a part, completely 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.
USE
OF PROCEEDS
We
will not receive any proceeds from the sales of any shares of common stock by
the selling stockholders. However, we may receive up to $1,453,573 from the
exercise of warrants held by the selling stockholders if and when those warrants
are exercised in exchange for cash. Any such proceeds would be used
for general working capital purposes.
DIVIDEND
POLICY
While we
will be required to pay dividends on the shares of our Series A and Series
B Preferred Stock, we have never declared or paid cash dividends on our common
stock and have no present plans to do so in the foreseeable future. The
certificate of designation for our outstanding Series A Preferred Stock
prohibits us from paying dividends on our common stock or redeeming common stock
while any shares of Series A Preferred Stock are outstanding. There are
currently 125,000 shares of our Series A Preferred Stock
outstanding. Any future decisions regarding dividends will be made by
our board of directors. We currently intend to retain and use any future
earnings for the development and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future.
20
MARKET
FOR OUR COMMON STOCK
Our common stock is quoted on the OTC
Bulletin Board, or OTC, under the symbol “CHGI.OB”. As of February 2,
2010, the closing price for our common stock was $1.45 per share. The
bid prices set forth below reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.
The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock.
Bid
Prices
|
||||||||
High
|
Low
|
|||||||
Fiscal
Year Ended December 31, 2010
|
||||||||
First
Quarter (through February 2, 2010)
|
$ | 1.75 | $ | 1.41 | ||||
Fiscal
Year Ended December 31, 2009
|
||||||||
First
Quarter
|
$ | 0.64 | $ | 0.10 | ||||
Second
Quarter
|
0.70 | 0.07 | ||||||
Third
Quarter
|
1.76 | 0.61 | ||||||
Fourth
Quarter
|
1.65 | 1.30 | ||||||
Fiscal
Year Ended December 31, 2008
|
||||||||
First
Quarter
|
$ | 3.36 | $ | 0.25 | ||||
Second
Quarter
|
2.16 | 1.01 | ||||||
Third
Quarter
|
1.40 | 0.52 | ||||||
Fourth
Quarter
|
1.26 | 0.20 | ||||||
Approximate Number of
Holders of Our Common Stock
On
February 1, 2010, there were 56 stockholders of record of our common
stock.
21
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the
results of our operations and financial condition should be read in conjunction
with our financial statements and the related notes, which appear elsewhere in
this prospectus. The following discussion includes forward-looking
statements. For a discussion of important factors that could cause
actual results to differ from our forward-looking statements, see the sections
entitled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements”
above.
Overview
We are
engaged in the manufacture of graphite based products in the People’s Republic
of China. Our products are either used in the manufacturing process
for other products, particularly metals, or for incorporation in various types
of products or processes. 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. We currently manufacture and sell the following types of
graphite products:
·
|
graphite
electrodes;
|
·
|
fine
grain graphite ; and
|
·
|
high
purity graphite.
|
Approximately 40% to 50% of our
graphite electrodes 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 customers both in China and in
foreign countries, including, among others, Japan, the United States, Spain,
England, South Korea and India. In 2010, our primary strategy is to
increase our production capacity by purchasing additional machinery and
equipment, hiring additional employees and seeking potential acquisitions of
other businesses in our industry in China.
Until the
third quarter of 2008, we experienced rapid growth in our
operations. However, our sales suffered during the three months ended
December 31, 2008 and the nine months ended September 30, 2009 as a result of
several factors. Sales in the nine months ended September 30, 2009
declined by 42.7% from the comparable period in 2008, although sales in the
three months ended September 30, 2009 increased 52.6% and 92.9%, compared to
sales in the two prior quarters, respectively. The sales decrease in
the three and nine months ended September 30, 2009, as compared to the
comparable periods in 2008, resulted from the global financial
crisis. Specifically, the volume of our sales declined because the
demand for products made by steel manufacturers, who comprise a large percentage
of the end users of our graphite electrodes, decreased during this
period. In addition, our accounts receivable increased, thereby
affecting our cash flows, because we have experienced delays in payments by our
customers whose cash reserves have been negatively affected. If the
global financial crisis continues to negatively affect our revenues and cash
flows, we may need to borrow additional funds or raise additional
capital. There can be no assurance that such sources of funding would
be available upon terms favorable to us, if at all. In the event that
we raised capital through the issuance of equity or convertible securities, the
holdings of existing shareholders would be diluted.
In
addition, our sales decreased during the nine months ended September 30, 2009
because of the residual effects of the closure of our facilities for almost two
months during the third quarter of 2008. The PRC government closed
our facility, which is located approximately 200 miles from Beijing, to reduce
air pollution in anticipation of the Olympics in Beijing in August
2008. This shutdown reduced our sales in the fourth quarter of 2008
and the first quarter of 2009 because it takes approximately three to six months
to produce our products. There can be no assurance that the PRC
government will refrain from closing our facility in the future, which would
have an adverse effect on our results of operations and financial
condition.
22
Furthermore,
our declining profit margin during the nine months ended September 30, 2009
reflected changes in our product mix. Specifically, sales of graphite
electrodes, whose profit margin is lower than that of our other products,
constituted a larger percentage of our overall sales in the nine months ended
September 30, 2009 as compared to the comparable period in 2008.
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 product. If we are not able to raise
our prices to pass on increased costs to our customers, we would be unable to
maintain our profit margins. Similarly, in times of decreasing
prices, we may have to sell our products at prices which are lower than the
prices at which we purchased our raw materials. Furthermore, PRC
regulations grant broad powers to the government to adjust prices 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.
RESULTS
OF OPERATIONS
Fiscal
Years Ended December 31, 2008 and 2007
The
following table sets forth the key components of our results of operations for
the periods indicated in dollar amounts and as a percentage of net sales (in
thousands of dollars):
Year
ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Sales
|
$ | 27,303 | 100.0 | % | $ | 25,357 | 100.0 | % | ||||||||
Cost
of goods sold
|
20,606 | 75.5 | % | 20,447 | 80.6 | % | ||||||||||
Gross
profit
|
6,697 | 24.5 | % | 4,910 | 19.4 | % | ||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
505 | 1.8 | % | 124 | 0.5 | % | ||||||||||
General
and administrative
|
1,952 | 7.1 | % | 1,121 | 4.4 | % | ||||||||||
Depreciation
and amortization
|
68 | 0.3 | % | 16 | 0.06 | % | ||||||||||
Income
from operations
|
4,172 | 15.3 | % | 3,649 | 14.4 | % | ||||||||||
Other
income
|
402 | 1.5 | % | 440 | 1.7 | % | ||||||||||
Interest
income
|
- | - | - | - | ||||||||||||
Other
expense
|
(11 | ) | (0.1 | )% | - | - | ||||||||||
Interest
expense
|
(581 | ) |
(2.1)
|
% | (495 | ) | (2.0 | )% | ||||||||
Income
before income tax expense
|
3,982 | 14.6 | % | 3,594 | 14.2 | % | ||||||||||
Net
income
|
3,982 | 14.6 | % | 3,594 | 14.2 | % | ||||||||||
Deemed
preferred stock dividend
|
(854 | ) | (3.1 | )% | - | - | ||||||||||
Net
income available to common shareholders
|
3,128 | 11.5 | % | 3,594 | 14.2 | % | ||||||||||
Foreign
currency translation adjustment
|
2,043 | 7.5 | % | 1,795 | 7.1 | % | ||||||||||
Total
comprehensive income
|
$ | 6,025 | 22.1 | % | $ | 5,389 | 21.3 | % |
Sales. During the
year ended December 31, 2008, we had sales of $27.3 million, as compared to
sales of $25.4 million for the year ended December 31, 2007, which represents an
increase of $1.9 million or approximately 7.5%. This increase
resulted from an 18.6% increase in the average sales price of our products,
offset by a 9.4% decrease of volume sold to both new and existing customers and
distribution. The increase in average sales price was due to the
increase in raw materials, which drove up the unit prices of graphite products
in 2008.
23
The
increase in volume sold was primarily due to a significant decrease of sales in
the fourth quarter of 2008. Specifically, sales volume decreased by
15.7% in the fourth quarter of 2008, as compared to the fourth quarter of 2007,
because of the closure of our facilities during the third quarter of 2008 and
because steel manufacturing and other purchasers of our products purchased fewer
products as a result of the global financial crisis.
Cost of goods
sold. Our cost of goods sold consists of cost of raw
materials, utility, labor cost and depreciation expenses on manufacturing
facilities. During the year ended December 31, 2008, our cost of
goods sold was $20.6 million, as compared to cost of goods sold of $20.4 million
during the year ended December 31, 2007, which represents an increase of $0.2
million, or approximately 1%.
Our gross
margin increased from 19.4% in the year ended December 31, 2007 to 24.5% in the
year ended December 31, 2008 due to an increase of approximately 26% in the unit
prices of our graphite electrode products in 2008 as compared to
2007.
Selling
expenses. Our selling expenses consist of shipping and
handling expenses and exhibition expenses. These expenses increased
from $124,241 in 2007 to $504,884 in 2008, representing an increase of $380,643
or 306%. This increase was due to the increased expenses incurred to
market our fine grain graphite and high purity graphite products.
General and administrative
expenses. Our general and administrative expenses consist of
salaries, office expenses, utility, business travel and amortization
expenses. These expenses increased from $1.12 million in fiscal year
2007 to $1.95 million in 2008, representing an increase of $0.8 million, or
74%. This increase was the result of an increase in our bad debt
expense of approximately $200,000 and an increase in our allowance for bad debts
of $860,000 in the fourth quarter of 2008. Such increase was offset
by a decrease in our public company expenses, which declined from $400,000 in
2007 to $200,000 in 2008. These expenses were higher in 2007 as a
result of the reverse acquisition in December 2007.
Depreciation and amortization
expenses. Depreciation and amortization expenses increased
from $16,350 in 2007 to $68,422 in 2008, representing an increase of $52,072, or
318%. This increase was due to additional amortization of newly
acquired land use rights at the end of 2007.
Income from
operations. For 2008, income from operations amounted to $4.2
million as compared to $3.6 million for 2007, an increase of approximately $0.6
million, or 16.7%, due to higher gross margins. However, as a
percentage of net sales, income from operations increased from 14.4% to only
15.3% because of our increased operating expenses.
Other income and
expenses. Interest expense was $580,808 for 2008, as compared
with $495,448 in 2007, reflecting increased interest payments on loans from
banks. Other income, which consisted of government grants, was
$401,860 in 2008 as compared to $440,506 in 2007.
Income tax. During
the years ended December 31, 2008 and 2007, we benefited from a 100% tax holiday
from the PRC enterprise tax. As a result, we had no income tax due
for these periods.
Net income. As a
result of the factors described above, our net income for 2008 was $4.0 million,
as compared to $3.6 million for 2007, an increase of $0.4 million or
11%.
Deemed preferred
dividend. As a result of the automatic conversion of $1.2
million of our 3% convertible notes into 1,200,499 shares of Series A Preferred
Stock and 6,000,000 warrants, we incurred a preferred stock deemed dividend of
$854,300, representing the intrinsic value of the conversion
option. The deemed preferred stock dividend is a non-cash charge
which did not affect our operations or cash flow in 2008.
Foreign currency translation.
Our
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 local currency
financial statements into U.S. dollars are included in determining comprehensive
income.
24
Three
and Nine Months Ended September 30, 2009 Compared to the Three and Nine Months
Ended September 30, 2008
The
following table sets forth the key components of our results of operations for
the periods indicated in dollar amounts and as a percentage of net sales (in
thousands of dollars):
Nine
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Sales
|
$ | 12,132 | 100.0 | % | 21,161 | 100.0 | % | |||||||||
Cost
of goods sold
|
9,013 | 74.3 | % | 15,568 | 73.6 | % | ||||||||||
Gross profit
|
3,119 | 25.7 | % | 5,593 | 26.4 | % | ||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
332 | 2.7 | % | 439 | 2.1 | % | ||||||||||
General
and administrative
|
676 | 5.6 | % | 575 | 2.7 | % | ||||||||||
Depreciation
and amortization
|
57 | 0.5 | % | 49 | 0.2 | % | ||||||||||
Income
from operations
|
2,054 | 16.9 | % | 4,529 | 21.4 | % | ||||||||||
Other
income
|
545 | 4.5 | % | 225 | 1.0 | % | ||||||||||
Other
expense
|
(1 | ) | (0.01 | )% | (11 | ) | (0.05 | )% | ||||||||
Interest
income
|
- | - | 1 | - | ||||||||||||
Interest
expense
|
(762 | ) | (6.3 | )% | (413 | ) | (2.0 | )% | ||||||||
Income
before income tax expense
|
1,836 | 15.1 | % | 4,330 | 20.5 | % | ||||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
income
|
1,836 | 15.1 | % | 4,330 | 20.5 | % | ||||||||||
Foreign
currency translation adjustment
|
125 | 1.0 | % | 2,065 | 9.8 | % | ||||||||||
Comprehensive
income
|
1,961 | 16.2 | % | 6,395 | 30.2 | % |
Three
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Sales
|
$ | 5,581 | 100.0 | % | $ | 7,509 | 100.0 | % | ||||||||
Cost
of goods sold
|
4,056 | 72.7 | % | 5,384 | 71.7 | % | ||||||||||
Gross
profit
|
1,525 | 27.3 | % | 2,125 | 28.3 | % | ||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
14 | 0.3 | % | 269 | 3.6 | % | ||||||||||
General
and administrative
|
219 | 3.9 | % | 177 | 2.4 | % | ||||||||||
Depreciation
and amortization
|
19 | 0.3 | % | 19 | 0.3 | % | ||||||||||
Income
from operations
|
1,273 | 22.8 | % | 1,660 | 22.1 | % | ||||||||||
Other
income
|
19 | 0.3 | % | 11 | 0.2 | % | ||||||||||
Interest
income
|
- | - | 493 | - | ||||||||||||
Interest
expense
|
(357 | ) | (6.4 | )% | (143 | ) | (1.9 | )% | ||||||||
Income
before income tax expense
|
935 | 16.8 | % | 1,528 | 20.4 | % | ||||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
income
|
$ | 935 | 16.8 | % | $ | 1,528 | 20.4 | % | ||||||||
Foreign
currency translation adjustment
|
76 | 1.36 | % | 85 | 1.13 | % | ||||||||||
Comprehensive
income
|
$ | 1,011 | 18.1 | % | $ | 1,613 | 21.9 | % |
Sales. During the
nine months ended September 30, 2009, we had sales of $12.1 million as compared
to sales of $21.2 million for the nine months ended September 30, 2008, a
decrease of $9.0 million or approximately 42.67% due to a decrease in sales
volume of 53.4% as compared to 2008.
25
During
the three months ended September 30, 2009, we had sales of $5.6 million, as
compared to sales of $7.5 million for the three months ended September 30, 2008,
a decrease of $1.9 million, or approximately 25.7% due to a decrease in sales
volume of 40%.
Sales
volume decreased during these periods because steel manufacturers and other
purchasers of our products purchased fewer products as a result of the global
economic crisis. In addition, the closure of our facilities for
almost two months during 2008 resulted in reduced sales volume in the first
quarter of 2009.
Cost of goods
sold. Our cost of goods sold consists of cost of raw
materials, utility, labor cost and depreciation expenses. During the
nine months ended September 30, 2009, our cost of goods sold was $9.0 million,
as compared to $15.6 million during the nine months ended September 30, 2008, a
decrease of $6.6 million, or 42.1%. During the three months ended
September 30, 2009, our cost of goods sold was $4.0 million , as compared to
$5.4 million during the three months ended September 30, 2008, a decrease of
$1.3 million, or 24.7%. This decrease was due to the decrease in
sales in 2009. As a percentage of net sales, cost of goods sold
increased from 73.6% to 74.3% because of the change in our product mix, as sales
of our graphite electrodes, a lower margin product, increased as a percentage of
our overall sales.
Selling
expenses. Our selling expenses consist of shipping and
handling expenses and exhibition expenses. Selling expenses decreased
from $439,000 during the nine months ended September 30, 2008 to $332,000 for
the nine months ended September 30, 2009, or 24.4%. Selling expenses
decreased from $269,000 for the three months ended September 30, 2008 to $14,000
for the three months ended September 30, 2009, or 94.8%.
This
decrease was a result of lower marketing expenses of fine grain graphite and
high purity graphite products in 2009 compared to 2008 as well as a decrease in
shipping expenses as a result of lower sales in 2009. In 2008, we
started to shift our product focus from graphite electrodes to fine grain
graphite and high purity graphite. We increased our selling expenses
in 2008 in order to generate sales of these new products. However, in 2009, we
were producing these products at full capacity and therefore did not incur
marketing expenses.
General and administrative
expenses. Our general and administrative expenses consist of
salaries, office expenses, utility, business travel and amortization
expenses. General and administrative expenses were $676,000 for the
nine months ended September 30, 2009, compared to $576,000 for the nine months
ended September 30, 2008. General and administrative expenses were
$218,000 for the three months ended September 30, 2009, compared to $177,000 for
the three months ended September 30, 2008. The increase in general
administrative expense was primarily due to the increase in public company
expenses.
Depreciation and amortization
expense. Depreciation and amortization expenses increased from
$49,399 during the nine months ended September 30, 2008 to $57,275 in 2009,
representing an increase of $7,900 or 16%, solely as a result of the
depreciation of the U.S. dollar against the RMB.
Income from
operations. As a result of the factors described above, income
from operations amounted to $2.1 million for the nine months ended September 30,
2009, as compared to $4.5 million for the nine months ended September 30, 2008,
a decrease of approximately $2.5 million or 54.7%.
Income from operations
amounted to $1.3 million for the three months ended September 30, 2009, as
compared to $1.7 million for the three months ended September 30, 2008, a
decrease of approximately $3.4 million or 23.3%.
Other income and
expenses. Interest expense was $762,000 and $357,000 for the
nine and three months ended September 30, 2009, as compared to $413,000 and
$143,000 for the nine and three months ended September 30, 2008, reflecting
increased interest rates on loans from banks. Other income, which
consisted of a government grant, was $545,000 and $19,000 for the nine and three
months ended September 30, 2009 and 2008, respectively, as compared with
$225,000 and $11,000 for the nine and three months ended September 30,
2008.
Income tax. During
the nine and three months ended September 30, 2009 and 2008, we benefited from a
100% tax holiday from the PRC enterprise tax. As a result, we had no
income tax due for these periods.
26
Net income. As a
result of the factors described above, our net income for the nine months ended
September 30, 2009 was $1.8 million as compared to $4.3 million for the nine
months ended September 30, 2008, a decrease of $2.5 million or
35.8%.
Our net
income for the three months ended September 30, 2009 was $935,000, as compared
to $1,528,000 for the three months ended September 30, 2008, a decrease of
$593,000, or 38.8%.
Foreign currency translation.
Our
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 local currency
financial statements into U.S. dollars are included in determining comprehensive
income.
LIQUIDITY
AND CAPITAL RESOURCES
|
General
|
Our
primary capital needs have been to fund our working capital
requirements. Our primary sources of financing have been cash
generated from operations, short-term and long-term loans from banks in China,
and loans from a related party. At December 31, 2008, we had loans in
the aggregate amount of $10 million outstanding. At September 30,
2009, we had short-term bank loans in the aggregate amount of $8,548,000
outstanding. Our short-term bank loans, which are due in June 2010, bear
interest at an annual rate of 8.541% as to $3,429,000 of the principal and
7.434% as to $5,119,000 of the principal. The short-term bank loans
are secured by a security interest on our fixed assets and land use
rights. We have also obtained a long-term bank loan, in the principal
amount of $3.8 million, $1.6 million of which is due in October 2010 and the
remainder in October 2011. This loan bears interest at an annual rate
of 6.75%. Although we believe that we will be able to obtain
extensions of these loans when they mature, we cannot assure you that such
extensions will be granted.
We expect
that anticipated cash flows from operations, short-term and long-term bank loans
and loans from a related party will be sufficient to fund our operations through
at least the next twelve months, provided that:
· We
generate sufficient business so that we are able to generate substantial
profits, which cannot be assured;
· Our banks
continue to provide us with the necessary working capital financing;
and
· We are
able to generate savings by improving the efficiency of our
operations.
In
December 2009, we raised approximately $3 million in a private placement
transaction with the selling stockholders. We will require additional
equity, debt or bank funding if we are going to make any acquisitions or
purchase new equipment to expand our production capacity or to allow us to
produce graphite for the nuclear industry, which are our short-term and
long-term strategies respectively. We can provide no assurances that
we will be able to enter into any financing agreements on terms favorable to us,
if at all, especially considering the current global instability of the capital
markets. In addition, although we expect to refinance our bank loans
when they mature, we can provide no assurances that we will be able to refinance
such loans on terms favorable to us, if at all.
At
December 31, 2008, cash and cash equivalents were $51,799, as compared to $4,497
at December 31, 2007. At September 30, 2009, cash and cash
equivalents (including restricted cash) were $6,047,000. Our working
capital position decreased by $1,159,000 to $10,902,000 at September 30, 2009
from a working capital of $12,061,000 at December 31, 2008. Although
our cash position increased significantly, by $5,995,000 from December 31, 2008
to September 30, 2009, the increase was more than offset by increases in current
bank debt of $3,660,000, and trade notes payable, which increased from zero to
$5,850,000. In addition, during the nine months ended September 30,
2009, at the request of certain of our suppliers, we settled certain trade
liabilities incurred in the ordinary course of business by
issuing notes guaranteed by a bank.
27
Fiscal
Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31,
2007
The
following table sets forth information about our net cash flow for the periods
indicated (in thousands of dollars):
Cash
Flows Data:
(in
thousands of U.S. dollars)
|
For year ended December
31,
|
|||||||
2008
|
2007
|
|||||||
Net cash flows provided by operating activities
|
5,442 | 2,865 | ||||||
Net
cash flows used in investing activities
|
(3,880 | ) | (2,435 | ) | ||||
Net cash
flows used in financing activities
|
(1,540 | ) | (648 | ) |
Net cash
flow provided by operating activities was $5.4 million in fiscal 2008 as
compared to net cash flow provided by operating activities was $2.9 million in
fiscal 2007, an increase of $2.5 million. Net cash flow provided by
operating activities in fiscal 2008 was mainly due to our net income of $4
million, a decrease in account receivable of $1.0 million, a decrease in notes
receivable of $0.2 million and other receivable of $0.7 million, an increase in
other payable of $0.5 million and the add-back of non-cash items of depreciation
and amortization of $1.3 million, offset by a decrease in advances from
customers of $2 million and an increase in advance to suppliers of $0.3
million. Net cash flow provided by operating activities in fiscal
2007 was mainly due to our net income of $3.6 million, the increase in advances
from customers of $2.5 million, an increase in income taxes payable of $30,711,
and the add-back of non-cash items of depreciation and amortization of $1.1
million.
Net cash
flow used in investing activities was $3.9 million for 2008 and $2.4 million for
2007. For 2007, the cash flow used in investing activity was
primarily to purchase land use right. For 2008, the cash flow used to
pay additional compensation in relation to the land use right acquired in 2007
was $0.6 million, the cash flow used in acquisition of other properties and
equipments was $1.3 million and the remaining $2 million was used in
construction in progress.
Net cash
flow used in financing activities was $1.5 million for 2008. We
received proceeds from bank loans at the amount of $9.8 million and repaid $6.3
million in bank loans. We repaid advances from related parties in the
amount of $4.8 million. We received an advance of approximately
$286,000 from a related party. The advance was
repaid by us in April 2009. Net cash flow used in financing
activities was $648,008 in fiscal 2007. For 2007, we repaid advances
from related parties $783,356 and notes payable $264,652. In
addition, we had convertible notes payable of $400,000 in 2007.
Our
improvement in operating cash flow from $2.9 million in 2007 to $5.4 million in
2008 reflects a number of factors, principally an increase in sales of $2.0
million, combined with a reduction in accounts receivable of $0.6
million. In addition, we increased our accounts payable by
approximately $0.8 million. However, as discussed above, during 2008,
particularly during the later part of the year, we were affected by the global
economic downturn, which resulted in a net loss for the fourth quarter of
2008. Most of our operating cash flow was generated during the first
three quarters of the year. The decline in sales in the later
part of 2008 was a contributing factor to an increase in inventories of $1.3
million and an increase in advances to suppliers of $0.4
million.
28
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
The
following table sets forth information about our net cash flow for the periods
indicated (in thousands of dollars):
Cash
Flows Data:
(in
thousands of U.S. dollars)
|
Nine months ended September
30,
|
|||||||
2009
|
2008
|
|||||||
Net
cash flows provided by operating activities
|
7,274 | 4,778 | ||||||
Net
cash flows used in investing activities
|
(4,074 | ) | (3,412 | ) | ||||
Net
cash flows provided by (used in) financing activities
|
2,690 | (1,535 | ) |
Net cash
flow provided by operating activities was $7,274,000 for the nine months ended
September 30, 2009 as compared to $4,778,000 for the nine months ended September
30, 2008, an increase of $2,496,000. Net cash flow provided by
operating activities in the nine months ended September 30, 2009 was mainly due
to our net income of $1,836,000, an increase in trade notes payable of
$5,847,000, an increase in accounts payable and accrued expenses of $1,693,000
and an increase in advance from customers of $297,000, offset by an increase of
accounts receivable of $1,966,000, other receivable of $1,215,000 and a decrease
in taxes payable of $215,000.
Net cash
flow provided by operating activities is sensitive to many factors, including
our operating results, inventory management, ability to collect accounts
receivable and timing of cash receipts and payments. For the nine
months ended September 30, 2009, the inventory turnover slowed down slightly
compared to December 31, 2008 due to the decreased sales of graphite
electrodes. Increased production of fine grain and high purity
graphite also contributed to the increase in inventory because these products
have a longer production process.
Net cash
flow used in investing activities was $4,074,000 for the nine months ended
September 30, 2009, of which $1,439,000 was used to purchase properties and
equipments and $2,635,000 was used in constructing new
buildings. Cash flow use in investing activities for the nine months
ended September 30, 2008 was $3,412,000.
Net cash
flow provided by financing activities was $2,690,000 for the nine months ended
September 30, 2009 as compared to net cash used in financing activities of
$1,535,000 for the nine months ended September 30, 2008. We received
$68,000 from the private sale of common stock. We received $5,116,000
from bank loans and repaid $2,785,000 of bank loan. In addition, we
received repayment of $291,000 from our former chief executive
officer.
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 of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities. On an on-going 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 of
Financial Statements, formerly known as Staff Accounting Bulletin No. 104,
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.
Comprehensive
Income
We have
adopted Statements of 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.
29
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.
On March
16, 2007, China’s parliament, the National People’s Congress, adopted the
Enterprise Income Tax Law, which will take effect on January 1,
2008. The new income tax law sets unified income tax rate for
domestic and foreign companies at 25% except a 15% corporate income tax rate for
qualified high technology and science enterprises. In accordance with
this new income tax law, low preferential tax rate in accordance with both the
tax laws and administrative regulations prior to the promulgation of this Law
gradually becomes subject to the new tax rate within five years after the
implementation of this law.
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 2008 through 2018. Afterwards,
based on the present tax law and our status as a qualified high technology and
science company, we will be subject to a corporation income tax rate of 15%
effective in 2019.
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. Management believes that there was no obsolete inventory as
of September 30, 2009 or December 31, 2008.
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.
Land
Use Rights
There is
no private ownership of land in China. All land ownership is held by
the government of China, its agencies and collectives. Land use
rights are obtained from government, and are typically
renewable. Land use rights can be transferred upon approval by the
land administrative authorities of China (State Land Administration Bureau) upon
payment of the required transfer fee. We own the land use right for
2,356,209 square
feet, of which 290,626 square is occupied by our facilities, for a term of 50
years, beginning from issuance date of the certificates granting the land use
right. We record the property subject to land use rights as
intangible asset.
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.
30
Research
and development
Research
and development costs are expensed as incurred, and are included in general and
administrative expenses. These costs primarily consist of 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, 2009 and 2008 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 of 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. We have been granted an exemption
from VAT by the Xinghe County People’s Government and Xinghe Tax Authority on
some products for which an exchange agreement is in place for raw materials and
fuel. We have been granted an exemption from VAT by the Xing He
County People’s Government and Xing He Tax Authority on some products in which
an exchange agreement is in place for raw materials and fuel.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May
2009, the FASB issued ASC 855, “Subsequent Events”, formerly known as SFAS No.
165. SFAS No. 165 is intended to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date,
that is, whether that date represents the date the financial statements were
issued or were available to be issued. SFAS 165 No. is effective for
interim or annual financial periods ending after June 15, 2009. The
Company adopted this statement for the financial statements since the quarter
ended June 30, 2009.
In June
2009, the FASB issued ASC 860, “Transfers and servicing”, formerly known as SFAS
No. 166, a revision to SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”, and will require more
information about transfers of financial assets and where companies have
continuing exposure to the risks related to transferred financial
assets. SFAS 166 is effective at the start of a company’s first
fiscal year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, formerly known as SFAS No. 167,
a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest
Entities”, and will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under SFAS No. 167, determining
whether a company is required to consolidate an entity will be based on, among
other things, an entity’s purpose and design and a company’s ability to direct
the activities of the entity that most significantly impact the entity’s
economic performance. SFAS No. 167 is effective at the start of a
company’s first fiscal year beginning after November 15, 2009, or January 1,
2010 for companies reporting earnings on a calendar-year basis. The
Company is in the process of evaluating the effect, if any, the adoption of SFAS
No. 167 will have on the Company’s financial statements
In June
2009, the FASB issued SFAS No. 168, “The Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally
Accepted Accounting Principles (GAAP) - a replacement of SFAS No. 162” , which
establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by
the FASB to be applied by non-governmental entities. As a result of
the adoption of SFAS 168, the majority of references to historically issued
accounting pronouncements are now superseded by references to the FASB ASC, with
no financial impact.
31
Overview
of Our Business
We are
engaged in the manufacture of graphite based products in the People’s Republic
of China. Our products are either used in the manufacturing process
for other products, particularly metals, or for incorporation in various types
of products or processes. 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. We currently manufacture and sell the following types of
graphite products:
·
|
graphite
electrodes;
|
·
|
fine
grain graphite ; and
|
·
|
high
purity graphite.
|
Approximately
40% to 50% of our graphite electrodes 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 customers both
in China and in foreign countries, including, among others, Japan, the United
States, Spain, England, South Korea and India. In 2010, our primary
strategy is to increase our production capacity by purchasing additional
machinery and equipment, hiring additional employees and seeking potential
acquisitions of other businesses in our industry in China.
Our
Growth Strategy
We plan
to expand our business by internal growth over the next several years. Our
short-term growth strategy is to increase our production capacity from 15,000
metric tons to 26,000 metric tons annually, assuming that we are able to obtain
the necessary funds. We are currently manufacturing at full
capacity. Once we increase our production capacity, we expect to
increase sales of our products, in particular our higher margin fine grain
graphite and high purity products.
Our
long-term strategy is to expand our product offerings by manufacturing nuclear
graphite used as a reflector or moderator in nuclear reactors in China, assuming
that we are able to obtain the necessary funds. The profit margin on these
products would be significantly higher than the profit margin on our current
line of products. There are currently 11 nuclear power plants in
China, with 15 more plants currently under construction. These power
plants currently purchase their nuclear graphite from manufacturers in foreign
countries, including Japan, Germany and the United States, which involves
greater costs than purchasing from local Chinese companies. We know
of only one graphite manufacturer in China that currently produces nuclear
graphite that meets the specifications of these power plants. Only graphite rods
with a diameter of more than 840 millimeters and a purity of more than 99.9999%
may be used in nuclear power reactors. To date, we have produced only samples
that meet these standards. The largest graphite that we currently
produce in large quantities that contains such a high level of purity has a
diameter of 600 millimeters.
In order
for us to increase the production capacity of our current products and to
develop a product line that manufactures nuclear graphite that meets the minimum
requirements for nuclear power reactors in China, we plan to purchase new
equipment and machinery, such as new machinery for our graphitization and
molding processes and larger baking ovens, and to hire additional employees. We
recently raised approximately $3 million pursuant to an equity offering to the
selling stockholders, which funds are being used to increase the production
capacity of our current products, in particular fine graphite and high purity
graphite. In order to further increase the production capacity of
these products and to expand our products offerings, we will need to raise a
substantial amount of additional capital from equity or debt markets or to
borrow additional funds from local banks. We currently have no
commitments from any financing source. The low price and low trading
volume of our common stock and the reluctance of many investors to make
significant investments in Chinese companies, together with the global economic
downturn make it increasingly difficult for us to raise funds. 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 additional or new
products.
32
We also
plan to expand our business by acquiring one or more companies which we believe
meet the following requirements:
· producing revenues
and earnings before interest, taxes, depreciation and amortization at a level
that will have a significant impact on our earnings;
· conducting
business in an industry that is related to our present business;
and
· will have prior to
or shortly following closing, audited financial statements, prepared in
accordance with United States GAAP.
We have
engaged in discussions with potential target companies, but, as of the date of
this prospectus, we have not reached any agreement with respect to any
acquisitions. We will either need to raise additional capital from equity or
debt markets or to borrow additional funds from local banks in order to fund any
acquisition. Alternatively, we may issue equity as consideration for
any such acquisition. There is no assurance that we will be able to
consummate any acquisition or that we will successfully integrate any target
company into our business. The issuance of any equity would dilute
the holdings of existing stockholders.
Organizational
Structure
We were
incorporated in Nevada on February 13, 2003 as Achievers Magazine
Inc. On December 14, 2007, we completed a reverse merger transaction
with Talent International Investment Limited, or Talent, a company incorporated
in the British Virgin Islands on February 1, 2007. Following the
reverse merger, our name was changed to China Carbon Graphite Group,
Inc.
As a
result of the reverse merger, we wholly own Talent. Talent wholly
owns Xinghe Yongle Carbon Co., Ltd., or Yongle, a wholly foreign owned
enterprise organized under the laws of the PRC on September 18,
2007. On December 14, 2007, Yongle executed a series of exclusive
contractual agreements with Xinghe Xingyong Carbon Co., Ltd., or Xingyong, an
operating company organized under the laws of the PRC in December
2001.
PRC law
currently has limits on foreign ownership of certain companies. To comply with
these foreign ownership restrictions, we operate our businesses in the PRC
through Xingyong. Xingyong has the licenses and approvals necessary to operate
its business in the PRC. We have contractual arrangements with Xingyong and its
stockholders pursuant to which we have the ability to substantially influence
Xingyong’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring stockholder approval. As a result of these
contractual arrangements, we are able to control Xingyong. Consequently, we
consolidate Xingyong’s financial statements with our financial
statements.
Xingyong’s
principal stockholder is Dengyong Jin, our former chief executive officer who,
together with family members, controls Sincere, which owns approximately 49.6%
of the outstanding shares of our common stock.
On
December 14, 2007, we entered into the following contractual
arrangements:
Business
Operations Agreement
Pursuant
to this agreement, Xingyong is obligated to pay between 80% and 100% of its net
income to Yongle, subject to annual negotiations between the
parties. In each of 2007 and 2008, Xingyong paid 100% of its net
income to Yongle. Xingyong has agreed to pay 100% of its net income to Yongle
for 2009 and 2010. In order to guarantee Xingyong’s performance under this
agreement, the stockholders of Xingyong agreed to obtain Yongle’s written
consent prior to allowing Xingyong to enter into any transaction which may
materially affect Xingyong’s assets, obligations, rights or
operations.
33
Option
Agreement
Pursuant
to the option agreement, Yongle was granted an exclusive option to purchase all
of the capital stock of Xingyong at the lowest price permitted by PRC laws
applicable at the time of the exercise of such option. Yongle may exercise such
option, in part or whole, at any time until December 2017.
Share
Pledge Agreement
Under the
share pledge agreement, the stockholders of Xingyong, pledged all of their
equity interests in Xingyong to Yongle to guarantee Xingyong’s performance of
its obligations under all other related agreements by and between Yongle and
Xingyong. None of these shares may be transferred without the
permission of Yongle.
Exclusive
Technical and Consulting Services Agreement
Under the
exclusive technical and consulting services agreement between Yongle and
Xingyong, Yongle agreed to provide certain technical consulting and services to
Xingyong, and Xingyong agreed not to accept any technical consulting services
from any third party without the consent of Yongle. In addition, Yongle is the
sole and exclusive owner of all rights, title and interests arising from the
performance of the agreement.
Industrial
Uses of Graphite
Graphite
is considered to be the purest form of carbon. We manufacture our graphite
products by using a high temperature process whereby the heavy hydrocarbons are
broken down into simpler molecules. The resulting product provides us with a
pure grade of carbon which we use to make our products. Graphite is an excellent
conductor of heat and electricity and has a high melting temperature of 3,500
degrees Celsius. It is extremely resistant to acid, chemically inert and highly
refractory. The utility of graphite is dependent largely upon its
type.
There are
three principal types of natural graphite, each occurring in different types of
ore deposit:
·
|
Crystalline
flake graphite, or flake graphite, occurs as isolated, flat, plate-like
particles with hexagonal edges if unbroken and when broken the edges can
be irregular or angular.
|
·
|
Amorphous
graphite occurs as fine particles and is the result of thermal
metamorphism of coal, the last stage of coalification, and is sometimes
called meta-anthracite. Very fine flake graphite is sometimes called
amorphous in the trade.
|
·
|
Lump
graphite, or vein graphite, occurs in fissure veins or fractures and
appears as massive platy intergrowths of fibrous or acicular crystalline
aggregates, and is probably hydrothermal in
origin.
|
All
grades of graphite, especially high grade amorphous and crystalline graphite
that remains suspended in oil are used as lubricants. Graphite has an
extraordinarily low co-efficient of friction under most working conditions. This
property is invaluable in lubricants. It diminishes friction and tends to keep
the moving surface cool. Dry graphite as well as graphite mixed with grease and
oil is utilized as a lubricant for heavy and light bearings. Graphite grease is
used as a heavy-duty lubricant where high temperatures may tend to remove the
grease.
The flake
type graphite is found to possess extremely low resistivity to electrical
conductance. The electrical resistivity decreases with the increase of flaky
particles. The bulk density decreases progressively as the particles become more
flaky. Because of this property in flake graphite, it is used in the manufacture
of carbon electrodes, plates and brushes required in the electrical industry and
dry cell batteries. Flake graphite has been replaced to some extent by
synthetic, amorphous, crystalline graphite and acetylene black in the
manufacture of plates and brushes.
34
Flake
graphite containing 80-85% carbon is used for crucible manufacture; 93% carbon
and above is preferred for the manufacture of lubricants, and graphite with 40
to 70% carbon is utilized for foundry facings. Natural graphite, refined or
otherwise pure, having carbon content not less than 95% is used in the
manufacture of carbon rods for dry battery cells.
Currently,
artificially prepared graphite has replaced natural graphite to a great extent.
Artificial graphite is prepared by heating a mixture of anthracite, high grade
coal or petroleum coke, quartz and saw-dust at a temperature of 3,000ºC, out of
contact with air. Graphite carbon is deposited as residue.
Our
Products
We
currently manufacture and sell the following types of graphite
products:
·
|
graphite
electrodes;
|
·
|
fine
grain graphite; and
|
·
|
high
purity graphite.
|
Graphite
electrodes are used as electricity-conducting materials within electric arc
furnaces for manufacture of steel and non-ferrous metals such as brown alumina,
yellow phosphorus, or other metals.
Fine
grain graphite blocks are used to make graphite crucibles in various industries
and continuous casting dies for non-ferrous metals and spark erosion tools in
the automotive industry. Fine grain graphite blocks are also machined to produce
piston rings, sealing rings as well as jigs in the molding industry. In the
space industry, fine grain graphite is used as rocket nozzles. Fine grain
graphite is widely used in smelting for colored metals and rare-earth metal
smelting as well as the manufacture of molds. We hope to penetrate
some of these markets as we increase our production capacity and market our
products to new customers.
High
purity graphite is used in the chemistry industry, semiconductor material and
precious metal smelting industry, food industry and nuclear industry. Graphite
bricks and rounds of high purity are used as moderators in an atomic reactor. In
the nuclear field, graphite is a good and convenient material as a moderator but
only if the graphite is low in certain neutron absorbing elements notably boron
and the rare earths and is of consistent quality particularly with regard to
density and orientation. High purity graphite is used in, among other things,
the metallurgy, mechanical, aviation, electronic, atomic energy, chemical and
food industries. We hope to penetrate some of these markets as we
increase our production capacity and market our products to new
customers.
Our
product types are differentiated based upon qualities such as density, thermal
conductivity, electrical resistivity, thermal expansion and
strength. With respect to each of our product types, we sell products
that vary in size and purity, depending on the particular specifications
requested by our distributors. We also customize our products in
various shapes. We regularly upgrade each of our products by
increasing their size, density and purity, in accordance with customer
demands.
Historically,
our graphite electrode products were our main profit
centers. However, in 2008, we increased production of our higher
margin products – fine grain graphite and high purity graphite – and increased
our marketing efforts for these products. Graphite electrodes
accounted for approximately 40% of our revenues in 2007, 30% in 2008 and 25%
during the nine months ended September 30, 2009. Fine grain graphite
products accounted for approximately 30% of our revenues in 2007, 35% in 2008
and 40% during the nine months ended September 30, 2009. High purity
graphite products accounted for approximately 30% of our revenues in 2007, 35%
in 2008 and 35% during the nine months ended September 30, 2009
In June
2009, we launched production of newly developed fine grain graphite rods with a
length of 3,500 millimeters and a purity level up to 99.99%. Based on
informal discussions with others in our industry, we believe that these rods are
currently the largest available in China’s graphite market.
35
Our
Manufacturing Facility
We
currently manufacture all of our products in our Inner Mongolia
facility. In 2008, our facility had the capacity to produce 15,000
tons of materials annually, in the aggregate. In 2009, we began
increasing our production capacity in this facility. Our short-term
goal is to increase our production capacity at this facility to 26,000 tons
annually, in the aggregate, by purchasing additional machinery for our
production lines. In addition, we are considering acquiring other
businesses in our industry in China in order to enable us to increase our
production capacity. See “—Our Growth Strategy”
above. Increasing our production capacity would ultimately enable us
to increase sales of our current products and to develop a new product line of
graphite rods that would be eligible for sale to nuclear power plants in
China.
The
manufacturing process of each of our products generally involves various steps,
including calcining, which is a thermal treatment process applied to raw
materials, crushing raw materials into smaller particles, screening, mixing,
forming, dipping, baking graphitization and machining. The technology
and procedures used in this process vary amongst the different products that we
manufacture. We have developed proprietary technology to support the
forming stage of production and, as discussed below under the heading
“—Intellectual Property,” we have been granted a patent by the State
Intellectual Property Office of the PRC to protect our rights to this
technology.
We employ
advanced methods of quality control and environmental management. In
this regard, we have obtained ISO90001 certification and ISO14000 certification
for all of our products.
Our
Raw Materials and Suppliers
Our
principal raw materials are coal asphalt, asphalt coke, metallurgy coke, needle
coke, metallurgy coke power, quartzose sand, coal, petroleum coke and calcined
coke, all of which are carbon rich and used in manufacturing graphite with a
high degree of density, strength and purity. We purchased all of our raw
materials from domestic Chinese suppliers in 2008 and during the nine months
ended September 30, 2009. We do not have any long-term contracts for raw
materials. Therefore, any increase in prices of raw material will
affect the price at which we can sell our product. 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
product. If we are not able to raise our prices to pass on increased
costs to our customers, we would be unable to maintain our profit
margins. Similarly, in times of decreasing prices, we may have to
sell our products at prices which are lower than the prices at which we
purchased our raw materials. Furthermore, PRC regulations grant broad
powers to the government to adjust prices 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. However, because of the diversity of available
sources of these raw materials, we believe that our raw materials are currently
in adequate supply and will continue to be so in the future.
Our
Customers
Approximately
78% of our sales in 2008 and through the nine months ended September 30, 2009
were made to over 200 distributors located throughout 22 provinces in
China. During these periods, our distributors sold our products to
end customers both in China and in foreign countries, including, among others,
Japan, the United States, Spain, England, South Korea and
India. These end users consist of companies in various industries,
including automobiles, defense, molding, machinery and tool
manufacturers.
Approximately
22% of our sales in 2008 and through the nine months ended September 30, 2009
were made directly to end users located in China. Our direct sales
consist of sales of our graphite electrodes to steel manufacturers and
metallurgy companies located in China and sales of our fine grain graphite and
high purity graphite products to molding companies located in
China.
36
We
generally do not enter into long-term contracts with our distributors or
customers. Our distributors and customers generally purchase our
products pursuant to purchase orders. We currently have one long-term agreement
with one of our distributors; however, the volume of sales from such distributor
is not material to our business.
Our
distributors and customers generally purchase on credit, depending on their
credit history and volume of purchases from us. During the nine
months ended September 30, 2009, as a result of the global economic crisis, we
experienced delays in the collection of our accounts receivable. This
is reflected in the increase in accounts receivable from $4.2 million at
December 31, 2008 to $6.2 million at September 30, 2009, despite a decline in
sales in 2009.
Sales to
three of our distributors accounted for 10% or more of our net sales in 2008, as
follows (dollars in thousands):
Sales
|
Percent
of
Net
Sales
|
||||
Name
|
|||||
Datong
Energy Development Co., Ltd.
|
|
$
|
4,349
|
15.9%
|
|
He
Ming Advanced Materials, Ltd.
|
|
|
4,079
|
14.9%
|
|
Jiangsu
Carbon Products Sales Co., Ltd.
|
|
|
3,099
|
11.3%
|
Our
Sales and Marketing Efforts
We have
not spent a significant amount of capital on advertising. Our sales
force consists of ten people located at our Inner Mongolia facility who market
our products primarily to distributors, and, to a lesser extent, end users, in
the PRC. Our marketing effort is oriented toward working with distributors, who
purchase our products and then sell them to end users in China and in foreign
countries, including Japan, the United States, Spain, England, South Korea and
India.
Research
and Development
We have
entered into a technology cooperation agreement with Hunan University, which
sets forth the terms pursuant to which the university provides us with basic
research and we perform experiments based upon their research. We also have a
similar informal relationship with Qinghua University. The research that these
universities are currently engaged in focuses on the development of high purity
graphite with a diameter of 840 millimeters. A diameter of more than 840
millimeters and a purity of at least 99.9999% are threshold requirement for
nuclear graphite for use in nuclear power reactors. The largest
graphite that we currently produce in large quantities that contains such a high
level of purity has a diameter of 600 millimeters. Our research and
development expenses have not been significant to date.
Intellectual
Property
We hold
one Chinese patent, Patent No IL: 2004 1 0044348.7, which relates to the molding
process for high-density, high strength and wear-resistant graphite
material. However, this patent affords us only limited protection,
and any actions we take to protect our intellectual property rights may not be
adequate. Most of our intellectual property consists of trade secrets
relating to the design and manufacture of graphite products and customer lists
that are accessible only by key executives and accounting personnel. Effective
intellectual property protection may not be available in China and other
countries in which our products are sold. Intellectual property rights in China
are still developing, and there are uncertainties involved in the protection and
the enforcement of such rights
Competition
and Competitive Advantages
We
compete with a number of domestic and international companies that manufacture
graphite products. Because of the nature of the product that we sell, we believe
that the reputation of the manufacturer and the quality of the product may be as
important as price.
37
In
addition to a number of domestic firms, there are three major international
firms that offer competing products. They are SGL Group, Toyo Tanso and Poco
Graphite. SGL Group is considered one of the world’s leading manufacturers of
carbon-based products. In 1974, Toyo Tanso became the first company in Japan to
develop isotropic graphite, significantly expanding the possibilities of carbon
use. Its products are now widely used in a variety of cutting edge technology
fields, including the semi-conductor and aerospace industries. Poco
Graphite’s products are
produced for the semiconductor and general industrial products, biomedical,
glass industry products and electrical discharge machining (EDM)
markets.
Government
Regulations
Approvals
for New Products
Before we
develop certain new products, we must obtain a variety of approvals from local
and municipal governments in the PRC. Our products may also be
required to comply with the regulations of foreign countries into which they are
ultimately sold. There is no assurance that we will be able to obtain
all required licenses, permits, or approvals from these government authorities.
If we fail to obtain all required licenses, permits or approvals, we may be
unable to expand our operations.
Environmental
Regulations
Xingyong, which manufactures our
products, is subject to Chinese and regional environmental laws and regulations.
Our refineries and related water treatment systems are built to meet government
requirements, and we received a manufacturing license from the government
department of environmental protection. Xingyong has passed environmental impact
assessment by local environment authorities. We believe that we and Xingyong are
in compliance in all material respects with all environmental protection laws
and regulations.
Regulations
Governing Electrical Equipment
Our
products are subject to regulations that pertain to electrical equipment, which
may materially adversely affect our business. These regulations influence the
design, components or operation of our products. New regulations and changes to
current regulations are always possible and, in some jurisdictions, regulations
may be introduced with little or no time to bring related products into
compliance with these regulations. Our failure to comply with these regulations
may restrict our ability to sell our products in the PRC. In addition, these
regulations may increase our cost of supplying the products by forcing us to
redesign existing products or to use more expensive designs or components. In
these cases, we may experience unexpected disruptions in our ability to supply
customers with products, or we may incur unexpected costs or operational
complexities to bring products into compliance. This could have an adverse
effect on our revenues, gross profit margins and results of operations and
increase the volatility of our financial results.
Circular
106 Compliance and Approval
On May
31, 2007, the SAFE issued an official notice known as “Circular 106,” which
requires the owners of any Chinese companies to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China. However, since the owners of
Xingyong were not stockholders of Talent, and Talent’s sole stockholder, a trust
of which the trustee and beneficiaries are family members of Mr. Jin, was not a
resident of the PRC, no SAFE application was required to be filed for Talent to
establish its offshore company, Yongle, as a “special purpose vehicle” for any
foreign ownership and capital raising activities by Xingyong.
Employees
As of
September 30, 2009, we had 553 full-time employees, of whom 462 were in
manufacturing, 36 were technical employees who were also engaged in research and
development, 40 were executive and administrative employees and 15 were sales
and marketing employees. We believe that our relationship with our employees is
good.
38
Properties
There is
no private ownership of land in the PRC. The government grants transferable land
use rights, which grant the right to use the land for a specified time period.
We have the land use rights to an area of 2,356,209 square feet in Xinghe
County, Inner Mongolia, China, on which we have a 290,626 square feet building
that we use for manufacturing and office space. The land use rights have terms
of 50 years, with the land use right relating to 1,207,388 square feet expiring
in 2050 and the land use right with respect to 1,148,821 square feet expiring in
2057. We believe that our facilities are sufficient to meet our current and near
future requirements and that any additional space that we may require would be
available on commercially reasonable terms.
Legal
Proceedings
We are not aware of any material
existing or pending legal proceedings against us, nor are we involved as a
plaintiff in any material proceeding or pending litigation. There are no
proceedings in which any of our current directors, officers or affiliates, or
any registered or beneficial shareholder, is an adverse party or has a material
interest adverse to us.
39
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth certain information with respect to our directors and
executive officers.
Name
|
Age
|
Position
|
||
Donghai
Yu
|
53 |
Chief
Executive officer, President and Director
|
||
Ting
Chen
|
27 |
Chief
Financial Officer and Director
|
||
Hongbo
Liu
|
50 |
Director
|
||
Yizhao
Zhang
|
39 |
Director
|
||
John
Chen
|
38 |
Director
|
Donghai
Yu has been our Chief Executive Officer since November 2008. Mr. Yu
served as Chief Financial Officer from December 2007 until November
2008. Since November 2007 he has also been Chief Financial Officer of
Xingyong. Mr. Yu received his MBA degree from Oklahoma City
University.
Ting Chen
has been our Chief Financial Officer since November 2008. Ms. Chen
was our Vice President of Finance and Investor Relations from January 2008 until
November 2008. Prior to that, Ms. Chen worked as an auditor at the
New York office of PricewaterhouseCoopers, from January 2005 to January
2008. Ms. Chen holds a CPA certificate and a bachelor degree in
accounting and economics from the City University of New York.
Hongbo
Liu has been a director since November 2008. Dr. Liu is a professor
at Hunan University in Hunan Province, where he has been the department chair of
Non-Metallic Materials since 2000. Dr. Liu is considered one of China’s top
scholars in carbon graphite studies. He has been granted a special annual
allowance for outstanding scholars in China by the PRC Department of State since
1997. Dr. Liu holds a doctorate degree in engineering from Hunan
University.
Yizhao
Zhang, 39, has more than 13 years of experiences in portfolio investment,
corporate finance, and accounting. He has been chief financial officer of
Universal Travel Group, a travel agency services company, since August 17, 2009.
From August 2008 to January 2009, he was the chief financial officer of
Energroup Holdings Corp., a fresh and processed meat producer in the PRC. From
May 2007 through May 2008, he was chief financial officer of Shengtai
Pharmaceutical Inc., a PRC manufacturer and supplier of glucose products. From
April 2006 through December 2006, he was the deputy chief financial officer of
China Natural Resources, Inc., a PRC mineral mining company. From April 2005
through April 2006, he was the vice president and senior manager in Chinawe
Asset Management Consultancy Limited, a company which mainly manages
non-performing loan assets in China. Mr. Zhang was a financial consultant with
Hendrickson Asset Management Assistance LLP from January 2004 through November
2004. Mr. Zhang is a certified public accountant, and a member of the American
Certified Accountants. Mr. Zhang received a bachelor degree in economics from
Fudan University, Shanghai in 1992 and obtained an MBA degree with Financial
Analysis and Accounting concentrations from the State University of New York at
Buffalo in 2003. Mr. Zhang currently serves as a director of China Education
Alliance, Inc., a PRC-based online educational resource company, China Green
Agriculture, Inc, a PRC-based producer of humic acid-based compound fertilizers,
and Kaisa Group Holdings Ltd., one of the largest property developers in China,
and from June 2008 to August 2009 served as director and audit chairman of
Universal Travel Group.
John Chen
has served as chief financial officer and director of General Steel Holdings,
Inc., a Chinese steel manufacturing company, since May 2004. From August 1997 to
July 2003, Mr. Chen was senior accountant at Moore Stephens, Wurth, Frazer and
Torbet, LLP, Los Angeles, California, USA. He graduated from Norman Bethune
University of Medical Science, Changchun City, Jilin Province, China in 1992. He
received a B.S. degree in accounting from California State Polytechnic
University, Pomona, California in 1997.
There are no agreements or
understandings between any of our executive officers or directors and any other
person pursuant to which such executive officer or director was selected to
serve as a director or executive officer of our company. Directors
are elected until their successors are duly elected and
qualified. There are no family relationships among our directors or
officers.
40
CORPORATE
GOVERNANCE
Director
Independence
Following
the appointment of Mr. Chen and Mr. Zhang on October 28, 2009, the board has
determined that a majority of the Company’s directors are independent under
Nasdaq rules. Effective October 28, 2009, the Company created audit,
compensation and corporate governance/nominating committees and adopted
committee charters and a code of conduct. Mr. Chen and Mr. Zhang,
along with Hongbo Liu, who is also an independent director, serve as members of
each of the committees with Mr. Zhang serving as chairman of the audit
committee, Mr. Chen as chairman of the compensation committee and Mr. Liu as
chairman of the corporate governance/nominating committee.
None of
our officers or directors have any family relationships with any other officers
or directors.
Audit
Committee
Our board
of directors has established an audit committee to assist it in fulfilling its
responsibilities for general oversight of the integrity of the financial
reporting process, compliance with legal and regulatory requirements, the
independent auditors’ qualifications and independence, the performance of our
independent auditors and an internal audit function and risk assessment and risk
management. Our board of directors has adopted a written charter for
the audit committee, which the audit committee reviews and reassesses for
adequacy on an annual basis. All of the members of our audit
committee are independent under the applicable rules and regulations of the SEC
and the Nasdaq.
Our audit
committee’s responsibilities include:
·
|
appointing,
evaluating and determining the compensation of our independent
auditors;
|
·
|
reviewing
and approving the scope of the annual audit, the audit fee and the
financial statements;
|
·
|
reviewing
disclosure controls and procedures, internal control over financial
reporting, any internal audit function and corporate policies with respect
to financial information;
|
·
|
discussing
with our independent auditor the scope and results of our year-end audit,
our quarterly results of operations, our internal accounting controls and
the professional services furnished by the independent auditor;
and
|
·
|
reviewing
other risks that may have a significant impact on our financial
statement
|
Commencing
with the audited financial statements for the year ended December 31, 2009, our
audit committee will meet with our representative of our independent accounting
firm with respect to our audited annual financial statements and our unaudited
quarterly financial statement before our Form 10-K or Form 10-Q is filed with
the SEC.
Compensation
Committee
Our
compensation committee discharges the board of director’s responsibilities
relating to compensation of our executive officers, produces an annual report on
executive compensation and provides general oversight of compensation
structure. Our compensation committee is currently comprised of Mr.
Chen, Mr. Zhang and Mr. Liu. Mr. Chen serves as chairman of the
compensation committee. All of the members of our compensation
committee are independent under the applicable rules and regulations of the SEC
and the Nasdaq. Our board of directors has adopted a written charter
for our compensation committee.
41
Our
compensation committee’s responsibilities include:
·
|
reviewing
and approving corporate goals and objectives relevant to compensation of
our executive officers;
|
·
|
evaluating
any incentive-compensation plans or equity-based
plans;
|
·
|
oversee
regulatory compliance with respect to compensation matters in consultation
with management; and
|
·
|
evaluating
any severance or similar termination payments proposed to be made to any
of our current or former executive officers or member of senior
management.
|
Corporate
Governance/Nominating Committee
Our board
of directors has established a corporate governance/nominating committee for the
purpose of reviewing all board of director-recommended and
stockholder-recommended nominees, determining each nominee’s qualifications and
making a recommendation to the full board of directors as to which persons
should be our board of director nominees. Our corporate
governance/nominating committee is currently comprised of Mr. Chen, Mr. Zhang
and Mr. Liu. Mr. Liu serves as chairman of the compensation
committee. All of the members of our compensation committee are
independent under the applicable rules and regulations of the SEC and the
Nasdaq. Our board of directors has adopted a written charter for our
corporate governance/nominating committee.
Our
corporate governance/nominating committee’s responsibilities
include:
·
|
identifying
and recommending to our board of directors criteria and procedures for
selecting board and committee
membership;
|
·
|
identifying
individuals qualified to become board
members
|
·
|
evaluating
the desirability of and recommending to the board any changes in the size
and composition of the board;
|
·
|
recommending
to our board of directors the persons to be nominated for election as
directors and each of the board’s
committees;
|
·
|
evaluation
of and successor planning for the chief executive officer and other
executive officers;
|
·
|
developing
and recommending to our board of directors a set of corporate governance
guidelines; and
|
·
|
overseeing
the evaluation of our board of directors, its committees and
management.
|
Director
Compensation
We have
entered into an agreement with Mr. Zhang and Mr. Chen, pursuant to which we
agreed to issue to each of them 25,000 shares of common stock each year for
their services as directors and committee members. Pursuant to these
agreements, we issued 25,000 shares to each of them upon their election in
October 2009. Beginning in May 2009, we also issued 25,000 shares of common
stock to Mr. Liu and will grant him this amount on an annual basis for his
services as director and committee member.
42
Code
of Ethics
On
October 28, 2009, our board of directors adopted a Code of Business Conduct and
Ethics, which applies to all directors, officers and employees. The purpose of
the Code is to promote honest and ethical conduct.
Board
Attendance
During
2008, the board of directors held two meetings. Each director
attended at least 75% of the board meetings held while he or she was a
director.
EXECUTIVE
COMPENSATION
The following summary compensation
table sets forth the compensation earned by our named executive officers during
the years ended December 31, 2007 and 2008. None of our executive
officers received $100,000 or more of compensation during 2007 or
2008.
SUMMARY
COMPENSATION TABLE
Name
and principal position
|
Year
|
Salary
|
Total
|
|||||||||
Dengyong
Jin,
Former
Chief Executive Officer
|
2008
2007
|
$ |
-
-
|
$ |
-
-
|
|||||||
Donghai
Yu,
Chief
Executive and Chief Financial Officer
|
2008
2007
|
$ |
-
-
|
$ |
-
-
|
Mr. Jin was our Chief Executive
Officer until November 2008, at which time Mr. Yu was appointed as our Chief
Executive Officer. Mr. Yu was our Chief Financial Officer prior to
such appointment. We have not entered into an employment agreement
with any of our executive officers.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
See “Business
– Organizational Structure” above for information relating to contracts between
us and Xingyong that give us control of the business of Xingyong. Dengyong Jin,
our former chief executive officer, is the chief executive officer and principal
shareholder of Xingyong. Our principal stockholder, Sincere, is owned by Lizhong
Gao, the brother-in-law of Mr. Jin, who has the sole power to vote and dispose
of the shares of our company held by Sincere. Sincere holds the shares as
trustee for Mr. Jin’s wife and sister in-law.
Dengyong
Jin provided a loan to us of approximately $4.5 million on December 31, 2007. We
repaid this loan in full during the fourth quarter of 2008. In
October 2008, we advanced to Beijing Royal Yiyuan Inc, a company owned by Mr.
Jin, approximately $290,000, which was repaid in full in April 2009. Each of the
advances bore no interest and were payable on demand.
43
SELLING
STOCKHOLDERS
The following table sets forth certain
information regarding the selling stockholders, including the number and
percentage of shares beneficially owned by them and the number of shares offered
by them in this prospectus. Beneficial ownership is determined in accordance
with the rules of the SEC. In computing the number and percentage of shares
beneficially owned by a selling stockholder, shares of common stock underlying
preferred stock and warrants held by such stockholder that are exercisable
within 60 days of February 1, 2010 are included. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other selling stockholder. Each selling stockholder’s percentage of ownership in
the following table is based upon 18,406,601 shares of common stock outstanding
as of February 1, 2010.
The selling stockholders acquired the
securities being registered for resale in this prospectus in a private
placement, pursuant to which we issued to the selling stockholders an aggregate
of 2,480,500 shares of Series B Convertible Preferred Stock, and warrants to
purchase an aggregate of up to 1,116,225 shares of our common
stock. The aggregate purchase price was approximately $3.0
million.
The shares of Series B Preferred Stock
may be converted at the option of the holders at any time until December 22,
2011, into an aggregate of 2,480,500 shares of common stock. On
December 22, 2011, any outstanding shares of Series B Preferred Stock will be
automatically converted into common stock. The initial exercise price
of the 992,200 warrants issued to investors is $1.30 per share, subject to
certain adjustments set forth therein, including adjustments in the event of
certain future financing transactions conducted by us or in the event of a stock
dividend or stock split. The warrants may be exercised at any time prior to the
five year anniversary of the issuance of the warrants.
In addition, we granted Maxim Group
LLC, the placement agent, five-year warrants to purchase up to 124,025 shares of
our common stock at an exercise price of $1.32 per share.
None of the selling stockholders are
employees, suppliers or affiliates of ours or our affiliates. Within the past
three years, none of the selling stockholders has held a position as an officer
or director of ours, nor has any selling stockholder had any material
relationship of any kind with us or any of our affiliates. In addition, none of
the selling stockholders has any family relationships with our officers,
directors or controlling stockholders. Furthermore, based on representations
made to us by the selling stockholders, no selling stockholder is a registered
broker-dealer or an affiliate of a registered broker-dealer, except for Maxim
Group LLC.
Unless otherwise indicated, to our
knowledge, each person named in the table below has sole voting and investment
power (subject to community property laws where applicable) with respect to the
shares of common stock set forth opposite such person’s name. We will file a
supplement to this prospectus (or a post-effective amendment hereto, if
necessary) to name successors to any named selling stockholders who are able to
use this prospectus to resell the securities registered hereby.
Any selling stockholders who are
affiliates of broker-dealers and any participating broker-dealers may be deemed
to be “underwriters” within the meaning of the Securities Act, and any
commissions or discounts given to any such selling stockholder or broker-dealer
may be regarded as underwriting commissions or discounts under the Securities
Act. The selling stockholders have informed us that they do not have any
agreement or understanding, directly or indirectly, with any person to
distribute their common stock.
44
Name
of Beneficial Owner
|
Shares
Beneficially Owned Before the Offering
|
Maximum
Number of Shares to be Sold
|
Beneficial
Shares After the Offering (1)
|
Percentage
of Common Stock Owned After Offering (1)
|
||||||||||||
Silver
Rock II, Ltd. (2)
|
560,000 | 560,000 | 0 | * | ||||||||||||
Chestnut
Ridge Partners, LP(3)
|
350,000 | 350,000 | 0 | * | ||||||||||||
Lumen
Capital Limited Partnership (4)
|
70,000 | 70,000 | 0 | * | ||||||||||||
Taylor
Int’l Fund, Ltd. (5)
|
630,000 | 630,000 | 0 | * | ||||||||||||
Tangiers
Investors LP (6)
|
32,200 | 32,200 | 0 | * | ||||||||||||
Matthew
M. Haden (7)
|
87,500 | 87,500 | 0 | * | ||||||||||||
Kassirer
Market Neutral LP(8)
|
70,000 | 70,000 | 0 | * | ||||||||||||
CNH
Diversified Opportunities Master Account, L.P.
(9)
|
700,000 | 700,000 | 0 | * | ||||||||||||
Midsouth
Investor Fund LP(10)
|
408,333 | 408,333 | 0 | * | ||||||||||||
Lyman
O. Heidtke(11)
|
116,667 | 116,667 | 0 | * | ||||||||||||
Jayhawk
Private Equity Fund II, L.P.(12)
|
350,000 | 350,000 | 0 | * | ||||||||||||
Jeff
Tisherman (13)
|
98,000 | 98,000 | 0 | * | ||||||||||||
Maxim
Group LLC (14)
|
124,025 | 124,025 | 0 | * | ||||||||||||
Total
|
3,596,725 | 3,020,725 | 0 | * |
* Less
than 1%
(1)
Assumes that all securities offered are sold.
(2)
Includes shares of Series B Preferred Stock which may be converted into 400,000
shares of our common stock and 160,000 shares of our common stock underlying
warrants. Rima Salam has sole voting and investment control over the
securities held by Silver Rock II, Ltd.
(3)
Includes shares of Series B preferred stock which may be converted into 250,000
shares of our common stock and 100,000 shares of our common stock underlying
warrants. Kenneth Holz has sole voting and investment control over
the securities held by Chestnut Ridge Partners, LP.
(4)
Includes shares of Series B preferred stock which may be converted into 50,000
shares of our common stock and 20,000 shares of our common stock underlying
warrants. Allan Lichtenberg is the Managing Member of Lumen
Management LLC, which is the General Partner of Lumen Capital Limited
Partnership and has sole voting power and investment power over the securities
held by Lumen Capital Limited Partnership.
(5)
Includes shares of Series B preferred stock which may be converted into 450,000
shares of our common stock and 180,00 shares of our common stock underlying
warrants. Stephen Taylor is the Portfolio Manager of Taylor
International Fund, which is the investment manager for Taylor Int’l Fund, Ltd.
and has sole voting power and investment power over the securities held by
Taylor Int’l Fund, Ltd.
(6)
Includes shares of Series B preferred stock which may be converted into 23,000
shares of our common stock and 9,200 shares of our common stock underlying
warrants. Edward M. Liceaga is the Managing Member of Tangiers
Capital LLC, which is the General Partner of Tangiers Investors LP and has sole
voting power and investment power over the securities held by Tangiers Investors
LP.
(7)
Includes shares of Series B preferred stock which may be converted into 62,500
shares of our common stock and 25,000 shares of our common stock underlying
warrants.
(8)
Includes shares of Series B preferred stock which may be converted into 50,000
shares of our common stock and 20,000 shares of our common stock underlying
warrants. Mark Kassirer is the Director and General Partner of
Kassirer Market Neutral LP and has sole voting power and investment power over
the securities held by Kassirer Market Neutral LP.
45
(9)
Includes shares of Series B preferred stock which may be converted into 500,000
shares of our common stock and 200,000 shares of our common stock underlying
warrants.
(10)
Includes shares of Series B preferred stock which may be converted into
291,666.6 shares of our common stock and 116,666.7 shares of our common stock
underlying warrants. Lyman O. Heidtke is the General Partner of
Midsouth Investor Fund LP and has sole voting power and investment power over
the securities held by Midsouth Investor Fund LP.
(11)
Includes
shares of Series B preferred stock which may be converted into 83,333.4 shares
of our common stock and 33,333.3 shares of our common stock underlying
warrants.
(12)
Includes shares of Series B preferred stock which may be converted into 250,000
shares of our common stock and 100,000 shares of our common stock underlying
warrants. Kent C. McCarthy is the managing member of Jayhawk Capital
Management LLC, which is the general partner of Jayhawk Private Equity Fund II,
L.P. and has sole voting power and investment power over the securities held by
Jayhawk Private Equity Fund II, L.P.
(13)
Includes shares of Series B preferred stock which may be converted into 70,000
shares of our common stock and 28,000 shares of our common stock underlying
warrants.
(14)
Includes 124,025 shares of our common stock underlying warrants.
46
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides
information as to shares of common stock beneficially owned as of February 1,
2010, by:
•
|
each
director;
|
•
|
each
named executive officer;
|
•
|
each
person known by us to beneficially own at least 5% of our common stock;
and
|
•
|
all
directors and executive officers as a
group.
|
Beneficial ownership is
determined in accordance with the rules of the SEC. Unless otherwise indicated
below, to our knowledge, the persons and entities named in the table have sole
voting and sole investment power with respect to all shares beneficially owned
(subject to community property laws where applicable). Unless
otherwise indicated, the address of each beneficial owner listed below is c/o
Xinghe Xingyong Carbon Co., Ltd., 787 Xicheng Wai, Chengguantown, Xinghe County,
Inner Mongolia, China.
Name
|
Shares of Common Stock Beneficially
Owned
|
Percentage
|
||||||
Sincere
Investment (PTC), Ltd.(1)
Donghai
Yu
Ting
Chen
Hongbo
Liu
Yizhao
Zhang
John
Chen
All
officers and directors as a group (5 persons)
|
9,388,412
20,000
20,000
25,000
25,000
25,000
115,000
|
51.0%
-
-
-
-
-
0.6
|
% |
(1)
Lizhong Gao, our former President and Director, is the president and sole
stockholder of Sincere and has the sole power to vote and dispose of the shares
owned by Sincere. Mr. Gao is the brother-in-law of Mr. Jin, our
General Manager of China Operations, the Chief Executive Officer of Xingyong and
our former Chief Executive Officer. Sincere holds the shares as
trustee for Mr. Jin’s wife, Shulian Gao, and his sister in-law, Wenyi
Li.
Our
authorized capitalization consists of 100,000,000 shares of common stock, par
value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share.
Common
Stock
Holders
of our common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders. Holders of our common stock are
entitled to receive such dividends as our board of directors, in its discretion,
may declare from funds legally available. In the event of liquidation, each
outstanding share entitles its holder to participate ratably in the assets
remaining after payment of liabilities.
Our
directors are elected by a plurality vote. A single holder or group of holders
of more than 50% of the outstanding shares of common stock present and voting at
an annual stockholders meeting at which a quorum is present can elect all of our
directors. Our stockholders have no preemptive or other rights to subscribe for
or purchase additional shares of any class of stock or of any other securities.
All outstanding shares of common stock are, and those issuable upon conversion
of the preferred stock and exercise of the warrants will be, upon such
conversion or exercise, respectively, validly issued, fully paid, and
non-assessable.
The
transfer agent for our common stock is Empire Stock Transfer,
Inc. Their address is 1859 Whitney Mesa Drive, Henderson, Nevada
89014.
47
Preferred
Stock
Our board
of directors is authorized to issue up to 20,000,000 shares of preferred stock,
which may be issued in series from time to time in one or more series with such
designations, rights, preferences and limitations as our board of directors may
declare by resolution.
The
rights, preferences and limitations of each series of preferred stock may differ
with respect to such matters as may be determined by our board of directors,
including, without limitation, the rate of dividends, method and nature of
payment of dividends, terms of redemption, amounts payable on liquidation,
sinking fund provisions, conversion rights and voting rights. Additional shares
of preferred stock may be issued and may provide dividend and liquidation
preferences over common stockholders. Unless otherwise required by law, the
board of directors has the authority to issue shares of preferred stock without
stockholder approval. The issuance of preferred stock may have the effect of
delaying or preventing a change in control without any further action by
stockholders.
Series
A Preferred Stock
Our board
of directors has authorized the creation of Series A Preferred Stock, consisting
of 10,000,000 authorized shares, of which 125,000 shares were outstanding as of
February 1, 2010. Each share of Series A Preferred Stock is convertible at the
holder’s option (or automatically upon a change of control) into one share of
common stock. While the Series A Preferred Stock is outstanding, unless we
obtain the approval of the holders of 75% of the outstanding shares of Series A
Preferred Stock, we may not pay cash dividends or other distributions of cash,
property or evidences of indebtedness, nor redeem any shares of common stock nor
authorize or create any class of stock ranking as to dividends or distribution
upon liquidation that are senior to or pari passu with the Series A Preferred
Stock. If we issue common stock at a price, or warrants or other convertible
securities at a conversion or exercise price, which is less than the conversion
price then in effect, the conversion price shall be adjusted on a formula basis.
No dividends are payable with respect to the Series A Preferred
Stock.
Upon any
voluntary or involuntary liquidation, dissolution or winding-up, the holders of
the Series A Preferred Stock are entitled to a preference of $1.00 per share
before any distributions or payments may be made with respect to the common
stock or any other class or series of capital stock which is junior to the
Series A Preferred Stock upon the occurrence of such event.
The
holders of the Series A Preferred Stock have no voting rights. However, so long
as any shares of Series A Preferred Stock are outstanding, we may not, unless we
have the affirmative approval of the holders of 75% of the outstanding shares of
Series A Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series A Preferred Stock or alter or
amend the certificate of designation, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon liquidation senior to or
otherwise pari passu with the Series A Preferred Stock, or any of preferred
stock possessing greater voting rights or the right to convert at a more
favorable price than the Series A Preferred Stock, (c) amend our articles of
incorporation or other charter documents in breach of any of the provisions
thereof, (d) increase the authorized number of shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to the
foregoing.
Series
B Preferred Stock
Our board
of directors has authorized the creation of Series B Preferred Stock, consisting
of 3,000,000 authorized shares, of which 2,480,500 shares were outstanding as of
February 1, 2010. Each share of Series B Preferred is convertible at
the holder’s option (or automatically a change of control) into one share of
common stock.
Cash
dividends of 6% per annum shall payable on the first day of April, July, October
and January, commencing on April 1, 2010 The dividends are payable in cash or in
kind at our option. Payment in kind shall be made by the issuance of shares of
common stock valued at the average of the closing prices of the common stock
during the ten days ending three trading days prior to the dividend payment
date.
Upon the
two year anniversary of the issuance of the shares, we must redeem any
outstanding Series B Preferred Stock at a redemption price of $1.20 per share
plus accrued but unpaid dividends, provided that the shares of common stock
underlying the Series B Preferred are eligible for resale pursuant to an
effective registration statement or pursuant to Rule 144 under the Securities
Act and provided that the redemption applies to all outstanding shares of Series
B Preferred. If the shares of common stock issuable upon conversion
of the Series B Preferred are not eligible to be sold pursuant to a registration
statement or pursuant to Rule 144, the holders thereof shall have the option of
retaining their preferred stock.
48
In the
event of any liquidation, dissolution or winding up our affairs, the proceeds
shall be paid as follows: first pay $1.20 plus accrued dividends on each share
of Series B Preferred. Thereafter, the Series B Preferred participates with the
common stock on an as-converted basis. A merger or consolidation into another
corporation or a sale, lease, transfer or other disposition of all or
substantially all of our assets in a transaction in which the proceeds of such
sale are distributed to shareholders will be treated as a liquidation
event. Upon the occurrence of such event, we must redeem the Series B
Preferred unless the holders of a majority of the Series B Preferred elect
otherwise.
So long
as any shares of Series B Preferred are outstanding, we may not, without the
written consent of the holders of at least a majority of the outstanding shares
of Series B Preferred, liquidate, dissolve or wind up our affairs, or effect any
change of control; amend, alter, or repeal any provision of the Certificate of
Designation relating to the Series B Preferred; purchase, redeem or pay any
dividend on any capital stock junior to the Series B Preferred; or create or
authorize the creation of any convertible debt security if our aggregate
convertible debt would exceed $5,000,000, unless such debt is incurred in
connection with an acquisition or an expansion of our facilities.
Warrants
We presently have
outstanding warrants to purchase 1,123,025 shares of common stock, 225,000 of
which have an exercise price of $2.00 per share, 100,000 of which have an
exercise price of $3.00, 680,00 of which have an exercise price of $1.30 per
share and 124,025 of which have an exercise price of $1.32. The warrants issued
to the selling stockholders expire five years from the date of the initial
closing with respect to this Offering. The holders of the warrants have no
cashless exercise rights. The warrants provide for an adjustment in the exercise
price and the number of shares issuable upon such exercise in the event of a
stock split, dividend, distribution, reverse split, combination of shares or
other recapitalization. We may redeem the warrants for $0.01 per share of common
stock issuable upon exercise of the warrants if for 20 trading days during any
30 trading day period, the price of the common stock exceeds $2.60 per
share.
The 124,025 warrants issued to Maxim
Group LLC expire five years from the date of the initial closing. The warrants
provide for cashless exercise and an adjustment in the exercise price and the
number of shares issuable upon such exercise in the event of a stock split,
dividend, distribution, reverse split, combination of shares or other
recapitalization. Such warrants have customary anti-dilution protection for
stock splits and similar events.
Indemnification
of Directors and Officers
Our officers and directors are
indemnified as provided by the Nevada Revised Statutes, or the NRS, and our
articles of incorporation.
Under the NRS, director immunity from
liability to a company or its shareholders for monetary liabilities applies
automatically unless it is specifically limited by a company’s articles of
incorporation that is not the case with our articles of incorporation. Excepted
from that immunity are:
(1)
|
a
willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
|
(2)
|
a
violation of criminal law (unless the director had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to
believe that his or her conduct was
unlawful);
|
(3)
|
a
transaction from which the director derived an improper personal profit;
and
|
(4)
|
willful
misconduct.
|
49
Our bylaws and articles of
incorporation provide that we may indemnify our directors, officers, employees,
and agents, to the fullest extent permitted by the NRS. We may
purchase and maintain liability insurance, or make other arrangements for such
obligations or otherwise, to the extent permitted by the NRS.
SHARES
ELIGIBLE FOR FUTURE SALE
As of February 1, 2010, we had
18,406,661 shares of common stock issued and outstanding.
Shares
Covered by this Prospectus
All of the 3,596,725 shares of common
stock being registered in this offering may be sold without restriction under
the Securities Act, so long as the registration statement of which this
prospectus is a part is, and remains, effective.
Rule
144
In general, pursuant to Rule 144 under
the Securities Act, a person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the three months
preceding a sale of shares of our common stock, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at least six months
(including any period of consecutive ownership of preceding non-affiliated
holders) would be entitled to sell those shares, subject only to the
availability of current public information about us. A non-affiliated person who
has beneficially owned restricted securities within the meaning of Rule 144 for
at least one year would be entitled to sell those shares without regard to the
current public information requirement.
A person (or persons whose shares are
aggregated) who is deemed to be an affiliate of ours and who has beneficially
owned restricted securities within the meaning of Rule 144 for at least six
months would be entitled to sell within any three-month period a number of
shares of our common stock that does not exceed the greater of (i) one percent
of the then outstanding shares of our common stock or (ii) the average weekly
trading volume of our common stock during the four calendar weeks preceding such
sale. Such sales are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about
us.
The selling stockholders will not be
governed by the foregoing restrictions when selling their shares pursuant to
this prospectus. The selling stockholders may sell their pursuant to
Rule 144, if available, rather than under this prospectus.
50
Each selling stockholder and any
pledgees, assignees and successors-in-interest of any selling stockholder may,
from time to time, sell any or all of their shares of common stock covered
hereby on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or
negotiated prices. A selling stockholder may use any one or more of
the following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker dealer
solicits purchasers;
|
·
|
block
trades in which the broker dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker dealer as principal and resale by the broker dealer for its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
·
|
in
transactions through broker dealers that agree with the selling
stockholders to sell a specified number of such shares at a stipulated
price per share;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
a
combination of any such methods of sale;
or
|
·
|
any
other method permitted pursuant to applicable
law.
|
The selling stockholders may also sell
shares under Rule 144 under the Securities Act, if available, rather than under
this prospectus.
Broker dealers engaged by the selling
stockholders may arrange for other brokers dealers to participate in
sales. Broker dealers may receive commissions or discounts from the
selling stockholders (or, if any broker dealer acts as agent for the purchaser
of shares, from the purchaser) in amounts to be negotiated, but, except as set
forth in a supplement to this prospectus, in the case of an agency transaction,
not in excess of a customary brokerage commission in compliance with FINRA Rule
2440; and in the case of a principal transaction a markup or markdown in
compliance with FINRA IM-2440.
In connection with the sale of the
common stock or interests therein, the selling stockholders may enter into
hedging transactions with broker-dealers or other financial institutions, which
may in turn engage in short sales of the common stock in the course of hedging
the positions they assume. The selling stockholders may also sell
shares of the common stock short and deliver these securities to close out their
short positions, or loan or pledge the common stock to broker-dealers that in
turn may sell these securities. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions or create one or more derivative securities which require the
delivery to such broker-dealer or other financial institution of shares offered
by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The selling stockholders and any
broker-dealers or agents that are involved in selling the shares may be deemed
to be “underwriters” within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. Each Selling Stockholder has informed us that it does
not have any written or oral agreement or understanding, directly or indirectly,
with any person to distribute the common stock. In no event shall any
broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%).
The selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act or any
exemption therefrom, including Rule 172 thereunder. The selling
stockholders have advised us that there is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the selling
stockholders.
51
The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares of
common stock covered hereby may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the resale
shares may not simultaneously engage in market making activities with respect to
the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of the common stock by the
selling stockholders or any other person. We will make copies of this
prospectus available to the selling stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale (including by compliance with Rule 172 under the Securities
Act).
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus has been passed upon for
us by Holland & Hart LLP, Nevada. Kramer Levin Naftalis &
Frankel LLP has advised the company with respect to United States federal
securities laws.
EXPERTS
The
consolidated financial statements for the year ended December 31, 2007 included
herein have been audited by Bernstein & Pinchuk LLP, an independent
registered public accounting firm, and are included herein in reliance on such
report, given the authority of small firm as an expert in auditing and
accounting. The consolidated financial statements for the year ended
December 31, 2008 included herein have been audited by AGCA, Inc., an
independent registered public accounting firm, and are included herein in
reliance on such report, given the authority of said firm as an expert in
auditing and accounting.
52
We have filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered in this offering. This prospectus does not contain all of
the information set forth in the registration statement. For further information
with respect to us and the common stock offered in this offering, we refer you
to the registration statement and to the attached exhibits. With respect to each
such document filed as an exhibit to the registration statement, we refer you to
the exhibit for a more complete description of the matters
involved.
You may inspect our registration
statement and the attached exhibits and schedules without charge at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain copies of all or any part of our registration
statement from the SEC upon payment of prescribed fees. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings, including the
registration statement and the exhibits filed with the registration statement,
are also available from the SEC’s website at www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.
53
INDEX
TO FINANCIAL STATEMENTS
CONTENTS
|
PAGES
|
||
Reports
of Independent Registered Public Accounting Firm
|
F-2 | ||
Consolidated
Balance Sheets for the Years Ended December 31, 2007 and
2008
|
F-4 | ||
Consolidated
Statements of Income for the Years Ended December 31, 2007 and
2008
|
F-5 | ||
Consolidated
Statements of changes in Stockholders’ Equity For the Years ended December
31, 2008 and 2007
|
F-6 | ||
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2008
|
F-7 | ||
Notes
To Financial Statements
|
F-8 | ||
Consolidated
Balance Sheets for the periods ended September 30, 2009 (Unaudited) and
December 31, 2008
|
F-24 | ||
Consolidated
Statements of Income for the periods ended September 30, 2008 and 2009
(Unaudited)
|
F-25 | ||
Consolidated
Statements of Cash Flows for the periods ended September 30, 2008 and 2009
(Unaudited)
|
F-27 | ||
Notes
to Financial Statements (Unaudited)
|
F-28 |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
China
Carbon Graphite Group, Inc.
Chengguantown,
Inner Mongolia
China
We have
audited the accompanying consolidated balance sheet of China Carbon Graphite
Group, Inc. and subsidiaries as of December 31, 2008 and the related
consolidated statements of income and comprehensive income, stockholders’
equity, and cash flows for the year then ended. China Carbon Graphite Group,
Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits. The Consolidated financial statements of China Carbon Graphite
Group, Inc. and subsidiaries for the year ended December 31, 2007 were audited
by other auditors whose report dated March 20, 2008 expressed an unqualified
opinion on those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Carbon Graphite Group, Inc.
and subsidiaries as of December 31, 2008 and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 2, the consolidated financial statements were prepared in
accordance with FASB Interpretation 46(R) – Consolidation of Variable Interest
Entities – An Interpretation of ARB No. 51.
As
discussed in Notes 2 and 16, the consolidated financial statements were prepared
on the assumption that Talent International Investment Limited will be able to
pay up the investment money to Xinghe Yongle Carbon Co., Ltd. on or before
December 31, 2009 and that the Government will not take any action to cancel the
investment due to interim default. In case Talent International Investment
Limited fails to pay the amount in full on time or that the Government takes
action to cancel the investment due to interim default, the basis of
consolidation may not be appropriate.
/s/
AGCA, Inc.
Arcadia,
California
April 10,
2009
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
China
Carbon Graphite Group, Inc.
We have
audited the accompanying consolidated balance sheet of China Carbon Graphite
Group, Inc. as of December 31, 2007, and the related statements of operations
and comprehensive income, stockholders’ equity, and cash flows for the year then
ended. China Carbon Graphite Group, Inc.’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Carbon Graphite Group, Inc.
as of December 31, 2007, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Bernstein & Pinchuk LLP
New York,
NY
March 20,
2008
F-3
China Carbon Graphite Group, Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31,
2008
|
December
31,
2007
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 51,799 | $ | 4,497 | ||||
Trade
accounts receivable, net
|
4,224,410 | 4,868,263 | ||||||
Notes
receivable
|
27,720 | 243,426 | ||||||
Other
receivables
|
150,694 | 766,945 | ||||||
Advance
to related party
|
290,409 | - | ||||||
Advance
to suppliers, net
|
1,017,088 | 636,660 | ||||||
Inventories
|
15,889,549 | 14,626,927 | ||||||
Total current
assets
|
21,651,669 | 21,146,718 | ||||||
Property
and equipment, net
|
21,003,607 | 19,416,718 | ||||||
Construction
in progress
|
2,029,777 | - | ||||||
Land
use rights, net
|
3,604,324 | 2,841,954 | ||||||
$ | 48,289,377 | $ | 43,610,283 | |||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,253,265 | $ | 988,470 | ||||
Advance
from customers
|
640,346 | 2,466,810 | ||||||
Taxes
payable
|
362,298 | 232,234 | ||||||
Short
term bank loans
|
4,887,514 | 6,015,778 | ||||||
Long
term bank loan - current portion
|
1,896,647 | - | ||||||
Notes
payable
|
- | 700,000 | ||||||
Convertible
note
|
- | 400,000 | ||||||
Loan
from shareholder
|
- | 4,543,648 | ||||||
Other
payables
|
551,096 | - | ||||||
Total current
liabilities
|
9,591,166 | 15,346,940 | ||||||
Long
Term Liabilities
|
||||||||
Long
term bank loan - non-current portion
|
3,209,711 | - | ||||||
Total liabilities
|
12,800,877 | 15,346,940 | ||||||
Contingencies
and Commitments (Note 16)
|
||||||||
Stockholders’
Equity
|
||||||||
Convertible
preferred stock, par value $0.001 per share,
authorized
20,000,000 shares, issued and outstanding 1,200,499
shares
at December 31,2008; none authorized and issued in 2007
|
$ | 1,200 | $ | - | ||||
Common
stock authorized 100,000,000 shares $0.001 par
value;
issued and outstanding 12,218,412 and 13,218,412 shares
at
December 31, 2008 and December 31, 2007, respectively
|
12,218 | 13,218 | ||||||
Treasury
Stock at cost - none at December 31, 2008
and
1,000,000 shares at December 31,2007
|
- | (149,700 | ) | |||||
Additional paid-in capital | 8,690,426 | 6,637,326 | ||||||
Accumulated other comprehensive income | 4,991,113 | 2,948,244 | ||||||
Retained earnings | 21,793,543 | 18,814,255 | ||||||
Total stockholders’ equity | 35,488,500 | 28,263,343 | ||||||
$ | 48,289,377 | $ | 43,610,283 |
The
accompanying footnotes are an integral part of these financial
statements
F-4
China
Carbon Graphite Group, Inc. and Subsidiaries
Consolidated
Statements of Income and Comprehensive Income
Years
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Sales
|
$ | 27,303,385 | $ | 25,357,242 | ||||
Cost
of Goods Sold
|
20,605,710 | 20,447,251 | ||||||
Gross
Profit
|
6,697,675 | 4,909,991 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
504,884 | 124,241 | ||||||
General
and administrative
|
1,951,642 | 1,120,839 | ||||||
Depreciation
and amortization
|
68,422 | 16,350 | ||||||
2,524,948 | 1,261,430 | |||||||
Operating
Income Before Other Income (Expense)
and
Income Tax Expense
|
4,172,727 | 3,648,561 | ||||||
Other
Income (Expense)
|
||||||||
Other
income
|
401,860 | 440,506 | ||||||
Interest
income
|
- | 563 | ||||||
Other
expenses
|
(11,491 | ) | - | |||||
Interest
expense
|
(580,808 | ) | (495,448 | ) | ||||
(190,439 | ) | (54,379 | ) | |||||
Income
Before Income Tax Expense
|
3,982,288 | 3,594,182 | ||||||
Income
tax expense
|
- | - | ||||||
Current
|
- | - | ||||||
Deferred
|
- | - | ||||||
Net
income
|
$ | 3,982,288 | $ | 3,594,182 | ||||
Deemed
preferred stock dividend
|
$ | (854,300 | ) | $ | - | |||
Net
income available to common shareholders
|
$ | 3,127,988 | $ | 3,594,182 | ||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
2,042,869 | 1,794,923 | ||||||
Total
comprehensive Income
|
$ | 6,025,157 | $ | 5,389,105 | ||||
Share
Data
|
||||||||
Basic
earnings per share
|
$ | 0.25 | $ | 0.34 | ||||
Diluted
earnings per share
|
$ | 0.21 | $ | 0.34 | ||||
Weighted
average common shares outstanding,
basic
|
12,591,363 | 10,464,432 | ||||||
Weighted
average common shares outstanding,
Diluted
|
14,623,187 | 10,506,099 |
The
accompanying footnotes are an integral part of these financial
statements
F-5
China
Carbon Graphite Group, Inc. and Subsidiaries
Consolidated
Statements of changes in Stockholders’ Equity
For
the years ended December 31, 2008 and 2007
Common
Stock
|
Convertible
Preferred
Stock
|
Additional
Paid-In
|
Retained
|
Accumulated
Other Comprehensive
|
Treasury
Stock
|
Total
Stockholders
|
||||||||||||||||||||||||||||||||||
Number
|
Amount
|
Number
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
Equity
|
|||||||||||||||||||||||||||||||
Balance
at December
31, 2006
|
10,388,172 | $ | 10,388 | - | $ | - | $ | 6,640,156 | $ | 15,870,373 | $ | 1,153,321 | - | $ | - | $ | 23,674,238 | |||||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | - | - | 1,794,923 | - | - | 1,794,923 | ||||||||||||||||||||||||||||||
Stock
issued in recapitalization
|
2,830,240 | 2,830 | - | - | (2,830 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
Repurchase
of common stock
|
- | - | - | - | - | (650,300 | ) | - | 1,000,000 | (149,700 | ) | (800,000 | ) | |||||||||||||||||||||||||||
Net
income for the year ended December 31, 2007
|
- | - | - | - | - | 3,594,182 | - | - | - | 3,594,182 | ||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
13,218,412 | $ | 13,218 | - | $ | - | $ | 6,637,326 | $ | 18,814,255 | $ | 2,948,244 | 1,000,000 | $ | (149,700 | ) | $ | 28,263,343 | ||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | 2,042,869 | - | - | 2,042,869 | ||||||||||||||||||||||||||||||
Net
income for the year ended December 31, 2008
|
- | - | - | - | - | 3,982,288 | - | - | - | 3,982,288 | ||||||||||||||||||||||||||||||
Cancellation
of common stock
|
(1,000,000 | ) | (1,000 | ) | - | - | - | (148,700 | ) | - | (1,000,000 | ) | 149,700 | - | ||||||||||||||||||||||||||
Issuance
of preferred stock
|
- | - | 1,200,499 | 1,200 | 1,198,800 | - | - | - | - | 1,200,000 | ||||||||||||||||||||||||||||||
Deemed
preferred stock dividend
|
- | - | - | - | 854,300 | (854,300 | ) | - | - | - | - | |||||||||||||||||||||||||||||
Balance
at December 31,2008
|
12,218,412 | $ | 12,218 | 1,200,499 | $ | 1,200 | $ | 8,690,426 | $ | 21,793,543 | $ | 4,991,113 | - | $ | - | $ | 35,488,500 |
The
accompanying footnotes are an integral part of these financial
statements
F-6
China
Carbon Graphite Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
Income
|
$ | 3,982,288 | $ | 3,594,182 | ||||
Adjustments
to reconcile net cash provided by
Operating
activities
|
||||||||
Depreciation
and amortization
|
1,254,462 | 1,147,316 | ||||||
Change
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
955,440 | (1,872,019 | ) | |||||
Notes
receivable
|
228,438 | (222,707 | ) | |||||
Other
receivables
|
657,349 | (651,714 | ) | |||||
Advance
to suppliers
|
(332,468 | ) | (636,660 | ) | ||||
Inventories
|
(276,827 | ) | (716,345 | ) | ||||
Accounts
payable and accrued expenses
|
303,570 | (279,396 | ) | |||||
Advance
from customers
|
(1,961,068 | ) | 2,466,810 | |||||
Taxes
payable
|
112,705 | 30,711 | ||||||
Prepaid
expenses
|
- | 4,858 | ||||||
Other
payables
|
518,341 | - | ||||||
Net
cash provided by operating activities
|
5,442,230 | 2,865,036 | ||||||
Cash
flows from investing activities
|
||||||||
Acquisition
of property and equipment
|
(1,250,458 | ) | (381,279 | ) | ||||
Acquisition
of land use rights
|
(631,232 | ) | (2,053,224 | ) | ||||
Construction
in progress
|
(1,998,276 | ) | - | |||||
Net
cash used in investing activities
|
(3,879,966 | ) | (2,434,503 | ) | ||||
Cash
flows from financing activities
|
||||||||
Convertible
notes
|
800,000 | 400,000 | ||||||
Repayment
for reverse acquisition
|
(800,000 | ) | - | |||||
Proceeds
from bank loans
|
9,838,773 | 5,776,401 | ||||||
Repayment
of bank loans
|
(6,319,796 | ) | (6,559,757 | ) | ||||
Advance
to related party
|
(285,902 | ) | - | |||||
Repayment
of advances from related parties
|
(4,773,270 | ) | (264,652 | ) | ||||
Net
cash used in financing activities
|
(1,540,195 | ) | (648,008 | ) | ||||
Effect
of exchange rate fluctuation
|
25,233 | 176,512 | ||||||
Net
increase (decrease) in cash
|
47,302 | (40,963 | ) | |||||
Cash
and cash equivalents at beginning of year
|
4,497 | 45,460 | ||||||
Cash
and cash equivalents at end of year
|
$ | 51,799 | $ | 4,497 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 580,808 | $ | 495,448 | ||||
Income
taxes paid
|
$ | - | $ | - | ||||
Non-cash
financing and investing activities
|
||||||||
Convertible
preferred stock and warrants
issued
for conversion of convertible notes
|
$ | 1,200,000 |
$
|
The
accompanying footnotes are an integral part of these financial
statements
F-7
China
Carbon Graphite Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
For
the years ended December 31, 2008 and 2007
1.
|
Organization
and Business
|
China
Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation,
incorporated on February 13, 2003 under the name Achievers Magazine Inc. In
connection with the reverse acquisition 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, dated as of December 14, 2007, with Sincere Investment
(PTC), Ltd. (“Sincere”), a British Virgin Islands corporation, which is the sole
stockholder of Talent International Investment Limited (“Talent”), a British
Virgin Islands corporation, which is the sole stockholder of Xinghe Yongle
Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the People’s
Republic of China (the “PRC”). Pursuant to the share exchange agreement, the
Company, then known as Achievers Magazine, Inc., issued 9,388,172 shares of
common stock to Sincere in exchange for all of the outstanding common stock of
Talent, and Talent became the Company’s wholly-owned subsidiary. From and after
December 17, 2007, the Company’s sole 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
under the laws of the PRC. Yongle is a party to a series of contractual
arrangements with Xinghe Xingyong Carbon Co., Ltd. (“Xingyong”), a corporation
organized under the laws of the PRC. Xingyong’s sole stockholder was, at the
time of the transaction, the Company’s chief executive officer. These agreements
give the Company the ability to operate and manage the business of Xingyong and
to derive the profit (or sustain the loss) from Xingyong’s business. As a
result, the operations of Xingyong are consolidated with those of the Company
for financial reporting purposes. The relationship among the above companies as
follows:
The
Company manufactures graphite electrodes, fine grain graphite, high purity
graphite and other carbon derived products.
Stock
distribution
On
January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby
each share of common stock became converted into 1.6 shares of common stock. All
references to share and per share information in these financial statements
reflect this stock distribution.
F-8
2.
|
Basis
of Preparation of Financial
Statements
|
The
Company maintains its books and accounting records in Renminbi (“RMB”), and its
reporting currency is United States 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, which is an affiliated company whose financial condition is
consolidated with the Company pursuant to FIN 46R, in accordance with accounting
principles generally accepted in the United States of America (“US
GAAP”).
Yongle
and Xingyong are under common control. At the time of the acquisition, Mr.
Denyong Jin was the chief executive officer and principal stockholder of
Xingong. Sincere Investment (PLC) Ltd., a British Virgin Islands company, as
trustee, is the Company’s principal stockholder. Lizhong Gao is
president and sole stockholder of Sincere. The beneficiaries of the trust are
Shulian Gao, who is Mr. Jin’s wife, and Wenyu Li, who is Mr. Jin’s
sister-in-law. Lizhong Gao is Mr. Jin’s brother-in-law.
Under
EITF 02-5(b), common control exists where immediate family members hold more
than 50% of the voting ownership interest in each of the
entities. Under Item 404(a) of Regulation S-K, an immediate family
member of a person includes that person’s “child, stepchild, parent, stepparent,
spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law.”
Since
more than 50% of Xingyong’s equity is owned by Mr. Jin and more than 50% of the
Company’s equity is owned by a company that is owned by Mr. Jin’s brother-in-law
and in which Mr. Jin’s wife and sister-in-law are the beneficiaries, the
companies are under common control and there is no revaluation of assets. The
following table reflects the relationship.
Denyong
Jin and members of his immediate family
|
||||
Control
of Xingyong through majority stock ownership
|
Control
of the Company and Yongle through majority stock ownership of the Company,
with the Company being the 100% beneficial owner of Yongle
|
Under US
GAAP, the acquisition by the Company of Talent is considered to be a capital
transaction in substance, rather than a business combination. That is, the
acquisition is equivalent, in the acquisition by Talent of the Company, then
known as Achievers Magazine, Inc., with the issuance of stock by Talent for the
net monetary assets of the Company. This transaction is accompanied by a
recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the comparative historical financial statements of the
Company, as the legal acquirer, are those of the accounting acquirer, Talent.
Since Talent and Yongle did not have any business activities, the Company’s
financial statements prior to the closing on the reverse acquisition, reflect
the only business of Xingyong. The accompanying financial statements reflect the
recapitalization of the stockholders’ equity as if the transactions occurred as
of the beginning of the first period presented. Thus, the 9,388,172 shares of
common stock issued to Sincere and the 2,803,040 shares purchased by other
investors are deemed to be outstanding for all period covered by these financial
statements.
The
Company’s consolidated financial statements include the financial statements of
its wholly-owned subsidiaries, Talent and Yongle, as well as Xingyong, which is
a variable interest entity whose financial statements are consolidated with
those of the Company pursuant to FASB Interpretation No. 46R “Consolidation of
Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting
Research Bulletin No. 51. All significant intercompany accounts and transactions
have been eliminated in the combination.
F-9
FIN 46R
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s
residual returns. Variable interest entities are those entities in which the
Company, through contractual arrangements, bears the risks of, and enjoys the
rewards normally associated with ownership of the entities, and therefore the
Company is the primary beneficiary of these entities.
Yongle is
a party to a series of contractual arrangements with Xingyong. These agreements
include a management agreement pursuant to which 80% to 100% of
Xingyong’s net income after deduction of necessary expenses, if any, is paid to
Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in
connection with its business. For the years ended December 31, 2008 and 2007,
Xingyong paid 100% of net income to Yongle. In addition, Yongle manages and
controls all of the funds of Xingyong. Yongle also has the right to purchase
Xingyong’s equipment and patents and lease its manufacturing plants, land and
remaining equipment. This agreement is designed so that Yongle can conduct its
business in China. Pursuant to two other agreements, the sole stockholder of
Xingyong, who was, at the time of the transaction, the Company’s chief executive
officer, has pledged all of his equity in Xingyong as security for performance
of Xingyong’s obligations to Yongle. As a result, Xingyong is considered a
variable interest entity.
According
to PRC rules and regulations, Talent is required to pay up 20% or $800,000
within three months and the balance of its investment of 80% or $3,200,000 in
Yongle within two years from the date of issuance of business
license. Business license was issued on September 13, 2007 and
accordingly, Talent is required to pay $800,000 on or before December 12, 2007
and $3,200,000 on or before September 12, 2009. Talent can apply for
extension of time to pay up its investments with reasons acceptable to the
Government. Failing this, Talent has to apply for the investment to
be cancelled and business license to be revoked. The Government can,
if ever Talent does not apply for cancellation, give notice to Talent and revoke
the business license and thus cancel the investment.
Talent
has not paid the initial 20% or $800,000 nor applied for an extension of time to
effect this payment. However, the Government issued a new business
license on Yongle expiring December 31, 2009. Management assumes that
the Government will take no action and the investment can be paid up on or
before December 31, 2009, the expiration date of the new business
license. Management is sourcing for new capital and estimates that
the investment can be fully paid up on time.
3.
|
Summary
of Significant Accounting Policies
|
Use of estimates - The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affected 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 reported periods.
Significant
estimates included 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 period 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.
Inventory - Inventory is
stated at the lower of cost or market. 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 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.
F-10
Accounts receivable - Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.
Property and equipment -
Property and equipment is stated at the historical cost, less accumulated
depreciation. Land use rights are being amortized to expense on a straight line
basis over the life of the rights. 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 were 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 there was no
impairment recorded during the years ended at December 31, 2008 and
2007.
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.
Land use rights - There is no
private ownership of land in the PRC. The Company has acquired land use rights
to a total of 2,356,209 square feet, on which a 290,626 square feet facility is
located. The land use rights have terms of 50 years, with the land use right
relating to 1,207,388 square feet expiring in 2050 and the land use right with
respect to 1,148,821 square feet expiring in 2057. The cost of the land use
rights is amortized over the 50-year term of the land use right. The Company
evaluates the carrying value of intangible assets during the fourth quarter of
each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the intangible asset
below its carrying amount. There were no impairments recorded during the years
ended December 31, 2008 or 2007.
Income recognition - Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, 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. The Company
believes that these criteria are satisfied when the goods are shipped pursuant
to a purchase order.
Interest
income is recognized when earned.
F-11
Advertising
The
Company expenses all advertising costs as incurred. There was no advertising
expense for the years ended December 31, 2008 and 2007.
Shipping and handling costs -
The Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting
for Shipping and Handling Fees and Costs. The Company does not charge
its customers for shipping and handling. The Company classifies shipping and
handling costs as part of the operating expenses. For the year ended December
31, 2008 and 2007, shipping and handling costs were $415,467 and
$120,620.
Segment reporting - Statement
of Financial Accounting Standards No 131 (“SFAS 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.
The
Company only sells carbon graphite products and sells only to Chinese
distributors and end users and is in only one business segment.
Taxation - Taxation on profits
earned in the PRC has been calculated on the estimated assessable profits for
the year at the rates of taxation prevailing in the PRC where the Company
operates after taking into effect the benefits from any special tax credits or
“tax holidays” allowed in the county of operations.
The
Company does not accrue United States income tax since it has no significant
operating income 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 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 of
some degree of uncertainty due to tax law and policy changes by the state.
However, 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 December 31, 2008 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
December 31, 2008, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
Enterprise
income tax
On March
16, 2007, the PRC’s parliament, the National People’s Congress, adopted the
Enterprise Income Tax Law, which took effect on January 1, 2008. The new income
tax law sets unified income tax rate for domestic and foreign companies at 25%
except a 15% corporation income tax rate for qualified high technology and
science enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this Law shall gradually transit to the
new tax rate within five years after the implementation of this
law.
F-12
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 tax holiday from 100% of
enterprises income tax for 10 years from 2008 through 2018. Afterwards, 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 corporation income tax rate of 15%
effective in 2019.
The
enterprise income tax is calculated on the basis of the statutory profit as
defined in the PRC tax laws. This statutory profit computed differently from 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 of 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.
The
Company has been granted an exemption from VAT by the Xing He County People’s
Government and Xing He Tax Authority on some products in which an exchange
agreement is in place for raw materials and fuel.
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.
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 was 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 balance
contribution of 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.
F-13
In
addition, we are required by Chinese laws to cover employees in China with
various types of social insurance. We believe that we are in material compliance
with the relevant PRC laws.
Fair value of financial instruments
- In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
157 are effective for the fiscal years beginning after November 15,
2007.
Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
157). The adoption of SFAS No. 157 did not have a material impact on the
Company’s fair value measurements. The carrying amounts of certain financial
instruments, including cash, accounts receivable, notes receivable, other
receivables, accounts payable, commercial notes payable, accrued expenses, and
other payables approximate their fair values as of December 31, 2008 and
December 31, 2007 because of the relatively short-term maturity of these
instruments.
Foreign currency translation -
The reporting currency of the Company is the U.S. dollar. The functional
currency of the Company is the local currency, the Chinese Renminbi (“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
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Translation adjustments for the year ended
December 31, 2008 and 2007 are $2,042,840 and $1,794,923, respectively. The
cumulative translation adjustment and effect of exchange rate changes on cash
for the year ended December 31, 2008 and 2007 was $29,740 and $176,512,
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.
Asset and
liability accounts at December 31, 2008 and December 31, 2007 were translated at
6.8542 RMB to $1.00 USD and at 7.3141 RMB to $1.00 USD, respectively. Equity
accounts were stated at their historical rate. The average translation rates
applied to income statements for the year ended December 31, 2008 and 2007 were
6.96225 RMB and 7.6172 RMB to $1.00 USD, respectively. In accordance with
Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,”
cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Earnings 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 uses if-converted
method to calculate the dilutive preferred stock and treasury stock method to
calculate the dilutive shares of warrants. For 2008, there were 3,000,000 shares
of common stock issuable upon exercise of anti-dilutive warrants.
Accumulated other comprehensive
income - The Company follows Statement of Financial Accounting Standards
No. 130 (SFAS 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 year ended December 31, 2008 and 2007
included net income and foreign currency translation adjustments.
F-14
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.
Reclassification - Certain
2007 amounts have been reclassified to conform to the current year’s financial
statements presentation. These reclassifications had no impact on previously
reported financial position, results of operations or cash flows.
Recent
accounting pronouncements
In
December, 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Accounting and Reporting of Noncontrolling interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160).
These new standards will significantly change the financial accounting and
reporting of business combination transactions and noncontrolling (or minority)
interests in consolidated financial statements. SFAS No. 141(R) and SFAS No. 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). Management does not expect that the adoption of SFAS
141(R) and 160 will have a material effect on the Company’s consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, the year ended December 31,
2009 for the Company). Management does not expect that this Statement will have
an effect on the Company’s consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS No.
161”), which changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This statement will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 (that is, the
year ended December 31, 2009 for the Company). Management does not expect that
this Statement will have an effect on the Company’s consolidated financial
statements.
In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon either mandatory or optional conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s non-convertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company will adopt FSP APB 14-1
beginning in the first quarter of 2009, and this standard must be applied on a
retroactive basis.
F-15
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that this
Statement will have an effect on the Company’s consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement
interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and
amends existing accounting pronouncements to clarify their application to the
financial guarantee insurance contracts included within the scope of this
Statement. This Statement requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 (that is, fiscal 2009 for the Company), and all interim
periods within those fiscal years. Management does not expect that this
Statement will have an effect on the Company’s consolidated financial
statements.
On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
As provided in the FSP, unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective commencing in the year ended December 31, 2009. We
are currently evaluating the requirements of EITF 03-6-1 as well as the impact
of the adoption on our consolidated financial statements.
In June
2008, the FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain
Convertible Instruments”, and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. This Issue is
effective for financial statements issued for fiscal years ending after December
15, 2008 and has no effect on the Company’s financial statements.
In June
2008, the FASB ratified Emerging Issues Task Force Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity’s own stock. Warrants that a company issues that contain a
strike price adjustment feature, upon the adoption of EITF 07-5, are no longer
being considered indexed to the company’s own stock. Accordingly, adoption of
EITF 07-5 will change the current classification (from equity to liability) and
the related accounting for such warrants outstanding at that date. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company is currently evaluating the
impact the adoption of EITF 07-5 will have on its financial statement
presentation and disclosures.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8
did not have any impact on the Company’s financial statements.
F-16
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, will not have a material impact on the Company’s consolidated
financial statements.
4.
|
Concentrations
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 FDIC on funds
held in U.S. banks.
The
Company is operating in the PRC, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese 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 Company’s large number of diverse
customers in different locations in China. The Company does not require
collateral or other security to support financial instruments subject to credit
risk.
For the
year ended December 31, 2008, three customers accounted for 10% or more of sales
revenues, representing 15.9%, 14.9% and 11.3%, respectively of the total sales.
No customer accounted for 10% or more of the Company’s revenue during the year
ended December 31, 2007.
As of
December 31, 2008 and 2007, the Company had insurance expense of $6,387 and $0
respectively. Accrual for losses is not recognized until such time a loss has
occurred.
5.
|
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
a 15% corporation income tax rate for qualified high technology and science
enterprises.
The
Company has been granted a 100% tax holiday from enterprises income tax from the
Xing He District Local Tax Authority for the ten years 2008 through 2018. This
tax holiday could be challenged by higher taxing authorities in the PRC, which
could result in taxes and penalties owed for those years. For the years ended
December 31, 2008 and 2007, the enterprise income tax at the statutory rates
would have been approximately $597,343 and $ 1,186,080,
respectively.
F-17
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:
2008
|
2007
|
|||||||
Computed
tax at the PRC statutory rate of 15% in 2008 and 33% in
2007
|
$
|
597,343
|
$
|
1,186,080
|
||||
Benefit
of tax holiday
|
(597,343
|
)
|
(1,186,080
|
)
|
||||
Income
tax expenses per books
|
|
$
|
-
|
|
|
$
|
-
|
|
6.
|
Trade
Accounts Receivable - net
|
As of
December 31, 2008 and 2007, trade accounts receivable consisted of the
following:
|
2008
|
2007
|
||||||
Amount
outstanding
|
$ | 4,928,354 | $ | 4,868,263 | ||||
Bad
debt provision
|
(703,944 | ) | - | |||||
Net
amount
|
$ | 4,224,410 | $ | 4,868,263 | ||||
For the
year ended December 31, 2008, bad debt provision of $693,020 was charged to
expenses. Bad debt of $196,620 was written off. For the year ended December 31,
2007, the bad debt expense was $79,095.
7.
|
Advance
to suppliers, net
|
As of
December 31, 2008 and 2007, advance to suppliers consisted of the
following:
2008
|
2007
|
|||||||
Amount
outstanding
|
$ | 1,186,640 | $ | 636,660 | ||||
Bad
debt provision
|
(169,552 | ) | - | |||||
Net
amount
|
$ | 1,017,088 | $ | 636,660 |
For the
years ended December 31, 2008 and 2007, bad debt provision on advance to
suppliers was charged to expenses for $166,921 and $0.
8.
|
Inventories
|
As of
December 31, 2008 and 2007, inventories consisted of the following:
2008
|
2007
|
|||||||
Raw
materials
|
$ | 820,250 | $ | 1,198,174 | ||||
Work
in process
|
13,193,750 | 10,119,774 | ||||||
Finished
goods
|
1,821,719 | 3,270,125 | ||||||
Repair
Parts
|
53,830 | 38,854 | ||||||
$ | 15,889,549 | $ | 14,626,927 |
Raw
materials consist primarily of asphalt, petroleum coke, needle coke and other
materials used in production. Finished goods consist of graphite electrodes,
fine grain graphite and high purity graphite. The costs of finished goods
include direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production are also included in the cost of inventory.
F-18
9.
|
Property
and Equipment, net
|
As of
December 31, 2008 and 2007, property and equipment consist of the
following:
2008
|
2007
|
|||||||
Building
|
$ | 7,956,770 | $ | 6,320,420 | ||||
Machinery
and equipment
|
19,515,684 | 18,234,302 | ||||||
Motor
vehicles
|
40,851 | 38,282 | ||||||
Construction
in progress
|
2,029,777 | - | ||||||
29,543,082 | 24,593,004 | |||||||
Less: Accumulated
depreciation
|
6,509,698 | 4,971,393 | ||||||
$ | 23,033,384 | $ | 19,621,611 |
For the
years ended December 31, 2008 and 2007, depreciation expense amounted to
$1,186,040 and $1,057,085 was charged to cost of goods sold.
10.
|
Land
Use Right
|
As of
December 31, 2008 and 2007, land use rights consist of the
following:
2008
|
2007
|
|||||||
Land
Use Right
|
$ | 3,811,539 | $ | 2,944,401 | ||||
Less: Accumulated
amortization
|
207,214 | 102,447 | ||||||
$ | 3,604,325 | $ | 2,841,954 |
For the
years ended December 31, 2008 and 2007, amortization expenses were $68,422 and
$16,350 respectively.
Future
amortization of the land use rights is as follows:
Year ended December 31,
|
||||
2009
|
$ | 75,048 | ||
2010
|
75,048 | |||
2011
|
75,048 | |||
2012
|
75,048 | |||
2013
|
75,048 | |||
2014
and thereafter
|
3,229,085 | |||
Total
|
$ | 3,604,325 |
11.
|
Stockholders’
equity
|
(a) 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 give the directors the authority to issue one or more series of
preferred stock and to designate the rights, preferences, privileges and
limitation of the holders of each set. The board of directors has designated the
rights, preferences, privileges and limitation of one series of preferred stock
-- the series A convertible preferred stock (“series A preferred
stock”).
F-19
On
December 17, 2007, the Company issued its 3% promissory note in the amount of
$1,200,000. Pursuant to the agreement pursuant to which the note was issued,
upon the filing of a restated certificate of incorporation which provided for
the creation of a series of preferred stock and the filing of a certificate of
designation which created the series A preferred stock, the note would
automatically be converted into 1,200,499 shares of series A preferred stock and
warrants to purchase 3,000,00 shares of common stock at $1.20 per shares and
3,000,00 shares of common stock at $2.00 per share. On January 22, 2008, upon
the filing of a restated articles of incorporation and a statement of
designation for the series A convertible preferred stock, and the outstanding
convertible note was converted into such series A preferred stock and
warrants.
The
statement of designation for the series A preferred stock provides the
following:
|
·
|
Each
share of series A preferred stock is convertible into one share of common
stock, at a conversion price of $1.00, subject to
adjustment.
|
|
·
|
While
the series A preferred stock is outstanding, if the Company issues common
stock at a price or warrants or other convertible securities at a
conversion or exercise price which is less than the conversion price then
in effect, the conversion price shall be adjusted on a formula
basis.
|
|
·
|
While
the Series A Preferred Stock is outstanding, without the approval of the
holders of 75% of the outstanding shares of Series A Preferred Stock, the
Company may not pay cash dividends or other distributions of cash,
property or evidences of indebtedness, nor redeem any shares of Common
Stock.
|
|
·
|
No
dividends are payable with respect to the series A preferred
stock.
|
|
·
|
Upon
any voluntary or involuntary liquidation, dissolution or winding-up, the
holders of the series A preferred stock are entitled to a preference of
$1.00 per share before any distributions or payments may be made with
respect to the common stock or any other class or series of capital stock
which is junior to the series A preferred stock upon voluntary or
involuntary liquidation, dissolution or winding-up.
|
|
·
|
The
holders of the series A preferred stock have no voting rights. However, so
long as any shares of series A preferred stock are outstanding, the
Company shall not, without the affirmative approval of the holders of 75%
of the outstanding shares of series A preferred stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to
the series A preferred stock or alter or amend the certificate of
designation, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon liquidation senior to or
otherwise pari passu with the series A preferred stock, or any of
preferred stock possessing greater voting rights or the right to convert
at a more favorable price than the series A preferred stock, (c) amend our
articles of incorporation or other charter documents in breach of any of
the provisions thereof, (d) increase the authorized number of shares of
series A preferred stock, or (e) enter into any agreement with respect to
the foregoing
|
(b) Warrants
The
warrants have terms of five years, and expire December 3, 2012. The warrants
provide a cashless exercise feature; however, the holders of the warrants may
not make a cashless exercise only if the underlying shares are not covered by an
effective registration statement.
(c) Securities
Purchase Agreement
Pursuant
to the securities purchase agreement, as amended, relating to the issuance of
the 3% convertible notes, in addition to the foregoing:
|
·
|
Our
directors approved a restatement of our articles of incorporation which
would change our corporate name to China Carbon Graphite Group, Inc.,
change our authorized capital stock to 120,000,000 shares of capital
stock, of which 20,000,000 shares would be shares of preferred stock, par
value $.001 per share, and 100,000,000 shares would be shares of common
stock, par value $.001 per share, and include a statement of designations
of the rights of the holders of the series A preferred stock.. The
restated articles were filed on January 22,
2008.
|
F-20
|
·
|
The
Company agreed that, within 90 days after the closing on December 17,
2007, it would have appointed such number of independent directors that
would result in a majority of our directors being independent directors
and we would have an audit committee composed solely of at least three
independent directors and a compensation committee would have a majority
of independent directors. The Company is required to pay liquidated
damages (i) if the Company fails to have a majority of independent
directors 90 days after the closing or (ii) thereafter, if the Company
subsequently fails to meet these requirements for a period of 60 days for
an excused reason, as defined in the purchase agreement, or 75 days for a
reason which is not an excused reason. Liquidated damages are payable in
cash or additional shares of series A preferred stock, with the series A
preferred stock being valued at the market price of the shares of common
stock issuable upon conversion of the series A preferred stock. The
liquidated damages are computed in an amount equal to 12% per annum of the
purchase price, with a maximum of $144,000. On April 8, 2009, the Company
entered into an amendment agreement with XingGuang to: (i) eliminate the
Company’s obligation to appoint such number of independent directors that
would result in a majority of the Company’s board of directors being
comprised of independent directors, and to (ii) eliminate the Company’s
obligation to establish board committees that would have been subject to
additional independent director requirements.
|
·
|
The
Company and XingGuang entered into a registration rights agreement
pursuant to which we are required to have a registration statement filed
with the SEC by March 16, 2008(subsequently extended to December 31, 2010
pursuant to an amendment agreement dated April 7, 2009) and declared
effective by the SEC not later than August 13, 2008(subsequently extended
to December 31, 2010 pursuant to an amendment agreement dated April 7,
2009). We are required to pay liquidated damages at the rate of 200 shares
of series A preferred stock for each day after August 13,
2008(subsequently extended to December 31, 2010 pursuant to an amendment
agreement dated April 7, 2009) that the registration statement is not
declared effective or for any period that we fail to keep the registration
statement effective, up to a maximum of 100,000 shares. The number of
shares of series A preferred stock issuable pursuant to the liquidated
damages provision is subject to reduction based on the maximum number of
shares that can be registered under the applicable SEC guidelines.The
registration obligation does not apply to shares that can be sold pursuant
to Rule 144 of the Securities and Exchange Commission.
|
|
|
·
|
XingGuang
has a right of refusal on future financings until December
2010.
|
(d) Cancellation
of common stock
In
connection with the acquisition of Talent, the Company purchased 1,000,000
shares of common stock from the then principal shareholder. The purchase price
was paid in installments, with the final installment being due and paid on June
30, 2008. The Company placed 1,000,000 of the shares of common stock in escrow,
and the shares were released from escrow and cancelled.
(e) Deemed
Preferred Stock Dividend
Upon
filing of the Company’s amended and restated articles of incorporation on
January 22, 2008, $1,200,000 of convertible notes were automatically converted
into (i) 1,200,499 shares of preferred stock, with each share of series A
preferred stock being convertible into one share of common stock and (ii)
warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000
shares at $2.00 per share. At December 17, 2007, the fair value of the warrants
used to calculate the intrinsic value of the conversion option was estimated at
$3,831,900 and was computed using the Black-Scholes option-pricing model based
on the assumed issuance of the warrants on the date the notes were issued.
Variables used in the option-pricing model include (1) risk-free interest rate
at the date of grant (3.5%), (2) expected warrant life of 5 years, (3) expected
volatility of 100%, and (4) 0% expected dividend. The Company
used the market price of its common stock at December 17, 2007, $0.95 per share,
and computed the effective preferred stock conversion price to be $0.24 per
share. The resulting intrinsic value of the conversion feature was $854,300
reported as a deemed dividend.
As the
series A preferred stock does not provide for redemption by the Company or have
a finite life, upon the conversion to preferred stock, a one-time preferred
stock deemed dividend of $854,300 was recognized immediately as a non-cash
charge. The deemed preferred stock dividend of $854,300 has been recorded as
additional paid-in capital and a reduction to retained earnings.
F-21
12.
|
Short-term
bank loans
|
As of
December 31, 2008 and 2007, short term loans consisted of the
following:
|
2008
|
2007 | ||||||
Bank
loans dated July 17, 2008, due May 6, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
$ | 656,532 | $ | - | ||||
Bank
loans dated July 17, 2008, due May 25, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | - | ||||||
Bank
loans dated July 17, 2008, due June 15, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | - | ||||||
Bank
loans dated July 17, 2008, due July 1, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | - | ||||||
Bank
loans dated July 17, 2008, due July 13, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
729,481 | - | ||||||
Bank
loans dated June 12, 2007, due June 10, 2008 with an interest rate of
8.541%, interest payable monthly, secured by property and equipment and
land use rights
|
- | 683,611 | ||||||
Bank
loan dated June 22, 2007, due June 20, 2008 with an interest rate of
7.227%, interest payable quarterly, secured by equipment and land use
rights
|
- | 5,332,167 | ||||||
|
$ | 4,887,514 | $ | 6,015,778 |
13.
|
Notes
payable
|
As of
December 31, 2008 and 2007, notes payable consisted of the
following:
|
|
2008
|
2007
|
|||||
Notes
payable to former principal shareholders pursuant to the buyback
agreements in relation to the reverse acquisition.
|
|
$ |
-
|
|
|
$
|
700,000
|
|
14.
|
Long-term
bank loan
|
|
|
2008
|
|
|
2007
|
|
||
Bank
loans dated October 10, 2008, due October 9, 2011 with an interest rate of
6.75%, interest payable monthly.
|
|
$
|
5,106,358
|
|
|
$
|
-
|
|
Less:
current portion
|
|
|
(1,896,647
|
)
|
|
|
-
|
|
Non-current
portion
|
|
$
|
3,209,711
|
|
|
$
|
-
|
|
F-22
15.
|
Related
party transactions
|
Prior to
December 31, 2007, Xingyong had borrowed money from Dengyong Jin, who is the
principal stockholder of Xingyong and Xingyong’s chief executive
officer. As of December 31, 2007, the Company had an outstanding
advance of $4,543,648 from Dengyong Jin. The advance was unsecured and bears no
interest. The advance was repaid in full in October 2008. The average balance
outstanding was approximately $4.7 million in 2008 and $4.8 million in
2007.
See Note
2 for information relating to contracts between the Company and
Xingyong.
In
October 2008, our VIE affiliate Xingyong had an advance of RMB 35,000,000
(approximately $5.1 million) to Beijing Royal Yiyuan Inc (“Royal”), a company
owned by our principal shareholder Dengyong Jin.
Xingyong
had borrowed money from Dengyong Jin, who is the principal stockholder of
Xingyong. The amount due to Dengyong Jin was approximately $3,758,000 when
Xingyong made the $5.1 million advance to Royal. In a written agreement, with
the consent of three parties, Dengyong Jin, Xingyong and Royal unanimously
agreed the terms as follows:
(i)
|
Royal
agreed to assume Xingyong’s debt to Dengyong Jin in the amount of
approximately $3,758,000. In exchange, Xingyong will reduce $3,758,000
from Royal’s debt obligation of $5.1 million to
Xingyong.
|
Xingyong
had borrowed money from Fengying Xue, who was not a related party to Xingyong.
The amount due to Fengying Xue was approximately $1,058,000 when Xingyong made
the $5.1 million advance to Beijing Royal Yiyuan Inc. In a written agreement,
with the consent of three parties, Fengying Xue, Xingyong and Royal unanimously
agreed the terms as follows:
(i)
|
Royal
agreed to assume Xingyong’s debt of approximately $1,058,000 to Fengying
Xue. In exchange, Xingyong will reduce the approximate amount of
$1,058,000 from Royal’s debt obligation of $5.1 million to
Xingyong.
|
The two
transactions above resulted in a deduction of Royal’s debt to Xingyong in the
total amount of $4,816,000. As a result, Royal’s remaining debt to Xingyong was
approximately $290,000 as of December 31, 2008. This balance was paid off on
April 10, 2009.
The two
transactions above also resulted in a cancellation of Xingyong’s debt to
Dengyong Jin in the amount of approximately $3,758,000 and a cancellation of
Xingyong’s debt to Fengying Xue in the amount of approximately $1,058,000. As of
December 31, 2008, Xingyong had no payable to Dengyong Jin and Fengying
Xue.
16.
|
Contingencies
and commitments
|
As
mentioned in Note 2, as Talent failed to effect the initial 20% or $800,000
investment in Yongle by December 12, 2007 or obtain an extension to effect such
payment, the Government can always give notice to Talent to cancel the business
license of Yongle and cancel the investment. As such, Yongle would
cease to be a subsidiary and thus all VIEs would be detached.
If ever
the Company fails to pay up the total investment of $4,000,000 on or before
September 12, 2009, the Government can also give notice to Talent to cancel the
business license of Yongle and cancel the investment.
Management
indicates that the Company would be able to obtain additional capital by then to
have the investment money fully paid.
F-23
China
Carbon Graphite Group, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
September
30, 2009
(Unaudited)
|
December
31, 2008
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
6,047,977
|
$
|
51,799
|
||||
Trade
accounts receivable, net
|
6,202,127
|
4,224,410
|
||||||
Notes
receivable
|
294,255
|
27,720
|
||||||
Other
receivables
|
1,366,607
|
150,694
|
||||||
Advance
to related party
|
-
|
290,409
|
||||||
Advance
to suppliers, net
|
654,831
|
1,017,088
|
||||||
Inventories
|
16,583,565
|
15,889,549
|
||||||
Prepaid
expenses
|
47,215
|
-
|
||||||
Total
current assets
|
31,196,577
|
21,651,669
|
||||||
Property
and equipment, net
|
21,528,739
|
21,003,607
|
||||||
Construction
in progress
|
4,671,340
|
2,029,777
|
||||||
Land
use rights, net
|
3,555,759
|
3,604,324
|
||||||
$
|
60,952,415
|
$
|
48,289,377
|
|||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$
|
2,176,342
|
$
|
1,253,265
|
||||
Advance
from customers
|
939,399
|
640,346
|
||||||
Trade
notes payable
|
5,850,006
|
-
|
||||||
Short
term bank loans
|
8,548,321
|
4,887,514
|
||||||
Long
term bank loan - current portion
|
1,608,752
|
1,896,647
|
||||||
Taxes
payable
|
147,807
|
362,298
|
||||||
Other
payables
|
1,023,934
|
551,096
|
||||||
Total
current liabilities
|
20,294,561
|
9,591,166
|
||||||
Long
Term Liabilities
|
||||||||
Long
term bank loan - non-current portion
|
2,193,752
|
3,209,711
|
||||||
Other
payable - non-current portion
|
773,720
|
-
|
||||||
Total
long-term liabilities
|
2,967,472
|
3,209,711
|
||||||
Total
liabilities
|
$
|
23,262,033
|
$
|
12,800,877
|
||||
Stockholders’
Equity
|
||||||||
Convertible
preferred stock, par value $0.001 per share,
|
||||||||
authorized
20,000,000 shares, issued and outstanding 0 and 1,200,499
|
||||||||
shares
at September 30,2009 and December 31, 2008, respectively
|
$
|
250
|
$
|
1,200
|
||||
Common
stock authorized 100,000,000 shares $0.001 par
|
||||||||
value;
issued and outstanding 15,501,411 and 12,218,412 shares
|
||||||||
at
September 30, 2009 and December 31, 2008, respectively
|
15,251
|
12,218
|
||||||
Additional
paid-in capital
|
8,966,244
|
8,690,426
|
||||||
Accumulated
other comprehensive income
|
5,115,757
|
4,991,113
|
||||||
Retained
earnings
|
23,592,880
|
21,793,543
|
||||||
Total
stockholders’ equity
|
37,690,382
|
35,488,500
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
60,952,415
|
$
|
48,289,377
|
The
accompanying notes are an integral part of these financial
statements.
F-24
China
Carbon Graphite Group, Inc and subsidiaries
Consolidated
Statements of Income and Comprehensive Income (Unaudited)
Nine
months ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$ | 12,131,938 | $ | 21,160,851 | ||||
Cost
of Goods Sold
|
9,012,935 | 15,567,633 | ||||||
Gross
Profit
|
3,119,003 | 5,593,218 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
332,016 | 439,004 | ||||||
General
and administrative
|
675,932 | 575,936 | ||||||
Depreciation
and amortization
|
57,275 | 49,399 | ||||||
1,065,223 | 1,064,339 | |||||||
Operating
Income Before Other Income (Expense)
|
||||||||
and
Income Tax Expense
|
2,053,780 | 4,528,879 | ||||||
Other
Income (Expense)
|
||||||||
Other
income
|
545,122 | 224,705 | ||||||
Other
expenses
|
(1,462 | ) | (11,431 | ) | ||||
Interest
income
|
- | 910 | ||||||
Interest
expense
|
(761,586 | ) | (413,039 | ) | ||||
(217,926 | ) | (198,855 | ) | |||||
Income
Before Income Tax Expense
|
1,835,854 | 4,330,024 | ||||||
Income
tax expense
|
- | - | ||||||
Net
income
|
1,835,854 | 4,330,024 | ||||||
Deemed
preferred stock dividend
|
- | (854,300 | ) | |||||
Net
income available to common shareholders
|
1,835,854 | 3,475,724 | ||||||
Comprehensive
income
|
||||||||
Net
income
|
1,835,854 | 4,330,024 | ||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
124,645 | 2,064,524 | ||||||
Total
Comprehensive Income
|
$ | 1,960,499 | 6,394,548 | |||||
Share
data
|
||||||||
Basic
earnings per share
|
0.13 | $ | 0.27 | |||||
Diluted
earnings per share
|
0.13 | $ | 0.18 | |||||
Weighted
average common shares outstanding, Basic
|
13,800,052 | 12,716,587 | ||||||
Weighted
average common shares outstanding, diluted
|
14,392,450 | 19,365,223 |
The
accompanying notes are an integral part of these financial
statements.
F-25
China
Carbon Graphite Group, Inc and subsidiaries
Consolidated
Statements of Income and Comprehensive Income (Unaudited)
Three
months ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$
|
5,580,776
|
$
|
7,509,072
|
||||
Cost
of Goods Sold
|
4,055,953
|
5,384,214
|
||||||
Gross
Profit
|
1,524,823
|
2,124,858
|
||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
14,102
|
269,002
|
||||||
General
and administrative
|
218,522
|
177,019
|
||||||
Depreciation
and amortization
|
19,096
|
18,672
|
||||||
251,720
|
464,693
|
|||||||
Operating
Income Before Other Income (Expense)
|
||||||||
and
Income Tax Expense
|
1,273,103
|
1,660,165
|
||||||
Other
Income (Expense)
|
||||||||
Other
income
|
19,053
|
11,032
|
||||||
Other
expenses
|
-
|
(120)
|
||||||
Interest
income
|
-
|
493
|
||||||
Interest
expense
|
(356,891)
|
(143,482)
|
||||||
(337,838)
|
(132,077)
|
|||||||
Income
Before Income Tax Expense
|
935,265
|
1,528,088
|
||||||
Income
tax expense
|
-
|
-
|
||||||
Net
income
|
935,265
|
1,528,088
|
||||||
Comprehensive
income
|
||||||||
Net
income
|
935,265
|
1,528,088
|
||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
75,900
|
84,634
|
||||||
Total
Comprehensive Income
|
$
|
1,011,165
|
$
|
1,612,722
|
||||
Share
data
|
||||||||
Basic
earnings per share
|
$
|
0.06
|
$
|
0.13
|
||||
Diluted
earnings per share
|
$
|
0.06
|
$
|
0.08
|
||||
Weighted
average common shares outstanding, basic
|
15,002,785
|
12,218,412
|
||||||
Weighted
average common shares outstanding, diluted
|
15,085,202
|
19,418,911
|
||||||
The
accompanying notes are an integral part of these financial
statements.
|
F-26
China
Carbon Graphite Group, Inc and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Nine
months ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net Income
|
$
|
1,835,855
|
$
|
4,330,024
|
||||
Adjustments to
reconcile net cash provided by
|
||||||||
operating
activities
|
||||||||
Depreciation
and amortization
|
1,021,937
|
954,924
|
||||||
Share based
compensation
|
108,000
|
-
|
||||||
Change
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(1,966,455
|
)
|
(680,934
|
)
|
||||
Notes
receivable
|
(266,331
|
)
|
258,703
|
|||||
Other
receivables
|
(1,214,925
|
)
|
323,933
|
|||||
Advance to
suppliers
|
364,539
|
(209,088)
|
||||||
Inventories
|
(655,104
|
)
|
(1,618,729
|
)
|
||||
Prepaid
expenses
|
(47,200
|
)
|
(30,487
|
)
|
||||
Accounts
payable and accrued expenses
|
920,089
|
(36,385
|
)
|
|||||
Non-current
accounts payable
|
773,324
|
-
|
||||||
Advance from
customers
|
297,347
|
899,273
|
||||||
Trade notes
payable
|
5,847,013
|
-
|
||||||
Taxes
payable
|
(215,260
|
)
|
78,661
|
|||||
Other
payables
|
471,259
|
508,451
|
||||||
Net
cash provided by operating activities
|
7,274,088
|
4,778,346
|
||||||
Cash
flows from investing activities
|
||||||||
Acquisition of
property and equipment
|
(1,438,549
|
)
|
(132,731
|
)
|
||||
Construction in
progress
|
(2,635,286
|
)
|
(2,625,861
|
)
|
||||
Additional
payment for land use rights
|
(653,028
|
)
|
||||||
Net
cash used in investing activities
|
(4,073,835
|
)
|
(3,411,620
|
)
|
||||
Cash
flows from financing activities
|
||||||||
Issuance of
common stock for cash
|
67,900
|
-
|
||||||
Repayment of
bank loans
|
(2,784,640
|
)
|
-
|
|||||
Proceeds from
bank loans
|
5,116,136
|
-
|
||||||
Repayment from
related party
|
290,965
|
-
|
||||||
Repayment to
related party
|
-
|
(28,353)
|
||||||
Repayment of
notes payable
|
-
|
(1,506,456
|
)
|
|||||
Net
cash provided by (used in) financing activities
|
2,690,362
|
(1,534,809
|
)
|
|||||
Effect
of exchange rate fluctuation
|
105,563
|
215,688
|
||||||
Net
increase in cash
|
5,996,178
|
47,605
|
||||||
Cash
and cash equivalents at beginning of period
|
51,799
|
4,497
|
||||||
Cash
and cash equivalents at end of period
|
$
|
6,047,977
|
$
|
52,102
|
||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$
|
761,586
|
$
|
413,039
|
||||
Income
taxes paid
|
$
|
-
|
$
|
-
|
||||
Non-cash
financing and investing activities:
|
||||||||
Deemed
preferred stock dividend
|
$
|
-
|
$
|
854,300
|
||||
Issuance of
common stock for consulting fee
|
$
|
108,000
|
$
|
-
|
||||
The
accompanying footnotes are an integral part of these financial
statements.
|
F-27
China
Carbon Graphite Group, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
For
the three months and nine months ended September 30, 2009
1. ORGANIZATION
AND BUSINESS
China
Carbon Graphite Group, Inc. (the “Company”), is a Nevada corporation,
incorporated on February 13, 2003 under the name Achievers Magazine
Inc. The Company’s corporate name was changed to China Carbon
Graphite Group, Inc. on January 30, 2008.
The
Company is the sole stockholder of Talent International Investment Limited
(“Talent”), a British Virgin Islands corporation, which is the sole stockholder
of Xinghe Yongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws
of the People’s Republic of China (the “PRC”).
Yongle is
a party to a series of contractual arrangements with Xinghe Xingyong Carbon Co.,
Ltd. (“Xingyong”), a corporation organized under the laws of the
PRC. These agreements give the Company the ability to operate and
manage the business of Xingyong and to derive the profit (or sustain the loss)
from Xingyong’s business. As a result, the operations of Xingyong are
consolidated with those of the Company for financial reporting purposes. The
relationship among the above companies as follows:
The
Company manufactures graphite electrodes, fine grain graphite, high purity
graphite and other carbon derived products.
Stock
distribution
On
January 22, 2008, the Company effected a 1.6-for-one stock distribution whereby
each share of common stock became converted into 1.6 shares of common stock. All
references to share and per share information in these financial statements
reflect this stock distribution.
2. BASIS
OF PREPARATION OF FINANCIAL STATEMENTS
F-28
Management
acknowledges its responsibility for the preparation of the accompanying interim
condensed consolidated financial statements which reflect all adjustments,
consisting of normal recurring adjustments, considered necessary in its opinion
for a fair statement of its condensed consolidated financial position and the
results of its operations for the interim period presented. These condensed
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, 2008.
The
accompanying unaudited condensed consolidated financial statements for China
Carbon Graphite Group, Inc., its subsidiaries and variable interest entity, have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the fiscal year as a whole.
The
Company maintains its books and accounting records in Renminbi (“RMB”), and its
reporting currency is United States 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, which is an affiliated company whose financial condition is
consolidated with the Company pursuant to Accounting Standard Codification (ASC)
Topic 810-10, formerly known as FIN 46R, in accordance with accounting
principles generally accepted in the United States of America (“US
GAAP”).
Yongle is
a party to a series of contractual arrangements with Xingyong. These agreements
include a management agreement pursuant to which 80% to 100% of
Xingyong’s net income after deduction of necessary expenses, if any, is paid to
Yongle and Yongle is responsible for paying Xingyong’s obligations incurred in
connection with its business. For the years ended December 31, 2008 and 2007,
Xingyong paid 100% of net income to Yongle.,Yongle manages and controls all of
the funds of Xingyong. Yongle also has the right to purchase Xingyong’s
equipment and patents and lease its manufacturing plants, land and remaining
equipment. This agreement is designed so that Yongle can conduct its business in
China. Pursuant to two other agreements, the sole stockholder of Xingyong, who
was, at the time of the transaction, the Company’s chief executive officer, has
pledged all of his equity in Xingyong as security for performance of Xingyong’s
obligations to Yongle. As a result, Xingyong is considered a variable interest
entity.
Yongle’s
business license was issued on September 13, 2007. According to PRC rules and
regulations, Talent was required to pay 20% of its capital investment in Yongle,
or $800,000, within three months, which would have been due on December 12,
2007, and the remaining 80%, or $3,200,000, within two years from the date of
issuance of business license, which would have been September 12,
2009. On May 21, 2009, the Company’s board of directors approved the
reduction of Talent’s investment in Yongle from $4,000,000 to $100,000 and the
reduction of Yongle’s registered capital from $4,000,000 to $100,000. The
Company believes that these actions effectively eliminated possible fines or
penalties by the PRC business bureau that could result from the Company’s
failure to pay the registered capital when required. All governmental
approval to the reduction in capital was obtained and the Talent paid the
$100,000 investment to Yongle in full in August 2009.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates - The
preparation of these financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affected 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 reported periods.
Significant
estimates included 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 period 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. Most 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 US is protected by FDIC
insurance
F-29
Inventory - Inventory is
stated at the lower of cost or market. 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 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.
Accounts receivable - Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred.
Property and equipment -
Property and equipment is stated at the historical cost, less accumulated
depreciation. Land use rights are being amortized to expense on a straight line
basis over the life of the rights. 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 were 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 there was no
impairment recorded during the nine months ended at September 30, 2009 and
2008.
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.
Land use rights - There is no
private ownership of land in the PRC. The Company has acquired land use rights
to a total of 2,356,209 square feet, on which a 290,626 square feet facility is
located. The land use rights have terms of 50 years, with the land use right
relating to 1,207,388 square feet expiring in 2050 and the land use right with
respect to 1,148,821 square feet expiring in 2057. The cost of the land use
rights is amortized over the 50-year term of the land use right. The Company
evaluates the carrying value of intangible assets during the fourth quarter of
each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the intangible asset
below its carrying amount.
F-30
Income recognition - Revenue
is recognized in accordance with ASC 605-25, Revenue Recognition of Financial
Statements, formerly known as Staff Accounting Bulletin No. 104, 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. The Company
believes that these criteria are satisfied when the goods are shipped pursuant
to a purchase order.
Interest
income is recognized when earned.
Advertising - The Company
expenses all advertising costs as incurred. There was no advertising expense for
the nine months ended September 30, 2009 and $7,400 for 2008.
Shipping and handling costs -
The Company follows ASC 605-45, Handling Costs, Shipping Costs, formerly known
as Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for Shipping and
Handling Fees and Costs. The Company does not charge its customers
for shipping and handling. The Company classifies shipping and handling costs as
part of the operating expenses. For the nine months ended September 30, 2009 and
2008, shipping and handling costs were $318,604 and $396,119, respectively, and
for the three months ended September 30, 2009 and 2008, these costs were $9,867
and $243,643, respectively.
Segment reporting - ASC 280,
“Segment Reporting”, formerly known as Statement of Financial Accounting
Standards (“SFAS”) 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.
The
Company only sells carbon graphite products and sells only to Chinese
distributors and end users and is in only one business segment.
Taxation - Taxation on profits
earned in the PRC has been calculated on the estimated assessable profits for
the year at the rates of taxation prevailing in the PRC where the Company
operates after taking into effect the benefits from any special tax credits or
“tax holidays” allowed in the county of operations.
The
Company does not accrue United States income tax since it has no operation 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 Topic 740 Income
Taxes, 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 of
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, 2009 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, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
F-31
Enterprise income tax - On
March 16, 2007, the PRC’s parliament, the National People’s Congress, adopted
the Enterprise Income Tax Law, which took effect on January 1, 2008. The new
income tax law sets unified income tax rate for domestic and foreign companies
at 25% except a 15% corporation income tax rate for qualified high technology
and science enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this Law shall gradually transit to the
new tax rate within five years after the implementation of this
law.
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 tax holiday from 100% of
enterprises income tax for 10 years from 2008 through 2018. Afterwards, 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 corporation income tax rate of 15%
effective in 2019.
The
enterprise income tax is calculated on the basis of the statutory profit as
defined in the PRC tax laws. This statutory profit computed differently from 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 of 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.
The
Company has been granted an exemption from VAT by the Xing He County People’s
Government and Xing He Tax Authority on some products in which an exchange
agreement is in place for raw materials and fuel.
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.
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.
F-32
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 was 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.
In
addition, the Company is required by Chinese laws to cover employees in China
with various types of social insurance. The Company believes that it is in
material compliance with the relevant PRC laws.
Fair value of financial instruments
- In September 2006, the FASB issued ASC 820, Fair Value Measurements and
Disclosures, formerly known as SFAS No. 157, Fair Value Measurements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement does not require any
new fair value measurements; rather, it applies under other accounting
pronouncements that require or permit fair value measurements. The provisions of
this statement are to be applied prospectively as of the beginning of the fiscal
year in which this statement is initially applied, with any transition
adjustment recognized as a cumulative-effect adjustment to the opening balance
of retained earnings. The provisions of SFAS No. 157 are effective for the
fiscal years beginning after November 15, 2007.
Effective
January 1, 2008, the Company adopted SFAS No. 157. The adoption of SFAS No. 157
did not have a material impact on the Company’s fair value measurements. The
carrying amounts of certain financial instruments, including cash, accounts
receivable, notes receivable, other receivables, accounts payable, commercial
notes payable, accrued expenses, and other payables approximate their fair
values as of September 30, 2009 and December 31, 2008 because of the relatively
short-term maturity of these instruments.
Foreign currency translation -
The reporting currency of the Company is the U.S. dollar. The functional
currency of the Company is the local currency, the Chinese Renminbi (“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
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Translation adjustments for the nine months
ended September 30, 2009 and 2008 are $124,645 and $2,064,524,
respectively.
The
cumulative translation adjustment and effect of exchange rate changes on cash
for the nine months ended September 30, 2009 and 2008 was $105,563 and $215,687,
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.
Asset and
liability accounts at September 30, 2009 and December 31, 2008 were translated
at 6.8376 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity
accounts were stated at their historical rate. The average translation rates
applied to income statements for the nine months ended September 30, 2009 and
2008 were 6.8425 RMB and 6.9989 RMB to $1.00 USD, respectively. In accordance
with Statement of Financial Accounting Standards No. 95, “Statement of Cash
Flows,” cash flows from the Company’s operations are calculated based upon the
local currencies using the average translation rate. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
Earnings 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 125,000 shares of common stock at an exercise price of $2.0
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
F-33
The
following table sets forth the computation of the number of net income per share
for the nine months ended September 30, 2009 and 2008.
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Weighted
average shares of common stock outstanding (basic)
|
13,800,052
|
12,716,587
|
||||||
Shares
issuable upon conversion of series A preferred stock
|
612,625
|
1,200,499
|
||||||
Shares
issuable upon exercise of warrants
|
-
|
6,000,000
|
||||||
Weighted
average shares of common stock outstanding (diluted)
|
14,392,450
|
19,365,223
|
||||||
Net
income available to common shareholders
|
$
|
.13
|
$
|
.27
|
||||
Net
income per shares of common stock (diluted)
|
$
|
.13
|
$
|
.18
|
||||
For the
nine months ended September 30, 2009, the Company did not include any shares of
common stock issuable upon exercise of warrants, since such issuance would be
antidilutive.
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, 2009 and 2008 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.
Subsequent events - For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the period
ending September 30, 2009, subsequent events were evaluated by the Company as of
November 16, 2009, the date on which the unaudited condensed consolidated
financial statements at and for the quarter ended September 30, 2009, were
available to be issued.
Recent
accounting pronouncements
In
December, 2007, the FASB issued ASC 805 “Business Combinations”, formerly known
as SFAS No. 141(R) “Business Combinations”. SFAS No. 141(R) requires an
acquiring entity to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value, with limited exceptions, and
applies to a wider range of transactions or events. SFAS No. 141(R) is effective
for fiscal years beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited. Effective January 1, 2009. ASC 805
revised SFAS No. 141(R) and addresses the accounting and disclosure for
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in a business combination. The adoption of SFAS 141(R) does not have a material
effect on the Company’s condensed consolidated financial
statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, formerly known as SFAS No. 167,
a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest
Entities”, and will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under SFAS No. 167, determining whether a
company is required to consolidate an entity will be based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. SFAS No. 167 is effective at the start of a company’s first fiscal
year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The Company is in the process of
evaluating the effect, if any, the adoption of SFAS No. 167 will have on
the Company’s financial statements
F-34
In March
2008, the FASB issued ASC 815, “Derivatives and Hedging”, formerly known
as SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities – An Amendment of FASB Statement No. 133”, which changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This statement will be effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008 (that is, the year
ended December 31, 2009 for the Company). This Statement does not have an effect
on the Company’s condensed consolidated financial statements.
In May
2008, the FASB issued ASC 470-20, “Debt with conversion and other options”,
formerly known as FASB Staff Position (“FSP”) APB 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)”. FSP APB 14-1 clarifies that convertible
debt instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted FSP APB 14-1 beginning in the first
quarter of 2009, and this standard must be applied on a retroactive basis. This
Statement does not have an effect on the Company’s condensed consolidated
financial statements.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of ASC 820, “Fair Value Measurement Disclosures”, formerly known as
SFAS No. 57, when the market for a financial asset is inactive. Specifically,
FSP 157-3 clarifies how (1) management’s internal assumptions should be
considered in measuring fair value when observable data are not present, (2)
observable market information from an inactive market should be taken into
account, and (3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.
In May
2009, the FASB issued ASC 855, “Subsequent Events”, formerly known as SFAS No.
165. SFAS No. 165 is intended to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 No. is effective for interim or annual financial periods ending after June
15, 2009. The Company adopted this statement for the financial statements since
the quarter ended June 30, 2009.
In June
2009, the FASB issued ASC 860, “Transfers and servicing”, formerly known as SFAS
No. 166, a revision to SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”, and will require more
information about transfers of financial assets and where companies have
continuing exposure to the risks related to transferred financial assets. SFAS
166 is effective at the start of a company’s first fiscal year beginning after
November 15, 2009, or January 1, 2010 for companies reporting earnings on a
calendar-year basis. The adoption of this statement is not expected to have a
material effect on the Company’s financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, formerly known as SFAS No. 167,
a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, and will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under SFAS No. 167, determining whether a
company is required to consolidate an entity will be based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. SFAS No. 167 is effective at the start of a company’s first fiscal
year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The Company is in the process of
evaluating the effect, if any, the adoption of SFAS No. 167 will have on
the Company’s financial statements
F-35
In June
2009, the FASB issued SFAS No. 168, “The Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally
Accepted Accounting Principles (GAAP) - a replacement of SFAS No. 162” (SFAS
168), which establishes the FASB ASC as the source of authoritative U.S. GAAP
recognized by the FASB to be applied by non-governmental entities. As a result
of the adoption of SFAS 168, the majority of references to historically issued
accounting pronouncements are now superseded by references to the FASB ASC, with
no financial impact.
4. 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 FDIC on funds held in
U.S. banks. The Company’s bank account in US is covered by FDIC
insurance.
The
Company is operating in the PRC, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese 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 Company’s large number of diverse
customers in different locations in 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, 2009, two customers accounted for 10% or more of
sales revenues, representing 27.4% and 25.1%, respectively of the total sales.
No customer accounted for 10% or more of the Company’s revenue during the nine
months ended September 30, 2008. As of September 30, 2009, there were
three customers that constitute 21.1%, 12.86% and 10.1%, respectively of the
accounts receivable. As of December 31, 2008, there were three customers that
accounted for 22.7%, 14.8%, and 12.5% respectively of the accounts
receivable.
For the
nine months ended September 30, 2009 and 2008, the Company had insurance expense
of $2,132 and $5,778 respectively. Accrual for losses is not recognized until
such time a loss has occurred.
5. 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
a 15% corporation income tax rate for qualified high technology and science
enterprises.
The
Company has been granted a 100% tax holiday from enterprises income tax from the
Xing He District Local Tax Authority for the ten years 2008 through 2018. This
tax holiday could be challenged by higher taxing authorities in the PRC, which
could result in taxes and penalties owed for those years. For the nine months
ended September 30, 2009 and 2008, the enterprise income tax at the statutory
rates would have been approximately $310,041 and $648,504, respectively, and for
the three months ended September 30, 2009 and 2008, the enterprise income tax at
the statutory rates would have been approximately $137,784 and $356,359,
respectively.
F-36
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,
|
||||||||
2009
|
2008
|
|||||||
Computed
tax at the PRC statutory rate of 15%
|
$
|
310,041
|
$
|
648,504
|
||||
Benefit
of tax holiday
|
(310,041
|
)
|
(648,504
|
) | ||||
Income
tax expenses per books
|
$
|
-
|
$
|
-
|
||||
Three
months ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Computed
tax at the PRC statutory rate of 15%
|
$
|
137,784
|
$
|
356,359
|
||||
Benefit
of tax holiday
|
(137,784
|
) |
(356,359
|
) | ||||
Income
tax expenses per books
|
$
|
-
|
$
|
-
|
||||
6. TRADE
ACCOUNTS RECEIVABLE - NET
As of
September 30, 2009 and December 31, 2008, trade accounts receivable consisted of
the following:
September
30, 2009
|
December
31, 2008
|
|||||||
Amount
outstanding
|
$
|
6,907,780
|
$
|
4,928,354
|
||||
Bad
debt provision
|
(705,653
|
) |
(703,944
|
) | ||||
Net
amount
|
$
|
6,202,127
|
$
|
4,224,410
|
For the
nine months ended September 30, 2009, $26,810 was charged to bad debt provision.
For the three and nine months ended September 30, 2008, no bad debt provision
was provided.
7. ADVANCE
TO SUPPLIERS, NET
As of
September 30, 2009 and December 31, 2008, advance to suppliers consisted of the
following:
September
30, 2009
|
December
31,
2008
|
|||||||
Amount
outstanding
|
$ | 824,795 | $ | 1,186,640 | ||||
Bad
debt provision
|
(169,964 | ) | (169,552 | ) | ||||
Net
amount
|
$ | 654,831 | $ | 1,017,088 |
For the
three and nine months ended September 30, 2009 and 2008, no additional bad debt
provision on advance to suppliers was charged to expenses.
8. INVENTORIES
As of
September 30, 2009 and December 31, 2008, inventories consisted of the
following:
September
30,
2009
|
December
31,
2008
|
|||||||
Raw
materials
|
$ | 1,450,304 | $ | 820,250 | ||||
Work
in process
|
13,413,482 | 13,193,750 | ||||||
Finished
goods
|
1,665,919 | 1,821,719 | ||||||
Repair
Parts
|
53,960 | 53,830 | ||||||
$ | 16,583,565 | $ | 15,889,549 |
F-37
Raw
materials consist primarily of asphalt, petroleum coke, needle coke and other
materials used in production. Finished goods consist of graphite electrodes,
fine grain graphite and high purity graphite. The costs of finished goods
include direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production are also included in the cost of inventory.
9. PROPERTY
AND EQUIPMENT, NET
As of
September 30, 2009 and December 31, 2008, property and equipment consist of the
following:
September
30, 2009
|
December
31, 2008
|
|||||||
Building
|
$ | 7,871,298 | $ | 7,956,770 | ||||
Machinery
and equipment
|
21,107,137 | 19,515,684 | ||||||
Motor
vehicles
|
40,950 | 40,851 | ||||||
29,019,385 | 27,513,305 | |||||||
Less:
Accumulated depreciation
|
7,094,646 | 6,509,698 | ||||||
$ | 21,528,739 | $ | 21,003,607 |
For the
nine months ended September 30, 2009 and 2008, depreciation expense amounted to
$635,329 and $601,822 was charged to cost of goods sold. For the three months ended
September 30, 2009 and 2008, depreciation expense amounted to $326,054 and
$294,373 was charged to cost of goods sold.
10. LAND
USE RIGHT
As of
September 30, 2009 and December 31, 2008, land use rights consist of the
following:
September
30,
2009
|
December
31,
2008
|
|||||||
Land
Use Right
|
$ | 3,819,407 | $ | 3,811,539 | ||||
Less:
Accumulated amortization
|
263,648 | 207,215 | ||||||
$ | 3,555,759 | $ | 3,604,324 |
For the
nine months ended September 30, 2009 and 2008, amortization expenses were
$57,275 and $30,727, respectively. For the three months ended September 30, 2009
and 2008, amortization expenses were $19,096 and $15,587,
respectively.
Future
amortization of the land use rights is as follows:
12-month
period ended September 30,
|
||||
2010
|
$ | 76,420 | ||
2011
|
76,420 | |||
2012
|
76,420 | |||
2013
|
76,420 | |||
2014
|
76,420 | |||
2015
and thereafter
|
3,173,659 | |||
Total
|
$ | 3,555,759 |
11. STOCKHOLDERS’
EQUITY
(a) 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 give the directors the authority to issue one or more series of
preferred stock and to designate the rights, preferences, privileges and
limitation of the holders of each set. The board of directors has designated the
rights, preferences, privileges and limitation of one series of preferred stock
-- the series A convertible preferred stock (“series A preferred
stock”).
F-38
On
December 17, 2007, the Company issued its 3% promissory note in the amount of
$1,200,000. Pursuant to the agreement pursuant to which the note was issued,
upon the filing of restated articles of incorporation which provided for the
creation of a series of preferred stock and the filing of a certificate of
designation which created the series A preferred stock, the note would
automatically be converted into 1,200,499 shares of series A preferred stock and
warrants to purchase 3,000,000 shares of common stock at $1.20 per share and
3,000,000 shares of common stock at $2.00 per share. On January 22, 2008, upon
the filing of restated articles of incorporation and a statement of designation
for the series A convertible preferred stock, and the outstanding convertible
note was converted into such series A preferred stock and warrants.
The
statement of designation for the series A preferred stock provides the
following:
·
|
Each
share of series A preferred stock is convertible into one share of common
stock, at a conversion price of $1.00, subject to
adjustment.
|
·
|
While
the series A preferred stock is outstanding, if the Company issues common
stock at a price or warrants or other convertible securities at a
conversion or exercise price which is less than the conversion price then
in effect, the conversion price shall be adjusted on a formula
basis.
|
·
|
While
the Series A Preferred Stock is outstanding, without the approval of the
holders of 75% of the outstanding shares of Series A Preferred Stock, the
Company may not pay cash dividends or other distributions of cash,
property or evidences of indebtedness, nor redeem any shares of Common
Stock.
|
·
|
No
dividends are payable with respect to the series A preferred
stock.
|
·
|
Upon
any voluntary or involuntary liquidation, dissolution or winding-up, the
holders of the series A preferred stock are entitled to a preference of
$1.00 per share before any distributions or payments may be made with
respect to the common stock or any other class or series of capital stock
which is junior to the series A preferred stock upon voluntary or
involuntary liquidation, dissolution or winding-up.
|
·
|
The
holders of the series A preferred stock have no voting rights. However, so
long as any shares of series A preferred stock are outstanding, the
Company shall not, without the affirmative approval of the holders of 75%
of the outstanding shares of series A preferred stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to
the series A preferred stock or alter or amend the certificate of
designation, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon liquidation senior to or
otherwise pari passu with the series A preferred stock, or any of
preferred stock possessing greater voting rights or the right to convert
at a more favorable price than the series A preferred stock, (c) amend our
articles of incorporation or other charter documents in breach of any of
the provisions thereof, (d) increase the authorized number of shares of
series A preferred stock, or (e) enter into any agreement with respect to
the foregoing
|
During
the nine months ended September 30, 2009, we issued 950,499 shares of common
stock upon conversion o f 950,499 shares of series A preferred
stock. At September 30, 2009, 250,000 shares of series A preferred
stock were outstanding.
(b) Deemed
Preferred Stock Dividend
Upon
filing of the Company’s amended and restated articles of incorporation on
January 22, 2008, $1,200,000 of convertible notes were automatically converted
into (i) 1,200,499 shares of preferred stock, with each share of series A
preferred stock being convertible into one share of common stock and (ii)
warrants to purchase 3,000,000 shares of the common stock at $1.20 and 3,000,000
shares at $2.00 per share. At December 17, 2007, the fair value of the warrants
used to calculate the intrinsic value of the conversion option was estimated at
$3,831,900 and was computed using the Black-Scholes option-pricing model based
on the assumed issuance of the warrants on the date the notes were issued.
Variables used in the option-pricing model include (1) risk-free interest rate
at the date of grant (3.5%), (2) expected warrant life of 5 years, (3) expected
volatility of 100%, and (4) 0% expected dividend. The Company
used the market price of its common stock at December 17, 2007, $0.95 per share,
and computed the effective preferred stock conversion price to be $0.24 per
share. The resulting intrinsic value of the conversion feature was $854,300
reported as a deemed dividend.
F-39
As the
series A preferred stock does not provide for redemption by the Company or have
a finite life, upon the conversion to preferred stock, a one-time preferred
stock deemed dividend of $854,300 was recognized immediately as a non-cash
charge. The deemed preferred stock dividend of $854,300 has been recorded as
additional paid-in capital and a reduction to retained earnings in
2008.
(c) Stock
Issuances; Warrants
On July
29, 2009, the Company issued 887,500 shares of common stock in connection with
the cancellation of warrants to purchase 3,000,000 shares of common stock at
$1.20 per share and 2,875,000 shares of common stock at $2.00 per
share. As a result, there remain outstanding warrants to purchase
125,000 shares at $2.00 per share. The warrants expire December 3, 2012 and
provide a cashless exercise feature which can only be exercised if the
underlying shares are not covered by an effective registration
statement.
We
estimated the fair value of the warrants that were canceled at $825,896 using
the Black-Scholes option valuation model. Variables used in the option-pricing
model include (i) expected terms of warrants life of 3.4 years (ii) the
weighted-average assumption of a risk free interest rate of 2.20% based on the
yield available on a U.S. Treasury note with a term equal to the estimated term
(iii) the expected volatility of 28% equals to the historical volatility of the
Company’s share price. The fair value of the common stock issued was $834,125.
Since the fair value of the warrants cancelled approximate the fair value of the
common stocks, no additional non-cash expense was recorded.
Pursuant
to a consulting agreement dated February 9, 2009, with Ventana Capital Partners,
the Company issued to Ventana 750,000 shares of common
stock. Pursuant to an agreement dated July 22, 2009, with Ventana,
the Company issued to Ventana 375,000 shares of common stock. The
issuance of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act and Regulation 506 of the SEC thereunder.
In March
2009, the Company sold 70,000 shares of common stock to one investor at a
purchase price of $1.00 per share, for a total of $70,000. The
Company paid $2,100 as a commission to a finder. The shares were issued pursuant
to Regulation S under the Securities Act.
12.
|
SHORT-TERM
BANK LOANS
|
As of
September 30, 2009 and December 31, 2008, short term loans consisted of the
following:
September
30,
2009
|
December
31,
2008
|
|||||||
Bank
loans dated July 17, 2008, due May 6, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
$ | $ | 656,532 | |||||
Bank
loans dated July 17, 2008, due May 25, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | |||||||
Bank
loans dated July 17, 2008, due June 15, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | |||||||
Bank
loans dated July 17, 2008, due July 1, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
1,167,167 | |||||||
Bank
loans dated July 17, 2008, due July 13, 2009 with an interest rate of
9.711%, interest payable monthly, secured by property and equipment and
land use rights
|
729,481 | |||||||
Bank
loans dated June 17, 2009, due June 15, 2010 with an interest rate of
8.541%, interest payable monthly, secured by property and equipment and
land use rights
|
3,429,566 | - | ||||||
Bank
loan dated June 16, 2009, due June 1, 2010 with an interest rate of
7.434%, interest payable quarterly, secured by equipment and land use
rights
|
5,118,755 | - | ||||||
$ | 8,548,321 | $ | 4,887,514 |
F-40
13.
|
LONG-TERM
BANK LOAN
|
September
30, 2009
|
December
31, 2008
|
|||||||
Bank
loans dated October 10, 2008, due October 9, 2011 with an interest rate of
6.75%, interest payable monthly.
|
$ | 3,802,504 | $ | 5,106,358 | ||||
Less:
current portion
|
(1,608,752 | ) | (1,896,647 | ) | ||||
Non-current
portion
|
$ | 2,193,752 | $ | 3,209,711 |
14.
|
TRADE
NOTES PAYABLE
|
As of
September 30, 2009 trade notes payable were $5,843,006. There were no
trade notes payable at December 31, 2008. The Company was requested by certain
of its suppliers to settle trade liabilities incurred in the ordinary course of
business by issuance of notes guaranteed by a bank acceptable to the supplier.
The notes are interest-free with maturity of six months from date of
issuance.
15.
|
SUBSEQUENT
EVENTS
|
On
October 12, 2009, the Company issued an aggregate of 750,000 shares of common
stock to two investors pursuant to subscription agreements dated as of July 30,
2009. The Company sold 493,760 shares at $.75 per share and 256,240 shares at
$1.00 per share. The issuance of these securities was exempt from
registration under Regulation S of he Securities and Exchange Commission under
the Securities Act. The investors are not “U.S. persons” as that term
is defined in Rule 902(k) of Regulation S under the Act, and that such investor
was acquiring our common stock, for investment purposes for their own respective
accounts and not as nominees or agents, and not with a view to the resale or
distribution thereof.
Pursuant
to agreements with two newly-elected independent directors, the Company issued
25,000 shares of common stock to each of these directors on November
5, 2009. On November 5, 2009, the Company issued 20,000 shares to
each of our chief executive officer and our chief financial
officer. The issuance of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation 506 of the SEC
thereunder.
Pursuant
to a consulting agreement dated October 15, 2009, with FirsTrust China Ltd.,
on October 27, 2009, the Company issued to FirsTrust five year
warrants to purchase 100,000 shares of common stock at $2.00 per share and
100,000 shares of common stock at $3.00 per share. The issuance of
these shares was exempt from registration pursuant to Section 4(2) of the
Securities Act and Regulation 506 of the SEC thereunder.
F-41
CHINA
CARBON GRAPHITE GROUP, INC.
3,596,725
Shares of Common Stock
PROSPECTUS
[_______],
2010
Until
_______, all dealers that buy, sell or trade shares of our common stock, whether
or not participating in this offering, may be required to deliver a
prospectus.
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The following table sets forth the
costs and expenses, other than underwriting discounts and commissions, payable
by us in connection with the sale of common stock being registered. All amounts,
other than the SEC registration fee, are estimates. We will pay all these
expenses.
Amount to
|
||||
be Paid
|
||||
SEC
Registration Fee
|
$ | 360.07 | ||
Legal
Fees and Expenses
|
65,000.00 | |||
Accounting
Fees and Expenses
|
6,000.00 | |||
Total
|
$ | 71,360.07 |
Item
14. Indemnification of Directors and Officers
Our articles of incorporation provide
for the indemnification of our present and prior directors and officers or any
person who may have served at our request as a director or officer of another
corporation in which we own shares of capital stock or of which we are a
creditor, against expenses actually and necessarily incurred by them in
connection with the defense of any actions, suits or proceedings in which they,
or any of them, are made parties, or a party, by reason of being or having been
director(s) or officer(s) of us or of such other corporation, in the absence of
negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar as indemnification by us for
liabilities arising under the Exchange Act may be permitted to our directors,
officers and controlling persons pursuant to provisions of our articles of
incorporation and bylaws, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy and is, therefore,
unenforceable. In the event that a claim for indemnification by such director,
officer or controlling person of us in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person
in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Exchange Act and will be
governed by the final adjudication of such issue.
At the present time, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of ours in which indemnification would be required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
Item
15. Recent Sales of Unregistered Securities
On December 17, 2007, we completed a
share exchange agreement with Sincere. Pursuant to the share exchange
agreement, Sincere transferred to us all of the capital stock of Talent in
exchange for 9,388,172 shares of our common stock, which were issued to
Sincere. As a result, Talent became our wholly-owned subsidiary and
our business became the business of Sincere and its affiliated
companies.
On February 9, 2009, we entered into a
consulting agreement with Ventana Capital Partners, Inc., or
Ventana. Pursuant to the consulting agreement, we issued Ventana an
aggregate of 750,000 shares of our common stock as consideration for Ventana’s
and public relations services. The consulting agreement expired in
August 9, 2009. The issuance of the shares was exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. Ventana represented to us that it is an accredited
investor.
II-1
In 2009, we retired outstanding
warrants to purchase an aggregate of 5,875,000 shares of common stock through
the issuance of 887,500 shares of common stock. The issuance of these
shares was exempt from registration pursuant to Rule 144 promulgated under the
Securities Act. The shares were issued to persons who are not affiliates of ours
upon cashless exercise of warrants that were issued in December
2007.
On December 22, 2009, we sold in a
private placement to the selling stockholders a total of 2,160,500 shares of
Series B Convertible Preferred Stock and five-year warrants to purchase an
aggregate 864,000 shares of common stock at an exercise price of $1.30 per
share, for an aggregate purchase price of $2,592,600. The
warrants have terms of five years and expire December 22, 2014.
We engaged Maxim Group LLC as exclusive
placement agent for the private placement. As consideration for
Maxim’s services, we paid Maxim $259,260 and issued Maxim a five-year warrant to
purchase 124,025 shares of common stock at an exercise price of $1.32 per
share.
The warrants issued to the investors
are immediately exercisable and have a term of five years. We have
the right to redeem the warrants, on 20 trading days’ notice, for $0.01 per
share of common stock issuable upon exercise of the warrants if, for 20 trading
days during any 30 trading day period, the price of the common stock is greater
than $2.60 per share. To the extent that the warrants are not exercised by 5:30
PM, New York City time, on the date set for redemption, the holders of the
warrants will have no right under the warrant other than to receive the $0.01
redemption price on presentation of his or her warrant.
The warrants issued to Maxim are the
same as the warrants issued to the investors except that the Maxim warrants are
not exercisable until six months after issuance, may be exercised on a cashless
basis and are not subject to redemption, and the exercise price is
$1.32.
In connection with the private
placement and pursuant to the transaction agreements, we deposited into escrow
1,080,250 shares of common stock, which are to be held in escrow to be returned
to us or delivered to the investors, depending on whether we meet certain
financial performance targets for the years ending December 31, 2010 and
December 31, 2011. The performance target for 2010 is net income, as
defined therein, of at least $5,100,000. The performance target for 2011 is net
income of at least $10,000,000. If we complete an underwritten equity
financing with gross proceeds in excess of $15,000,000 prior to August 31, 2010,
the performance target for 2011 is net income of at least
$20,000,000. In determining net income, to the extent that any
excluded items are deducted in computing net income, there shall be added back
the amount of such excluded items. Excluded items means: (i) any
income tax, enterprise tax or similar tax in excess of 25% of income before
income taxes; and (ii) any items of expense or deduction arising directly or
indirectly from the private placement and the transaction contemplated by the
private placement.
In connection with
the consent required from the Series A holders for the issuance of the Series B
Preferred Stock, we issued to holders of the Series A Preferred Stock warrants
to purchase an aggregate of 200,000 shares at an exercise price of $1.30 per
share. These warrants bear the same terms and provisions as the warrants issued
to the investors in the private placement.
On January 13, 2010, we issued and
sold, pursuant to a second closing, a total of 320,000 shares of Series B
Convertible Preferred Stock and five-year warrants to purchase an aggregate of
128,000 shares of common stock at an exercise price of $1.30 per share, for an
aggregate purchase price of $384,000, bringing the total gross proceeds raised
in the private placement to $2,976,600 for which the Company issued an aggregate
of 2,480,500 shares of Series B Convertible Preferred Stock and warrants to
purchase an aggregate of 992,200 shares of common stock.
In connection with the second closing,
we deposited into escrow an additional 160,000 shares of common stock, making a
total of 1,240,250 shares of common stock that are to be held in escrow to be
returned to the Company or delivered to the investors in the first and second
closings of the private placement.
Maxim
Group LLC served as exclusive placement agent for the private
placement. At the second closing, the Company paid Maxim $38,400 and
issued Maxim a five-year warrant expiring to purchase 16,000 shares of common
stock at an exercise price of $1.32 per share, bringing total consideration to
Maxim in the private placement to $298,000 and warrants to purchase an aggregate
of 124,025 shares of common stock.
II-2
The issuance of the Series B Preferred
Stock and warrants to the investors in the private placement and the issuance of
the warrants to the holders of the Series A Preferred Stock was exempt from
registration under Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. Each of the investors is an “accredited investor,” as
defined in Rule 501 of SEC under the Securities Act, and acquired the Company’s
common stock for investment purposes for its own accounts and not with a view to
the resale or distribution thereof. The certificates for the Series B
Preferred Stock and the warrants bear a restricted stock legend.
We deposited into escrow
1,240,250 shares of common stock, which are to be held in escrow to be returned
to us or delivered to the investors, depending on whether we meet certain
financial performance targets for the years ending December 31, 2010 and
December 31, 2011. The performance target for 2010 is net income, as
defined, of at least $5,100,000. The performance target for 2011 is net income
of at least $10,000,000. If we complete an underwritten equity
financing with gross proceeds in excess of $15,000,000 prior to August 31, 2010,
the performance target for 2011 is net income of at least
$20,000,000. In determining net income, to the extent that any
excluded items are deducted in computing net income, there shall be added back
the amount of such excluded items. Excluded items means: (i) any
income tax, enterprise tax or similar tax in excess of 25% of income before
income taxes; and (ii) any items of expense or deduction arising directly or
indirectly from the private placement and the transaction contemplated by the
private placement.
(ii) any
items of expense or deduction arising directly or indirectly from the private
placement and the transaction contemplated by the private
placement.
On
December 31, 2009, we issued 250,000 shares of common stock to investors at
$1.20 per share. This transaction was exempt from registration
under Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. The investor is an “accredited investor,” as defined in
Rule 501 of SEC under the Securities Act, and acquired the Company’s common
stock for investment purposes for its own accounts and not with a view to the
resale or distribution thereof.
On
January 20, 2010, we issued 450,000 shares of common stock to
consultants. This transaction was exempt from registration under
Section 4(2) of the Securities Act and Rule 506 of the SEC
thereunder. The investor is an “accredited investor,” as defined in
Rule 501 of SEC under the Securities Act, and acquired the Company’s common
stock for investment purposes for its own accounts and not with a view to the
resale or distribution thereof.
Item
16. Exhibits and Financial Statement Schedules
The following exhibits are included as part of this Form S-1.
Exhibit No.
|
Description
|
|
2.1
|
Exchange
Agreement dated as of December 14, 2007, by and between the Company and
Sincere Investment (PTC), Ltd.*
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series A Convertible Preferred Stock, as
filed with the State of Nevada**
|
|
3.2
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series B Preferred Stock, as filed with the
State of Nevada******
|
|
3.3
|
Amended
and Restated Bylaws of the Company***
|
|
4.1
|
3%
Convertible Promissory Note payable to the order of XingGuang Investment
Corporation Limited*
|
|
4.2
|
Promissory
note payable to Anna Krimshtein PLC, as escrow agent*
|
|
4.3
|
Form
of Warrant issued to the investors******
|
|
4.4
|
Warrant
issued to Maxim Group LLC******
|
|
5.1
|
Opinion
of Holland & Hart LLP.+
|
|
10.1
|
Securities
purchase agreement dated December 14, 2007, between the Registrant and
XingGuang Investment Corporation Limited
*
|
II-3
10.2
|
Business
Operations Agreement dated December 7, 2007, between Xinghe Xingyong
Carbon Co., Ltd. and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
10.3
|
Exclusive
Technical and Consulting Services Agreement dated December 7, 2007,
between Xinghe Xingyong Carbon Co., Ltd. and Xinghe Yongle Carbon Co.,
Ltd. (English Translation)*
|
|
10.4
|
Option
Agreement dated December 7, 2007, between Xinghe Xingyong Carbon Co., Ltd.
and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
10.5
|
Equity
Pledge Agreement dated December 7, 2007, among Xinghe Xingyong Carbon Co.,
Ltd., Xinghe Yongle Carbon Co., Ltd. and Dengyong Jin (English
Translation)*
|
|
10.6
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $1.20 per share)*
|
|
10.7
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $2.00 per share)*
|
|
10.8
|
Consulting
Agreement, dated February 9, 2009, between the Registrant and Ventanta
Capital Partners****
|
|
10.9
|
Amendment
to Securities Purchase Agreement, dated April 8, 2009, between the
Registrant and XingGuang Investment Corporation,
Limited*****
|
|
10.10
|
Form
of Subscription Agreement, dated December 22, 2009, by and between the
Registrant and the investors set forth therein******
|
|
10.11
|
Registration
Rights Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
|
|
10.12
|
Securities
Escrow Agreement, dated December 22, 2009, by and between the Registrant,
Maxim Group LLC, and the investors set forth
therein******
|
|
23.1
|
Consent
of Bernstein & Pinchuk LLP, independent registered public accounting
firm.+
|
|
23.2
|
Consent
of AGCA, Inc., an independent registered public accounting
firm.+
|
|
23.3
|
Consent
of Holland & Hart LLP, included in Exhibit 5.1.
|
|
24
|
Power
of Attorney (set forth on the signature
page)
|
+
|
Filed
herewith.
|
*
|
Incorporated
by reference to the Form 8-K filed by the Registrant on December 31,
2007.
|
**
|
Incorporated
by reference to the Form 8-K filed by the Registrant on January 29,
2008.
|
***
|
Incorporated
by reference to the Form 8-K filed by the Registrant on November, 3
2009.
|
****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on February 13,
2009.
|
*****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on April 13,
2009.
|
******
|
Incorporated
by reference to the Form 8-K filed by the Registrant on December 28,
2009.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(b) To reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement; and
II-4
(c) To
include material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(b) For determining
liability of the registrant under the Securities Act to any purchaser in the
initial distribution of the securities, the registrant undertakes that in
primary offering of securities of the registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-5
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
(4) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of first
use.
(5) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wu Lan Cha Bu, Xinhe
County, on the 5th day
of February, 2010.
CHINA
CARBON GRAPHITE GROUP, INC.
|
||
By:
|
/s/ Donghai
Yu
|
|
Donghai
Yu
|
||
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature appears below constitutes and
appoints Donghai Yu and Ting Chen, and each of them individually, his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the SEC,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Signature
|
Title
|
Date
|
||
/s/ Donghai Yu
|
|
|
||
Donghai
Yu
|
Chief
Executive Officer, President and Director
|
February
5, 2010
|
||
(Principal
Executive Officer)
|
||||
/s/ Ting Chen
|
|
|
||
Ting
Chen
|
Chief
Financial Officer and Director
|
February
5, 2010
|
||
(Principal
Financial Officer and
|
||||
Principal
Accounting Officer)
|
||||
/s/ Hongbo Liu
|
|
|
||
Hongbo
Liu
|
Director
|
February
5, 2010
|
||
/s/ Yizhao Zhang
|
|
|
||
Yizhao
Zhang
|
Director
|
February
5, 2010
|
||
/s/ John Chen
|
|
|
||
John
Chen
|
Director
|
February
5, 2010
|
II-7
Exhibit No.
|
Description
|
|
2.1
|
Exchange
Agreement dated as of December 14, 2007, by and between the Company and
Sincere Investment (PTC), Ltd.*
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series A Convertible Preferred Stock, as
filed with the State of Nevada**
|
|
3.2
|
Amended
and Restated Articles of Incorporation of the Company, including the
Statement of Designation for Series B Preferred Stock, as filed with the
State of Nevada*****
|
|
3.3
|
Amended
and Restated Bylaws of the Company***
|
|
4.1
|
3%
Convertible Promissory Note payable to the order of XingGuang Investment
Corporation Limited*
|
|
4.2
|
Promissory
note payable to Anna Krimshtein PLC, as escrow agent*
|
|
4.3
|
Form
of Warrant issued to the investors******
|
|
4.4
|
Warrant
issued to Maxim Group LLC******
|
|
5.1
|
Opinion
of Holland & Hart LLP.+
|
|
10.1
|
Securities
purchase agreement dated December 14, 2007, between the Registrant and
XingGuang Investment Corporation Limited *
|
|
10.2
|
Registration
rights agreement dated June 14, 2007,
between the Registrant and XingGuang Investment Corporation
Limited*
|
|
10.3
|
Buy
Back Agreement dated December 14, 2007, among the Registrant
and Arto Tavukciyan and Lyndon Grove*
|
|
10.4
|
Escrow
agreement dated December 14, 2007, among the Registrant, Arto Tavukciyan
and Lyndon Grove and Anna Krimshtein PLC, as escrow
agent*
|
|
10.5
|
Business
Operations Agreement dated December 7, 2007, between Xinghe Xingyong
Carbon Co., Ltd. and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
10.6
|
Exclusive
Technical and Consulting Services Agreement dated December 7, 2007,
between Xinghe Xingyong Carbon Co., Ltd. and Xinghe Yongle Carbon Co.,
Ltd. (English Translation)*
|
|
10.7
|
Option
Agreement dated December 7, 2007, between Xinghe Xingyong Carbon Co., Ltd.
and Xinghe Yongle Carbon Co., Ltd. (English
Translation)*
|
|
10.8
|
Equity
Pledge Agreement dated December 7, 2007, among Xinghe Xingyong Carbon Co.,
Ltd., Xinghe Yongle Carbon Co., Ltd. and Dengyong Jin (English
Translation)*
|
|
10.9
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $1.20 per share)*
|
|
10.10
|
China
Carbon Graphic Group, Inc. Common Stock Purchase Warrant “A” (exercise
price of $2.00 per share)*
|
|
10.11
|
Consulting
Agreement, dated February 9, 2009, between the Registrant and Ventanta
Capital Partners****
|
|
10.12
|
Amendment
to Securities Purchase Agreement, dated April 8, 2009, between the
Registrant and XingGuang Investment Corporation,
Limited*****
|
|
10.13
|
Form
of subscription agreement, dated December 22, 2009, by and between China
Carbon Graphite Group, Inc. and the investors******
|
|
10.14
|
Registration
rights agreement, dated December 22, 2009, by and between China Carbon
Graphite Group, Inc., Maxim Group LLC, and the
investors******
|
|
10.15
|
Securities
escrow agreement, dated December 22, 2009, by and between China Carbon
Graphite Group, Inc., Maxim Group LLC, and the
investors******
|
|
23.1
|
Consent
of Bernstein & Pinchuk LLP, independent registered public accounting
firm.+
|
|
23.2
|
Consent
of AGCA, Inc., an independent registered public accounting
firm.+
|
|
23.3
|
Consent
of Holland & Hart LLP, included in Exhibit
5.1.+
|
+
|
Filed
herewith.
|
*
|
Incorporated
by reference to the Form 8-K filed by the Registrant on December 31,
2007.
|
**
|
Incorporated
by reference to the Form 8-K filed by the Registrant on January 28,
2008.
|
***
|
Incorporated
by reference to our registration statement on Form SB-2 filed by the
Registrant on April 19, 2004.
|
****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on February 13,
2009.
|
*****
|
Incorporated
by reference to the Form 8-K filed by the Registrant on April 13,
2009.
|
******
|
Incorporated
by reference to the Form 8-K filed by the Registrant n December 22,
2009.
|
II-8