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EX-31.1 - CERTIFICATION - China Carbon Graphite Group, Inc.f10q0915ex31i_chinacarbon.htm
EX-32.1 - CERTIFICATION - China Carbon Graphite Group, Inc.f10q0915ex32i_chinacarbon.htm
EX-32.2 - CERTIFICATION - China Carbon Graphite Group, Inc.f10q0915ex32ii_chinacarbon.htm
EX-31.2 - CERTIFICATION - China Carbon Graphite Group, Inc.f10q0915ex31ii_chinacarbon.htm
 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

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

 

For the transition period from _______________ to _______________

 

Commission File Number: 333-114564

 

CHINA CARBON GRAPHITE GROUP, INC.

(Exact Name of Registrant as specified in its charter)

 

Nevada   98-0550699

(State or other jurisdiction of

incorporation of organization)

 

(I.R.S. Employer

Identification No.)

 

20955 Pathfinder Road, Suite 200

Diamond Bar, CA 91765

(Address of principal executive offices, zip code)

 

(909) 843-6518

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if smaller reporting company)  

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 33,670,518 shares of common stock are issued and outstanding as of November 16, 2015.

 

 

 

 
 

 

CHINA CARBON GRAPHITE GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2015

 

TABLE OF CONTENTS

 

    Page No.
     
PART I - FINANCIAL INFORMATION
     
Item 1. Financial Statements: 3
  Consolidated Balance Sheets at September 30, 2015 (unaudited) and December 31, 2014 4
  Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 5
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 6
  Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
Item 4. Controls and Procedures 48
     
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings 49
Item 1A. Risk Factors 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 3. Defaults Upon Senior Securities 49
Item 4. Mine Safety Disclosures 49
Item 5. Other Information 49
Item 6. Exhibits 50
  Signatures 51

 

 2 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following unaudited interim financial statements of China Carbon Graphite Group, Inc. (referred to herein as the "Company," "we," "us" or "our") are included in this quarterly report on Form 10-Q:

 

    Page
     
Consolidated Balance Sheets at September 30, 2015 (unaudited) and December 31, 2014   4
     
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014   5
     
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014   6
     
Notes to Unaudited Consolidated Financial Statements   8

 

 3 

 

 

China Carbon Graphite Group, Inc. and subsidiaries

Consolidated Balance Sheets

 

    September 30, 2015     December 31, 2014  
    (Unaudited)     (Audited)  
ASSETS            
Current Assets
Cash and cash equivalents   $ 25,433     $ 30,863  
Account Receivable     42,295       -  
Advance to suppliers     -       16,897  
Inventories     2,431       1,136  
Prepaid expenses     834       7,716  
Other receivables, net     33,976       25,084  
Due from related parties     1,573,416       1,611,707  
Total current assets     1,678,385       1,693,403  
                 
Goodwill     -       494,540  
                 
Property And Equipment, Net     32,900       39,388  
                 
Total Assets   $ 1,711,285     $ 2,227,331  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
                 
Current Liabilities                
Accounts payable and accrued expenses   $ 608,713     $ 452,428  
Advance from customers     -       6,614  
Other payables     892,246       865,314  
Due to related parties     248,250       229,632  
Dividends payable     55,015       55,015  
Total current liabilities     1,804,224       1,609,003  
                 
Total Liabilities     1,804,224       1,609,003  
                 
Redeemable convertible series B preferred stock, $0.001 par value; 300,000 shares authorized; 0 and 300,000 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively.     -       270,000  
Stockholders' Equity (Deficit)                
Common stock, $0.001 par value; 100,000,000 shares authorized 33,670,518 and 33,670,518 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively     33,670       33,670  
Additional paid-in capital     48,391,103       48,391,103  
Accumulated other comprehensive income     103,074       137,085  
(Accumulated deficit) Retained earnings     (48,620,786 )     (47,943,530 )
Total stockholders' equity (deficit)     (92,939 )     618,328  
Total Liabilities and Stockholders' Equity (Deficit)   $ 1,711,285     $ 2,497,331  

 

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

 

 4 

 

 

China Carbon Graphite Group, Inc and subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

For the Nine Months Ended September, 2015 and 2014

(Unaudited)

 

   Three months ended September 30,   Nine Months ended
September 30,
 
   2015   2014   2015   2014 
                 
Sales  $117,572   $99,171   $146,408   $164,742 
                     
Cost of Goods Sold   70,149    14,977    80,626    54,727 
                     
Gross Profit   47,423    84,194    65,782    110,015 
                     
Operating Expenses                    
Selling expenses   9,130    12,319    19,590    26,176 
General and administrative   584,106    20,617    781,527    814,905 
                     
Total operating expenses   593,236    32,936    801,117    841,081 
                     
Loss from continuing operations before other income (expense) and income taxes   (545,814)   51,258    (735,336)   (731,066)
                     
Other Income (Expense)                    
Interest expense   (731)   (519)   (1,707)   (1,994)
Interest income   -    -    -    95 
Other income (expense), net   21,355    (547)   59,787    (236)
Change in fair value of warrants   -    181    -    13,379 
                     
Total other expense (income), net   20,624    (885)   58,080    11,244 
                     
Loss from continuing operations before income taxes   (525,190)   50,373    (677,256)   (719,822)
                     
Income Tax Expense   -    -    -    - 
                     
Net loss from continuing operations   (525,190)   50,373    (677,256)   (719,822)
Discontinued operations, net of income taxes   -    -    -    (5,311,304)
Net loss   (525,190)   50,373    (677,256)   (6,031,126)
                     
Preferred Stock Dividends   -    -    -    - 
                     
Net Loss Available To Common Shareholders   (525,190)   50,373    (677,256)   (6,031,126)
                     
Other Comprehensive Income                    
Foreign currency translation gain   (34,912)   14,905    (34,011)   350,296 
                     
Total Comprehensive Loss  $(560,102)  $65,278   $(711,267)  $(5,680,830)
                     
Share Data                    
Basic and diluted loss per share                    
Continued operations   (0.02)   0.00    (0.02)   (0.02)
Discontinued operations   0.00    0.00    0.00    (0.16)
Net loss attributable to Common Shareholders   (0.02)   0.00    (0.02)   (0.19)
                     
Weighted average common shares outstanding, basic   33,670,518    31,518,518    33,670,518    32,216,452 
                     
Weighted average common shares outstanding, diluted   33,670,518    31,518,518    33,670,518    32,216,452 

 

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

 

 5 

 

 

China Carbon Graphite Group, Inc and subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months ended
September 30,
 
   2015   2014 
Cash Flows from Operating Activities
Net Loss  $(677,256)  $(6,031,126)
Net loss from discontinued operations   -    5,311,304 
Adjustments to reconcile net cash provided by (used in) operating activities          
Depreciation and Amortization   6,715    6,640 
Goodwill impairment   494,540    - 
Change in fair value of warrants   -    (13,379)
Changes in operating assets and liabilities          
Accounts receivable   (43,026)   (21,919)
Other receivables   (9,515)   289,042 
Advance to suppliers   16,780    (51,838)
Inventory   (1,345)   (9,581)
Prepaid expenses   -    (53,212)
Accounts payable and accrued liabilities   157,264    16,682 
Advance from customers   (6,568)   40,035 
Taxes payable   6,814    (535)
Other payables   27,334    654,858 
Net cash provided by (used in) operating activities – continuing operations   (28,263)   136,971 
Net cash provided by (used in) operating activities – discontinued operations   -    3,333,981 
Net cash provided by (used in) operating activities   (28,263)   3,470,952 
           
Cash flows from investing activities          
Acquisition of property, plant and equipment   (1,067)   (443)
Net cash used in investing activities – continuing operations   (1,067)   (443)
Net cash used in investing activities – discontinued operations   -    (892,143)
Net cash used in investing activities   (1,067)   (892,586)
           
Cash flows from financing activities          
Proceeds from loan from related parties   24,489    (135,400)
Net cash used in financing activities – continuing operations   24,489    (135,400)
Net cash used in financing activities – discontinued operations   -    (2,440,413)
Net cash provided by (used in) financing activities   24,489    (2,575,813)
           
Effect of exchange rate fluctuation   (589)   (1,586)
           
Net (decrease) increase in cash   (5,430)   967 
           
Cash and cash equivalents at beginning of period   30,863    31,848 
           
Cash and cash equivalents at ending of period  $25,433   $32,815 
           
Supplemental disclosure of cash flow information          
           
Interest paid  $1,707   $- 
Income taxes paid  $-   $- 
           
Non-cash activities:          
           
Issuance of common stock for compensation  $-   $22,880 
           
Issuance of common stock for acquisition  $-   $600,000 

 

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

 

 6 

 

 

China Carbon Graphite Group, Inc. and subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

(1) Organization and Business

 

China Carbon Graphite Group, Inc. (the “Company”), through its subsidiaries, is engaged in the manufacture and sales of graphene and graphene oxide and graphite bipolar plates in the People’s Republic of China (“China” or the “PRC”). We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

 

The Company was incorporated on February 13, 2003 in Nevada under the name Achievers Magazine Inc. In connection with the reverse merger transaction described below, the Company’s corporate name was changed to China Carbon Graphite Group, Inc. on January 30, 2008.

 

On December 17, 2007, the Company completed a share exchange pursuant to a share exchange agreement with Sincere Investment (PTC), Ltd. (“Sincere”), a British Virgin Islands corporation. Sincere was the sole stockholder of Talent International Investment Limited (“Talent”), a British Virgin Islands corporation, which is the sole stockholder of XingheYongle Carbon Co., Ltd. (“Yongle”), a company organized under the laws of the PRC. Pursuant to the share exchange agreement, the Company issued 9,388,172 shares of common stock to Sincere in exchange for all of the outstanding on stock of Talent, and Talent became a wholly-owned subsidiary of the Company. Upon completion of the reverse merger, the Company’s business became the business of Talent, its subsidiaries and its affiliated variable interest entities.

 

Talent owns 100% of the stock of Yongle, which is a wholly foreign-owned enterprise organized under the laws of the PRC. Yongle was a party to a series of contractual agreements with XingheXingyong Carbon Co., Ltd. (“Xingyong”), a corporation organized under the laws of the PRC. These agreements allowed the Company to operate its business in the PRC and to control the management of Xingyong and receive economic remuneration from Xingyong’s business. Xingyong’s principal stockholder is Mr. Denyong Jin, the General Manager of Xingyong. As a result, Xingyong was a variable interest entity and the operations of Xingyong were consolidated with those of the Company for financial reporting purposes before Xingyong was sold on June 30, 2014.

 

Accounting Standard Codification (“ASC”) 810-10-45-25 calls for balance sheet disclosure of (a) assets of a consolidated variable interest entity (VIE) that can be used only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated VIE for which creditors (or beneficial interest owners) do not have recourse to the general credit of the primary beneficiary. The majority operating business of the Company was conducted by Xingyong and the consolidated balance sheet of the Company reflected Xingyong’s balance sheet before Xingyong was disposed on June 30, 2014. There are no such assets or liabilities on the balance sheet of Xingyong. The Operating Agreement dated December 7, 2007 provides that Yongle is a full-recourse guarantor of all obligations of Xingyong, and Xingyong has pledged all of its assets to Yongle. The Consulting Agreement of that date includes an assignment of all of the revenues of Xingyong to Yongle. Yongle was 100% owned by Talent and Talent is 100% owned by the Company. Accordingly, there are no assets or liabilities of Xingyong that in which the Company did not own before Xingyong was disposed on June 30, 2014.

  

 8 

 

 

Talent was party to four agreements dated December 7, 2007 with the owners of the registered equity of Xingyong. The agreements transfer to Talent benefits and all of the risk arising from the operations of Xingyong, as well as complete managerial authority over the operations of Xingyong.

 

The following paragraphs briefly describe the key provisions of each contractual agreement that prescribes the Company’s relationship with Xingyong:

 

Exclusive Technical Consulting and Services Agreement. Technical consulting and services agreement entered into on December 7, 2007 between Yongle and Xingyong, pursuant to which Yongle has agreed to provide technical and consulting services related to the business operations of Xingyong. As consideration for such services, Xingyong has agreed to pay to Yongle a service fee equal to 80% to 100% of the profits of Xingyong. The exact fee is calculated and paid on a quarterly basis, and is determined based on a number of factors, including but not limited to the complexity of the services provided and the commercial value of the services provided. The exclusive technical consulting and services agreement has a 10 year term. Yongle may extend the term of such agreement. The parties may terminate the agreement, prior to its expiration, upon the mutual consent of Yongle and Xingyong.

 

Business Operations Agreement. Pursuant to the business operations agreement entered into on December 7, 2007 between Yongle, Xingyong, and the shareholders of Xingyong, Xingyong has agreed not to conduct any material transaction or corporate action without obtaining the prior written consent of Yongle. Furthermore, Xingyong and its shareholders have agreed to implement proposals made by Yongle with respect to the operations of Xingyong’s business and the appointment of directors and officers of Xingyong. Yongle may terminate the business operations agreement at any time. The term of the business operations agreement is indefinite.

 

Option Agreement.Yongle entered into an option agreement on December 7, 2007 with Xingyong and each of the shareholders of Xingyong, pursuant to which Yongle has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Xingyong owned by the shareholders of Xingyong. To the extent permitted by the PRC laws, the purchase price for the entire equity interest shall equal the actual price designated by Yongle to the extent permitted by relevant laws and regulations. The option agreement has a 10 year term. Upon the request of Yongle, the parties shall extend the term of the option agreement.

 

Equity Pledge Agreement. Pursuant to an equity pledge agreement, dated December 7, 2007, each of the shareholders of Xingyong pledged his equity interest in Xingyong to Yongle to secure Xingyong’s obligations under the VIE agreements described above. In addition, the shareholders of Xingyong agreed not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Xingyong that would affect Yongle’s interests. The equity pledge agreement will expire when Xingyong fully performs its obligations under the various VIE agreements described above.

  

 9 

 

 

On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to the Agreement, the Purchasers purchased all of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement is $1,612,903 (RMB 10 million), including $601,613 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $1,011,290 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on June 30, 2014 after approved by majority of shareholders at a special meeting of shareholders held on such date. 

 

The Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective basis for all periods presented.

 

The consolidated financial statements presented herein consolidate the financial statements of China Carbon Graphite, Inc. with the financial statements of its subsidiaries.

 

Acquisition in December 2013

 

On December 23, 2013, the Company acquired Golden Ivy Limited, a British Virgin Island company (“BVI Co.,”). Pursuant to the terms of the acquisition, we issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The shares were issued on January 16, 2014. BVI Co. then became a wholly owned subsidiary of the Company.

 

BVI Co. currently has two business operations as follows (collectively the “Business”):

 

  Manufacture of Graphene Oxide and graphite bipolar plates. Graphene Oxide has wide applications as a conductive agent, such as in lithium ion batteries, super capacitors, rubber and plastic additives, conductive ink, special coating, transparent conductive thin films and chips. Graphite bipolar plates are primarily used in solar power storage.
     
  A business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website.

 

The Business and the facilities related thereto are all located in the People’s Republic of China (“China”). The Business is conducted by Royal Elite New Energy Science and Technology (Shanghai) Co., Ltd. (“Royal Shanghai”), a wholly foreign owned enterprise under laws of China. Royal Shanghai is wholly owned by Royal Elite International Limited, a Hong Kong company, (“Royal HK”), which is wholly owned by BVI Co. The Business currently generates minimal sales.

 

 10 

 

  

Royal Shanghai was set up in Shanghai on June 9, 2010. Royal HK was set up in Hong Kong on January 8, 2010.

 

Liquidity and Working Capital Deficit

 

As of September 30, 2015 and as of December 31, 2014, the Company managed to operate its business with a negative working capital.

 

The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:

 

1. 10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
   
2. If the cumulative balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
   
3. Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.

 

Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The Company has never distributed earnings to shareholders and has no intentions to do so.

 

(2) Going Concern

 

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended September 30, 2015, the Company has incurred operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Management’s Plan to Continue as a Going Concern

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with other companies in the graphite industry.

 

 11 

 

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.

 

(3) Basis for Preparation of the Financial Statements

 

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2014. The consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements. The results of the nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2015.

 

The accompanying unaudited consolidated financial statements for China Carbon Graphite Group, Inc. and its subsidiaries and variable interest entity, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

 

The Company maintains its books and accounting records in Renminbi (“RMB”), but its reporting currency is U.S. dollars.

 

The financial statements have been prepared in order to present the financial position and results of operations of the Company and its subsidiaries whose financial condition consolidated with the Company pursuant to ASC Topic 810-10, Consolidation, in accordance with U.S. GAAP. All significant intercompany accounts and transactions have been eliminated.

 

(4) Summary of Significant Accounting Policies

 

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

 

The Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and results of operations after the date of the acquisition.

 

 12 

 

 

Use of estimates

 

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Some of the significant estimates include values and lives assigned to acquired property, equipment and intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and stock warrant valuation. Actual results may differ from these estimates.

 

Cash and cash equivalents

 

The Company considers all highly liquid debt instruments purchased with maturity periods of six months or less to be cash equivalents. The carrying amounts reported in the accompanying balance sheet for cash and cash equivalents approximate their fair value. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. The Company’s bank account in the United States is protected by FDIC insurance.

 

Accounts receivable

 

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary.

 

Inventory

 

Inventory is stated at the lower of cost or market. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. Cost is determined using the weighted average method. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. Impairment of inventories is recorded in cost of goods sold.

 

 13 

 

 

For the nine months ended September 30, 2015 and 2014, the Company has not made provision for inventory in regards to slow moving or obsolete items.

 

Goodwill

 

The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company recorded an impairment expense of $494,540 for the nine months ended September 30, 2015.

 

Property and equipment

 

Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property 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:

 

Machinery and equipment   5 years 
Motor vehicle   5 years 

 

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

 

Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.

 

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2015 and 2014.

 

Stock-based compensation

 

Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation” and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.

 

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All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.

 

Common stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued are recorded in common stock to be issued.

 

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service.

 

The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.

 

Foreign currency translation

 

The reporting currency of the Company is U.S. dollars. The Company uses RMB as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the three months ended September 30, 2015 and 2014 were $(34,912) and $14,905, respectively. Translation adjustments for the nine months ended September 30, 2015 and 2014 were $(34,011) and $350,296, respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2015 and 2014 were $(589) and $(1,586), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Assets and liabilities were translated at 6.36 RMB and 6.20 RMB to $1.00 at September 30, 2015 and December 31, 2014, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the nine months ended September 30, 2015 and 2014 were 6.25 RMB and 6.17 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

 

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Revenue recognition

 

We recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.

 

In accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

 

The Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor. The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the nine months ended September 30, 2015 and 2014.

 

Cost of goods sold

 

Cost of goods sold consists primarily of the costs of products.

 

Shipping and handling costs

 

The Company follows ASC 605-45, Handling Costs, and Shipping Costs, formerly known as Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company classifies shipping and handling costs paid on behalf of its customers in selling expenses. For the three months ended September 30, 2015 and 2014, shipping and handling costs were $4,827 and $3,107, respectively. For the nine months ended September 30, 2015 and 2014, shipping and handling costs were $11,118 and $12,103, respectively.

 

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Segment reporting

 

ASC 280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.

 

Because the Company sells only carbon graphite products to Chinese distributors and end users, it has only one business segment.

 

Taxation

 

Taxation on profits earned in the PRC has been calculated based on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed in the county of operations.

 

The Company does not accrue U.S. income tax since it has no operations in the United States. Its operating subsidiaries are organized and located in the PRC and do not conduct any business in the United States.

  

In 2006, the Financial Accounting Standards Board (“FASB”) issued ASC, 740 Income Tax, formerly known as FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.

  

The Company recognizes that virtually all tax positions in the PRC are not free from some degree of uncertainty due to tax law and policy changes by the state. The Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

 

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September 30, 2015 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, 2015, 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 twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

 

 17 

 

 

Enterprise income tax

 

The enterprise income tax is calculated on the basis of the statutory profit as defined in the PRC tax laws. This statutory profit is computed differently than the Company’s net income under U.S. GAAP.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Value added tax

 

The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax (“VAT”) is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC. 

 

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. VAT payable is included in prepaid expenses of $834 and is included in prepaid expenses of $7,716 as of September 30, 2015 and December 31, 2014, respectively.

 

Contingent liabilities and contingent assets

 

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that the Company will incur a liability or obligations as a result. A contingent liability, which might occur but is not probable, is not recorded but is disclosed in the notes to the financial statements. The Company will recognize a liability or obligation when it is probable that the Company will incur such liability or obligation.

 

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A contingent asset is an asset, which could possibly arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Company. Contingent assets are not recorded but are disclosed in the notes to the financial statements when it is likely that the Company will recognize an economic benefit. When the benefit is virtually certain, the asset is recognized.

 

Retirement benefit costs

 

According to PRC regulations on pensions, the Company contributes to a defined contribution retirement program organized by the municipal government in the province in which the Company is registered and all qualified employees are eligible to participate in the program. Contributions to the program are calculated at 23.5% of the employees’ salaries above a fixed threshold amount and the employees contribute 2% to 8% while the Company contributes the remaining 15.5% to 21.5%. The Company has no other material obligation for the payment of retirement benefits beyond the annual contributions under this program.

 

Fair value of financial instruments

 

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

 

  Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
     
  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

The fair value of the 2009 Warrants to purchase 200,000 shares of common stock were both $nil at September 30, 2015 and December 31, 2014, respectively. The Company recognized a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain of $nil from the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change in fair value of these warrants for the three months ended September 30, 2015. These shares expired on October 15, 2014.

 

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The fair value of the 2009 Series B Warrants to purchase 804,200 shares of common stock were both $nil at September 30, 2015, and December 31, 2014, respectively. The Company recognized a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain of $nil from the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change in fair value of these warrants for the three months ended September 30, 2015. These shares expired on December 22, 2014.

 

The fair value of 2010 Series B warrants to purchase 100,000 shares of common stock were both $nil at September 30, 2015 and December 31, 2014, respectively. The Company recognized a gain of $nil from the change in fair value of these warrants for the three months ended March 31, 2015 and a gain of $nil from the change in fair value of these warrants for the three months ended June 30, 2015and a gain of $nil from the change in fair value of these warrants for the three months ended September 30, 2015. These warrants will expire on January 13, 2015.

 

In summary, the Company recorded a total amount of $ nil of changes in fair value of warrants in the Consolidate statement of income and comprehensive income for the three and nine months ended September 30, 2015. Each reporting period, the change in fair value is recorded into other income (expense).

   

The carrying amount of restricted cash, other receivables, advance to vendors, advances from customers, other payables, accrued liabilities and short-term loans are reasonable estimates of their fair value because of the short-term nature of these items.

 

The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was accounted for at fair value on a recurring basis or for purposes of disclosures as of September 30, 2015:

 

    Carrying Value at
September 30,
   Fair Value Measurement at
September 30, 2015
 
    2015   Level 1    Level 2     Level 3 
Warrant liability  $-   -    -   $- 

 

 

The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of December 31, 2014:

 

    Carrying 
Value at 
December 31,
    Fair Value Measurement at
December 31, 2014
 
    2014    Level 1    Level 2    Level 3 
Warrant liability  $-    -    -   $- 

  

The Company uses the black-scholes valuation method approach when determining fair values of its Level 3 recurring fair value measurements. Certain unobservable units for these assets are offered quotes, lack of marketability and volatility. For Level 3 measurements, significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair value measurement. In general, a significant change in the calculated volatility of the Company’s stock price could negatively affect the fair value of the warrant liability.

 

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Summary of warrants outstanding:

 

   Warrants   Weighted 
Average 
Exercise 
Price
 
Outstanding as of December 31, 2014   100,000   $1.51 
Granted   -    - 
Exercised   -    - 
Expired   (100,000)   - 
Outstanding as of September 30, 2015   -   $- 

 

Earnings (loss) per share

 

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the conversion of convertible debt, preferred stock and warrants. The Company uses if-converted method to calculate the dilutive preferred stock and treasury stock method to calculate the dilutive shares issuable upon exercise of warrants.

 

The following table sets forth the computation of the number of net income per share for the nine months ended September 30, 2015 and 2014:

 

   September 30,
2015
   September 30,
2014
 
Weighted average shares of common stock outstanding (basic)   33,670,518    31,216,452 
Shares issuable upon conversion of Series B Preferred Stock   -    - 
Weighted average shares of common stock outstanding (diluted)   33,670,518    31,216,452 
Net (loss) available to common shareholders  $(677,256)  $(6,031,126)
Net (loss) per shares of common stock (basic)  $(0.02)  $(0.19)
Net (loss) per shares of common stock (diluted)  $(0.02)  $(0.19)

 

For the nine months ended September 30, 2015, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.

 

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The following table sets forth the computation of the number of net income per share for the three months ended September 30, 2015 and 2014:

 

   September 30, 2015   September 30, 2014 
Weighted average shares of common stock outstanding (basic)   33,670,518    31,518,518 
Shares issuable upon conversion of Series B Preferred Stock   -    - 
Weighted average shares of common stock outstanding (diluted)   33,670,518    31,518,518 
Net (loss) available to common shareholders  $(525,190)  $50,373 
Net (loss) per shares of common stock (basic)  $(0.02)  $0.00 
Net (loss) per shares of common stock (diluted)  $(0.02)  $0.00 

 

For the three months ended September 30, 2015, the Company excluded 300,000 shares of common stock issuable upon conversion of preferred stock, because such issuance would be anti-dilutive.

 

Accumulated other comprehensive income

 

The Company follows ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the nine months ended September 30, 2015 and 2014 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.

 

Recent accounting pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.

 

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In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

 

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

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If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

  a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
     
  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
     
  c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

  

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

  a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
     
  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
     
  c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

 

(5) Concentration of Business and Credit Risk

 

Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.

 

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Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.

 

(6) Advances to Suppliers

 

As of September 30, 2015 and December 31, 2014, advances to suppliers are advances for raw materials and amounted to $0 and $16,897, respectively.

 

Advances to suppliers represent interest-free cash paid in advance to suppliers for purchases of raw materials.

 

(7) Inventories

 

As of September 30, 2015 and December 31, 2014, inventories consisted of the following:

 

   September 30,
2015
   December 31,
2014
 
Finished goods  $2,431   $1,136 
Reserve for slow moving and obsolete inventory   -    - 
   $2,431   $1,136 

  

For the nine months ended September 30, 2015 and 2014, the Company has not made provision for inventory in regards to slow moving or obsolete items. As of September 30, 2015 and December 31, 2014, the Company did not record any provision for inventory in regards to slow moving or obsolete items.

 

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(8) Property, plant and Equipment, net

 

As of September 30, 2015 and December 31, 2014, property, plant and equipment consisted of the following:

 

   September 30,
2015
   December 31,
2014
 
Machinery and equipment  $5,062   $4,110 
Motor vehicles   43,954    45,024 
Total   49,016    49,134 
Less: accumulated depreciation   (16,116)   (9,746)
Property, plant and Equipment, net  $32,900   $39,388 

 

For the three months ended September 30, 2015 and 2014, depreciation expenses amounted to $2,223 and $2,225, respectively. For the nine months ended September 30, 2015 and 2014, depreciation expenses amounted to $6,715 and $6,640, respectively.

 

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the nine months ended September 30, 2015 and 2014.

 

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(9) Stockholders’ equity

 

Restated Articles of Incorporation

 

On January 22, 2008, the Company changed its authorized capital stock to 120,000,000 shares of capital stock, of which 20,000,000 shares are shares of preferred stock, par value $0.001 per share, and 100,000,000 shares are shares of common stock, par value $0.001 per share. The restated articles of incorporation authorizes the board of directors of the Company to issue one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such preferred stock. The board of directors has authorized the issuance of two series of preferred stock, Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”).

 

Issuance of Common Stock

 

(a) Conversion of Series B Preferred Stock

 

During the nine months ended September 30, 2015, the Company issued an aggregate of 0 shares of common stock to holders of Series B Preferred Stock upon the conversion of an aggregate of 0 shares of Series B Preferred Stock. 300,000 shares of Series B Preferred Stock are redeemable by the holder as of December 31, 2012. The Company has reclassified these shares into Temporary Equity since December 31, 2012. 

 

In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares and the parties settled out of court for $320,000 plus $40,000 that were already paid. The Company paid $90,000 in 2013 and $270,000 in 2014, respectively, and has fully paid off the settlement as the date of this Quarterly Report. Subsequently, CNH returned the stock certificates representing the Series B Preferred Stock and all of the issued and outstanding Series B Preferred Stock have been cancelled as of September 30, 2015.

 

(b) Stock Issuances For Compensation

 

On January 14, 2014, the Company issued an aggregate of 100,000 shares of common stock to four directors as compensation for services provided in 2013. The issuance of these shares was recorded at fair market value.

 

On January 14, 2014, the Company issued 76,000 shares of common stock to two employees for services provided in 2013. The issuance of these shares was recorded at fair market value.

 

On December 11, 2014, the Company issued an aggregate of 200,000 shares of common stock to four directors as compensation for services provided in 2014.

  

On December 11, 2014, the Company issued 152,000 shares of common stock to two employees for services provided in 2014. The issuance of these shares was recorded at fair market value, or $6,080.

 

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(c) Stock Issuances For Acquisition

 

On January 16, 2014, the Company issued an aggregate of 5,000,000 shares of common stock, par value $0.001 per share, to the former shareholders of BVI Co. in exchange for 100% of the issued and outstanding equity of BVI Co. The issuance of these shares was recorded at fair market value.

 

(d) Shares Held in Escrow

 

In a private placement that closed on December 22, 2009 and January 13, 2010, the Company sold an aggregate of 2,480,500 shares of Series B Preferred Stock and five-year warrants to purchase 992,000 shares of common stock at an exercise price of $1.30 per share, for an aggregate purchase price of $2,976,600. The Company also paid the private placement agent an aggregate of $298,000 and issued five-year warrants to purchase 124,025 shares of common stock at an exercise price of $1.32 per share. In connection with the private placement and pursuant to the transaction agreements, the Company deposited into escrow an aggregate of 1,240,250 shares of common stock, which are to be held in escrow to be returned to the Company or delivered to the investors, depending on whether the Company meets certain financial performance targets for the years ending December 31, 2010 and 2011.

 

The Company did not meet the financial targets. The number of Escrow Shares payable to each Investor shall be equal to a fraction of the total number of Escrow Shares potentially issuable pursuant to the terms hereof, the numerator of which shall be the amount by which (i) the number of Conversion Shares issued or issuable upon Preferred Shares which was initially issued to the Investor exceeds (ii) the sum of (x) the number of Conversion Shares sold or otherwise transferred by the Investor plus (y) the number of shares of Conversion Shares issued or issuable sold or otherwise transferred by the Investor, and the denominator of which is the number of Conversion Shares issued or issuable by the Company in the Offering. Any Escrow Shares for either Fiscal Year 2011 or Fiscal Year 2010 which are not transferred to the Investors pursuant to this paragraph shall be returned to the Company for cancellation. As of September 30, 2015, no Escrow shares have been transferred to investors or returned to the Company.

 

(10) Related Parties

 

As of September 30, 2015 and December 31, 2014, due from related parties amounted to $1,573,416 and $1,611,707, respectively. $1,573,416 is receivable from Mr. Jin for disposal of Xingyong. (see Note 13).

 

As of September 30, 2015 and December 31, 2014, $248,250 and $229,632 are due to Mr. Donghai Yu, who is CEO of the Company. These amounts are advances made to the Company by unrelated parties through Mr. Donghai Yu for business operating purposes. The advances are interest free.

 

(11) Other Payable

 

Other payable amounted $892,246 and $865,314 as of September 30, 2015 and December 31, 2014, respectively. Other payable are money borrowed from unrelated parties for operating purpose. These payable are without collateral, interest free, and due on demand.

 

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(12) Discontinued Operations

 

On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”). Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements. The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong. The purchase price under the Agreement is $1,573,416 (RMB 10 million), including $586,884 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $986,532 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company. The disposal of Xingyong became effective on September 30, 2014 after approved by majority of shareholders at a special meeting of shareholders held on such date.

  

The Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective basis for all periods presented.

 

Balances for Xingyong as of September 30, 2015 and December 31, 2014 are as follows:

 

   September 30, 
2015
   December 31,
2014
 
Total current assets  $-   $57,863,291 
           
Total noncurrent assets   -    59,753,754 
           
Total Assets  $-   $117,617,045 
           
Total current liabilities  $-   $118,967,814 
           
Total Non current liabilities   -    18,056,644 
           
Total Liabilities  $-   $137,024,458 

 

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The operating results of Xingyong for the three and nine months ended September 30, 2015 and 2014 classified as discontinued operations are summarized below:

 

   Three Months Ended
September 30
  

Nine Months Ended
September 30

 
   2015   2014   2015   2014 
Sales  $-   $-   $-   $2,981,403 
Cost of Goods Sold   -    -    -    4,248,552 
Gross Profit   -    -    -    (1,267,149)
Operating Expenses   -    -    -    2,153,231 
Other Income (Expense)   -    -    -    1,890,924 
Income Tax Expense   -    -    -    - 
Net loss  $-   $-   $-   $(5,311,304)

 

Data for nine months ended September 30, 2015 only includes data before Xingyong was disposed.

 

On July 3, 2014, the Company entered into an installment payment agreement (the “Installment Agreement”) with Purchasers. The Installment Agreement is entered in connection with the Purchase Agreement. Pursuant to the Installment Agreement, the Purchasers agreed to pay the purchase price under the Purchase Agreement of $1,573,416 (RMB 10 million) in installments as follows: (1) an initial installment of $94,405 (RMB 0.6 million) in cash plus the cancellation of the registrant’s repayment obligation of $986,532 (RMB 6.27 million) to Dengyong Jin, and (2) one or more installments of the remaining $586,884 (RMB 3.73 million) in cash on or before July 25, 2014. Additionally, the closing of the transactions contemplated under the Purchase Agreement shall close concurrently with the final installment. In connection with the foregoing initial installment, the Company and Dengyong Jin entered into an indebtedness cancellation agreement (the “Cancellation Agreement”) concurrently with the Installment Agreement, pursuant to which Mr. Jin discharged the Company of its obligation to repay him $986,532 (RMB 6.27 million), and surrendered all right to collect such amount from the Company. 

 

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

 

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”).

 

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “ believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements.

 

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. This Quarterly Report should be read in its entirety and with the understanding that our actual future results may be materially different from what we expect.

 

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

 

Overview

 

We are engaged in the manufacturing of graphene, graphene oxide and graphite bipolar plates products in the PRC. We also operate a business-to-business and business-to-consumers Internet portal (www.roycarbon.com) for graphite related products. Vendors can sell raw materials, industrial commodities and consumer (household) commodities to both business and consumers through the website by paying a fee for each transaction conducted through the website. 

 

On June 10, 2014, the Company entered into an asset purchase agreement (the “Agreement”) by and among the Company and its wholly-owned subsidiary, Yongle (together with the Company, the “Sellers”), and Dengyong Jin and Benhua Du (collectively “Purchasers”).  Pursuant to the Agreement, the Purchasers will, following the satisfaction or waiver of applicable conditions to closing, purchase all of the rights and obligations of Yongle under the Contractual Arrangements.  The Purchasers collectively hold 100% of the outstanding equity interests of Xingyong.  The purchase price under the Agreement is $1,573,416 (RMB 10 million), including $586,884 (RMB 3.73 million) in cash and the cancellation of the registrant’s repayment obligations of $986,532 (RMB 6.27 million) previously advanced by Dengyong Jin to the Company.  The disposal of Xingyong became effective on September 30, 2014 after approved by a special meeting of shareholders.

  

The Company’s results of operations related to Xingyong have been reclassified as discontinued operations on a retrospective basis for all periods presented. See Note 13 — Discontinued Operations for additional information.

 

As of and for the three months ended September 30, 2015, the Company has incurred operating losses and working capital deficit from operating activities. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merger with other graphite companies.

 

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PRC regulations grant broad powers to the government to adjust the price of raw materials and manufactured products.  Although the government has not imposed price controls on our raw materials or our products, it is possible that price controls may be implemented in the future, thereby affecting our results of operations and financial condition.

 

Results of Operations

 

Three months ended September 30, 2015 and 2014

 

Sales.

 

During the three months ended September 30, 2015, we had sales of $117,572, compared to sales of $99,171 for the three months ended September 30, 2014, an increase of $18,401, or approximately 18.55%. Sales increase was mainly attributable to the increase in demand for products among consumers in the market.

 

Sales from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

Cost of goods sold.

 

Our cost of goods sold consists of the cost of raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the three months ended September 30, 2015, our cost of goods sold was $70,149, compared to $14,977 for the cost of goods sold for the three months ended September 30, 2014, an increase of $55,172 or approximately 368.38%. The increase in the cost of sales was primarily attributable to the increase in sales volume.

 

Cost of goods sold from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

Gross profit.

 

Our gross profit decreased from $84,194 for the three months ended September 30, 2014 to $47,423 for the three months ended September 30, 2015. The decrease of the gross profit is mainly attributed to the increase in cost of goods sold.

 

Gross profit from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were nil and a loss of $0, respectively and were included in net loss from discontinued operations.

 

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Operating expenses.

 

Operating expenses totaled $593,236 for the three months ended September 30, 2015, compared to $32,936 for the three months ended September 30, 2015, an increase of $560,300, or approximately 1,701.18%. The increase is mainly attributed to the write off of goodwill in expense.

 

Operating expenses from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

Selling, general and administrative expenses.

 

Selling expenses decreased from $12,319 for the three months ended September 30, 2014 to $9,130 for the three months ended September 30, 2015, a decrease of $3,189, or 25.88%. The decrease is mainly attributed to decreased professional expenses.

 

Selling expenses from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

  

Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $584,106 for the three months ended September 30, 2015, compared to $20,617 for the three months ended September 30, 2014, an increase of $563,489, or 2,733.13%. The increase is mainly attributed to write off goodwill to expense.

 

General and administrative expenses from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0 respectively and were included in net loss from discontinued operations.

 

Loss from operations.

 

As a result of the factors described above, operating loss was $545,814 for the three months ended September 30, 2015, compared to operating income of $51,258 for the three months ended September 30, 2014, a decrease of approximately $597,072, or 1,164.84%.

 

Loss from operations from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

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Other income and expenses.

 

Our  interest expense was $731 for the three months ended September 30, 2015, compared to $519 for the three months ended September 30, 2014. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $0 for the three months ended September 30, 2015, compared to $181 for the three months ended September 30, 2014.

 

Rental income of $59,787 and $21,355 were recorded as other income for the three months ended September 30, 2015 and 2014, respectively.

 

Other expense from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

Income tax.

 

During the three months ended September 30, 2015 and 2014, we did not incur any income tax due for these periods.

 

Net loss from continuing operations.

 

As a result of the factors described above, our net loss from continuing operations for the three months ended September 30, 2015 was $525,190, compared to net income of $50,373 for the three months ended September 30, 2014, a decrease of $575,563, or 1,142.60%.

 

Net loss from discontinued operations.

 

Net loss from Xingyong (our discontinued business) for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively and were included in net loss from discontinued operations.

 

Net loss.

 

Our net loss for the three months ended September 30, 2015 was $525,190, compared to net income of $50,373 for the three months ended September 30, 2014, a decrease of $575,563, or 1,142.60%. The decrease is mainly due to increased cost of goods sold.

 

Foreign currency translation.

 

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the three months ended September 30, 2015 was $(34,912), compared to $14,905 for the three months ended September 30, 2014, a decrease of $49,817 or 334.23%.

 

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Net loss available to common stockholders.

 

Net loss available to our common stockholders was $525,190, or $0.02 per share (basic and diluted), for the three months ended September 30, 2015, compared to net loss of $50,373, or net loss of $0.00 per share (basic and diluted), for the three months ended September 30, 2014.

 

Nine months ended September 30, 2015 and 2014

 

Sales.

 

During the nine months ended September 30, 2015, we had sales of $146,408, compared to sales of $164,742 for the nine months ended September 30, 2014, a decrease of $18,334, or approximately 11.13%. Sales decrease was mainly attributable to the decrease in demand for products among consumers in the market.

  

Sales from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $2,981,403, respectively and were included in net loss from discontinued operations.

 

Cost of goods sold.

 

Our cost of goods sold consists of the cost of raw materials, utilities, labor, and depreciation expenses in our manufacturing facilities. During the nine months ended September 30, 2015, our cost of goods sold was $80,626, compared to $54,727 for the cost of goods sold for the nine months ended September 30, 2014, an increase of $25,899 or approximately 47.32%. The increase in the cost of sales was primarily attributable to the decrease in sales volume.

 

Cost of goods sold from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $4,248,552, respectively and were included in net loss from discontinued operations.

 

Gross profit.

 

Our gross profit decreased from $110,015 for the nine months ended September 30, 2014 to $65,782 for the nine months ended September 30, 2015. The decrease of the gross profit is mainly attributed to the increase of costs of goods sold.

 

Gross profit from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were nil and a loss of $1,267,149, respectively and were included in net loss from discontinued operations.

  

Operating expenses.

 

Operating expenses totaled $801,117 for the nine months ended September 30, 2015, compared to $841,081 for the nine months ended September 30, 2014, a decrease of $39,964, or approximately 4.75%. The decrease is mainly attributed to the decrease in compensation expenses, legal expenses and other professional expenses.

 

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Operating expenses from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $2,153,231, respectively and were included in net loss from discontinued operations.

 

Selling, general and administrative expenses .

 

Selling expenses decreased from $26,176 for the nine months ended September 30, 2014 to $19,590 for the nine months ended September 30, 2015, a decrease of $6,586, or 25.16%. The decrease is mainly attributed to the decrease in professional expenses.

 

Selling expenses from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $50,184, respectively and were included in net loss from discontinued operations.

  

Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses) and stock compensation. General and administrative expenses were $781,527 for the nine months ended September 30, 2015, compared to $814,905 for the nine months ended September 30, 2014, a decrease of $33,378, or 4.10%. The decrease is mainly attributed to the decrease in compensation expenses, legal expense, and other professional fees.

 

General and administrative expenses from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $2,103,047, respectively and were included in net loss from discontinued operations.

 

Loss from operations.

 

As a result of the factors described above, operating loss was $735,336 for the nine months ended September 30, 2015, compared to operating loss of $731,066 for the nine months ended September 30, 2014, an increase of approximately $4,270, or 0.58%.

 

Loss from operations from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $3,420,380, respectively and were included in net loss from discontinued operations.

  

Other income and expenses.

 

Our interest expense was $1,707 for the nine months ended September 30, 2015, compared to $1,994 for the nine months ended September 30, 2014. Expenses from changes in the fair value of our warrants as a result of adopting ASC 820-10 was $0 for the nine months ended September 30, 2015, compared to $13,379 for the nine months ended September 30, 2014.

 

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Other expense from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $1,890,924, respectively and were included in net loss from discontinued operations.

 

Rental income of $0 and $0 were recorded as other income for the three months ended September 30, 2015 and 2014, respectively.

 

Income tax.

 

During the nine months ended September 30, 2015 and 2014, we did not incur any income tax due for these periods.

 

Net loss from continuing operations.

 

As a result of the factors described above, our net loss from continuing operations for the nine months ended September 30, 2015 was $677,256, compared to net loss of $719,822 for the nine months ended September 30, 2014, a decrease of $42,566, or 5.91%.

 

Net loss from discontinued operations.

 

Net loss from Xingyong (our discontinued business) for the nine months ended September 30, 2015 and 2014 were $0 and $5,311,304, respectively and were included in net loss from discontinued operations.

 

Net loss.

 

Our net loss for the nine months ended September 30, 2015 was $677,256, compared to net loss of $6,031,126 for the nine months ended September 30, 2014, a decrease of $5,353,870, or 88.77%. The decrease is mainly due to decreased loss from discontinued operations.

 

Foreign currency translation.

 

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the nine months ended September 30, 2015 was $(34,011), compared to $350,296 for the nine months ended September 30, 2014, a decrease of $384,307 or 109.71%.

  

Net loss available to common stockholders.

 

Net loss available to our common stockholders was $677,256, or $0.02 per share (basic and diluted), for the nine months ended September 30, 2015, compared to net loss of $6,031,126 or net loss of $0.19 per share (basic and diluted), for the nine months ended September 30, 2014.

 

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Liquidity and Capital Resources

 

All of our business operations are carried out by Royal Shanghai, and all of the cash generated by our operations has been held by that entity. In order to transfer such cash to our parent entity, China Carbon Graphite Group, Inc., which is a Nevada corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, Royal Shanghai would have to transfer funds to our parent entity through our wholly-owned subsidiaries, Royal Hongkong and BVI. Co,

 

PRC regulations relating to statutory reserves and currency conversion would impact our ability to transfer cash within our corporate structure. The Company Law of the PRC applicable to Chinese companies provides that net after tax income should be allocated by the following rules:

 

  1. 10% of after tax income to be allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital.
     
  2. If the accumulate balance of statutory surplus reserve is not enough to make up the Company’s cumulative prior years’ losses, the current year’s after tax income should be first used to make up the losses before the statutory surplus reverse is drawn.
     
  3. Allocation can be made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.

 

Therefore, the Company is required to maintain a statutory reserve in China that limits any equity distributions to its shareholders. The maximum amount of the shareholders has not been reached. The company has never distributed earnings to shareholders and has consistently stated in the Company’s filings it has no intentions to do so.

 

The RMB cannot be freely exchanged into the Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises, such as Royal Shanghai, may purchase foreign currency from designated financial institutions in connection with current account transactions, including profit repatriation.

 

These factors will limit the amount of funds that we can transfer from Royal Shanghai to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of Royal Shanghai to the United States, those earnings may become subject to United States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly, taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.

 

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Our primary capital needs have been to fund our working capital requirements. Our primary sources of financing will be cash generated from loans from banks, equity investment from investors, and borrowings from unrelated parties.

 

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended June, 2015, the Company has incurred operating losses and working capital deficit from operating activities. The Company’s sales revenue is not sufficient to cover the company’s expenses for the nine months ended September 30, 2015.

 

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. At this point, there can be no assurance that the Company is able to obtain such funding.

 

Our long-term goal is to develop our Royal Shanghai business. During the interim, we expect that anticipated cash flows from future operations, loans and equity investment from unrelated or related parties, and cash from disposal of Xingyong 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;
     
  we receive cash from disposal of Xingyong; and
     
  we are able to generate savings by improving the efficiency of our operations.

 

We may require additional equity, debt or bank funding to finance acquisitions or to allow us to develop our Royal Shanghai business, which is one of our primary growth strategies.  We can provide no assurances that we will be able to enter into any additional financing agreements on terms favorable to us, if at all, especially considering the current global instability of the capital markets.

 

At September 30, 2015, cash and cash equivalents were $25,433, compared to $30,863 at December 31, 2014, a decrease of $5,430. Our working capital deficit decreased by $210,240 to a deficit of $125,840 at September 30, 2015 from $84,400 at December 31, 2014.

  

As of September 30, 2015, inventories were $2,431, compared to $1,136 at December 31, 2014, an increase of $1,295, or 114.00%. As of September 30, 2015 and December 31, 2014, the Company has not made provision for inventory in regards to slow moving or obsolete items. 

 

As of September 30, 2015, prepaid expenses were $834, compared to $7,716 at December 31, 2014, a decrease of $6,882, or 89.20%. The decrease in prepaid expenses is attributed to amortization of prepaid services.

 

Advances to suppliers decreased from $16,897 at December 31, 2014 to $0 at September 30, 2015, a decrease of $16,897. The decrease of advances to suppliers is mainly because the Company made less advanced payments to suppliers during the nine months ended September 30, 2015. No allowance for doubtful accounts for the balance of advances to suppliers was reserved as of September 30, 2015 and December 31, 2014, respectively.

 

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Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

The following table sets forth information about our net cash flow for the nine months indicated:

 

Cash Flows Data:

 

   For Nine Months Ended
September 30
 
   2015   2014 
Net cash flows provided by operating activities  $(28,263)  $3,470,952 
Net cash flows used in investing activities  $(1,067)  $(892,586)
Net cash flows provided by financing activities  $24,489   $(2,575,813)

 

Net cash flow used in operating activities was $28,263 for the nine months ended September 30, 2015, compared to $3,470,952 provided by operating activities for the nine months ended September 30, 2014, a decrease of $3,499,215, or 100.81%. The decrease in net cash flow used in operating activities was mainly due to decreased net loss from discontinued operations and less cash provided by discontinued operations during the nine months ended September 30, 2015 compared to that of the same period last year.

 

Net cash flow used in investing activities was $1,067 for the nine months ended September 30, 2015, compared to $892,586 for the nine months ended September 30, 2014, a decrease of $891,519, or 99.88%. The decrease is mainly due to less cash used in discontinued operations during the nine months ended September 30, 2015 compared to that of the same period last year.

 

Net cash flow provided by financing activities was $24,489 for the nine months ended September 30, 2015, compared to $2,575,813 used in financing activities for the nine months ended September 30, 2014, an increase of $2,600,302 or 100.95%. The increase in net cash flow provided by financing activities was mainly due to more cash provided by operations during the nine months ended September 30, 2015 compared to that of the same period last year.

  

Concentration of Business and Credit Risk

 

Most of the Company’s bank accounts are in banks located in the PRC and are not covered by any type of protection similar to that provided by the Federal Deposit Insurance Corporation (“FDIC”) on funds held in U.S. banks. The Company’s bank account in the United States is covered by FDIC insurance.

 

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Because the Company’s operations are located in the PRC, this may give rise to significant foreign currency risks due to fluctuations in and the volatility of foreign exchange rates between U.S. dollars and RMB.

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, trade accounts receivables and inventories, the balances of which are stated on the balance sheet. The Company places its cash in banks located in China. Concentration of credit risk with respect to trade accounts receivables is limited due to the diversity of the Company’s customers who are located in different regions of China. The Company does not require collateral or other security to support financial instruments subject to credit risk.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements.

 

Significant Accounting Estimates and Policies

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an ongoing basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition

 

We recognize revenue in accordance with ASC 605-25, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Sales represent the invoiced value of goods, net of value added tax (“VAT”), if any, and are recognized upon delivery of goods and passage of title.

  

In accordance with ASC 605-25, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

 

The Company derives revenues from the manufacturing and distribution of graphite based products. The Company recognizes its revenues net of VAT. The Company is subject to VAT, which is levied on a majority of the products, at a rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

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The Company recognizes revenue upon receipt of the delivery confirmation provided by the customer or distributor.  The Company does not provide chargeback or price protection rights to the distributors. The distributor only places purchase orders with the Company once it has confirmed the sale with a third party because this is a specialized business, which dictates that the Company will not manufacture the products until the purchase order is received. The Company allows its customers to return products only if its products are later determined by the Company to be defective. Based on the Company’s historical experience, product returns have been insignificant throughout all of its product lines. Therefore, the Company does not estimate deductions or allowances for sales returns. If sales returns occur, they are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers. Interest income is recognized when earned. The Company experienced no returns for the three and nine months ended September 30, 2015 and 2014.

 

Comprehensive Income

 

We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.

 

Income Taxes

 

We account for income taxes under the provisions of ASC 740, Income Tax, formerly known as SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Effective January 1, 2008, the new Chinese income tax law sets unified income tax rates for domestic and foreign companies at 25%, except for a 15% corporate income tax rate for qualified high technology and science enterprises. In accordance with this new income tax law, low preferential tax rates in accordance with both the tax laws and administrative regulations prior to the promulgation of this law gradually become subject to the new tax rate within five years after the implementation of this law.

 

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Accounts Receivable and Allowance For Doubtful Accounts

 

Accounts receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. The allowance for doubtful accounts amounted to $nil as of September 30, 2015.

 

Inventories

 

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include fixed and variable production overhead, taking into account the stage of completion. For the three and nine months ended September 30, 2015 and 2014, the Company has not made provision for inventory in regards to slow moving or obsolete items.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets after taking into account the estimated residual value. The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the three and nine months ended September 30, 2015 and 2014.

  

Research and Development

 

Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of the cost of material used and salaries paid for the development of our products and fees paid to third parties. Our research and development expense for the three and nine months ended September 30, 2015 and 2014 were not significant.

 

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Value Added Tax

 

Pursuant to China’s VAT rules and regulations, as an ordinary VAT taxpayer we are subject to a tax rate of 17% (“output VAT”). The output VAT is payable after offsetting VAT paid by us on purchases (“input VAT”). Under the commercial practice of the PRC, the Company paid VAT and business tax based on tax invoices issued.

 

The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes that are determined to be late or deficient. In the event that a tax penalty is assessed on late or deficient payments, the penalty will be expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.

 

Fair Value of Financial Instruments

 

On January 1, 2008, the Company began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. On January 1, 2009, the Company began recording non-recurring financial as well as all non-financial assets and liabilities subject to fair value measurement under the same principles. These fair value principles prioritize valuation inputs across three broad levels. The three levels are defined as follows:

 

  Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
     
  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

The carrying amounts of financial assets and liabilities, including cash and cash equivalents, accounts receivable, notes receivable, advances to suppliers, other receivables, short-term bank loans, notes payable, accounts payable, advances from customers and other payables, approximate their fair values because of the short maturity period for these instruments.

  

The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of September 30, 2015:

 

      Carrying
Value at
September 30,
    Fair Value Measurement at
September 30, 2015
 
      2015     Level 1       Level 2       Level 3  
Warrant liability   $ -     -       -     $ -  

 

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The following table sets forth by level within the fair value hierarchy of the Company’s financial assets and liabilities that was used to calculate fair value on a recurring basis as of December 31, 2014: 

 

      Carrying
Value at
December 31,
    Fair Value Measurement at
December 31, 2014
 
      2014     Level 1       Level 2        Level 3  
Warrant liability   $ -     -       -     $ -  

 

Please see Note 3 contained in the Notes to the Consolidated Financial Statements for a description of our warrant liability for the nine months ended September 30, 2015 and 2014.

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the balance sheet at fair value.

 

Stock-based Compensation

 

Stock-based compensation includes (i) common stock awards granted to employees and directors for services which are accounted for under FASB ASC 718, Compensation–Stock Compensation, and (ii) common stock awards granted to consultants which are accounted for under FASB ASC 505-50, Equity–Equity-Based Payments to Non-Employees.

  

All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.

 

Common stock awards are granted to directors for services provided.

 

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service. The Company did not make significant grants to consultants for any of the periods presented.

 

The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.

 

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No stock compensation expenses was amortized and recognized as general and administrative expenses for the nine months ended September 30, 2015 and 2014, respectively.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

  

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

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In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

  

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

  a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)

 

  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

 

  c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

  

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

  a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

 

  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

 

  c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

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The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

  

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015.

 

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

 

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting, our disclosure controls and procedures were not effective as of September 30, 2015.

 

Changes in Internal Control over Financial Reporting

 

During the nine months ended September 30, 2015, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We will continue to monitor the deficiencies identified in internal controls and make changes that our management deems necessary.

 

Limitations on Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our properties or subsidiaries, except for the following:

 

In July 2013, CNH Diversified Opportunities Master Fund LP (“CNH”) filed a lawsuit against the Company in the Southern District of New York. CNH is the sole holder of the Company’s Series B Preferred Stock. In its pleadings, CNH has made a claim against the Company in the amount of approximately $400,000 in connection with the mandatory redemption of their Series B Preferred shares and the parties settled out of court for $320,000 plus $40,000 that were already paid. The Company paid $90,000 in 2013 and$270,000 in 2014, respectively, and has fully paid off the settlement as the date of this Quarterly Report. Subsequently, CNH returned the stock certificates representing the Series B Preferred Stock and all of the issued and outstanding Series B Preferred Stock have been cancelled as of September 30, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

None.

  

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

  

Exhibit Number   Description
     
31.1   Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+   Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.2+   Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.

 

+ In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

 

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SIGNATURES

 

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

 

  CHINA CARBON GRAPHITE GROUP, INC.
     
Date: November 16, 2015 By: /s/ Donghai Yu
    Donghai Yu
    Chief Executive Officer
     
Date: November 16, 2015 By: /s/ ZhenfangYang
    Zhenfang Yang
    Chief Financial Officer

 

 

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